1H12 Financial Results Building on a strong retirement income platform Brian Benari Chief Executive Officer 20 February 2012
Challenger Group Sustainable financial metrics Performance Normalised NPAT of $127m up 5% Statutory NPAT of $20m down 83% impacted by negative investment experience Normalised EPS of 25.3cps flat due to early exercise of options in Oct 11 Normalised cost to income ratio in line with expectations - steady at 37% Interim dividend declared of 7.5 cps unfranked up 7% Upgraded Cash Operating Earnings guidance for Life FY12 of $435m Growth Total Life sales of $1.3bn Organic retail sales of $983m up 38%, institutional sales of $288m, large increase on pcp Upgraded FY12 retail Life sales targeted to grow ~30%; retail net book growth ~10% in FY12 Net boutique FUM flow of $2.0bn in last 6 months; Boutique FUM of $16.2bn across ten partnerships, up 28% on pcp Flexibility Excess capital to regulatory minimum remains strong >$600m Operating cash-flow up 10% to $140m delivering strong organic capital generation Group net cash position of $209m, no Group recourse debt 2 1 Life retail sales in FY11 of $1,460m excluding High Yield Fund Transaction, ~25% sales growth implies $1,825m retail sales in FY12
$m $m Challenger Group Sustainable profit growth Consistent growth in earnings year on year Over 5 years EPS growth enhanced by on-market buybacks - refreshed in November 2011 Revenue has steadily accreted since 2007 while expenses have been flat; reducing our cost to income ratio from 49% to 37% over five years Earnings / Normalised EPS 300 250 200 150 100 50 0 300 250 200 150 100 2007 2008 2009 2010 2011 2012 Revenue / Expenses Normalised NPAT 1H Basic EPS (RHS) Revenue Expenses Normalised NPAT 2H 60 50 40 30 20 10 0 cps Positive Jaws 50 0 2H09 1H10 2H10 1H11 2H11 1H12 3
$m Challenger Group Sustainable organic capital generation Capital strength Strong excess to regulatory minimum in CLC maintained, providing buffer to continued variable market conditions Additional financial flexibility held at Challenger Group COE margin Continued heavy weighting to cash earnings Market volatility aids customer demand for our product and assists portfolio margins Overall margin remains within long term range of 4-5% Expect these trends to continue Capital excess to regulatory requirements 1000 750 500 250 0 2007 2008 2009 2010 2011 1H12 Life COE Margin Life Normalised Capital Growth 6.0% Life Cash Earnings 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2007 2008 2009 2010 2011 1H12 4
$bn $m Challenger Group Record growth in annuities and FUM Financial performance underpinned by growth across our core businesses Organic sales of retail guaranteed product up over 38%, with recently introduced products accounting for 57% of flows in last 6 months Ten boutique partnerships FUM now $16.2bn Net flows of ~$2.0bn in the last 6 months Pipeline strengthening Annual Sales of Guaranteed Products (bars represent sum of the four previous quarters) 2,500 2,000 1,500 1,000 500 Boutique Funds Under Management 20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 Institutional Sales (GIR) 0 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Fixed Income Equity & Other Retail Sales (GIP/GIF/GA) 0.0 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 5
6 Retirement income strategy phase 3
Strong platform for continuation of retirement income strategy Business refocus between 2007 2010 has positioned us well for Phase 3 with sale of Financial Planning and Mortgage Management acquisition of two material Life books (from MetLife and AXA) organisation restructured to support growth in our Life business and transition to a boutique/aligned funds management approach No change to our retirement income strategy following recent CEO change Key to our success Focus on retirement income sector with a bias towards organic growth Disciplined risk management and investment decisions in Life and Group Strong expense control relative to revenue growth Challenger Group 7
Australian superannuation phases of growth Challenger Group 1 1992 2007 Establishment / initial growth (accumulation) 3% rising to 9% compulsory contributions Minimal focus on retirement 2 2007 2012 Equity bull market ends Change in demographics and risk preferences Regulatory reviews (Henry, Cooper & Ripoll) 3 2012 onwards 20 years of babyboomer retirement still to come Realisation superannuation is about creating an adequate retirement income stream for life Focus on risk, longevity and product innovation 8
Challenger Group Change in demographics supportive Recent data from ABS / Deloitte suggests that by 2030 Baby Boomers will represent 69% of the retirement population 1 Target demographic 9 Source: Dynamics of the Australian Superannuation System: The next 20 years: 2011-2030
Challenger Group Change in demographics supportive Recent data from ABS / Deloitte suggests that by 2030 Baby Boomers will represent 69% of the retirement population 1 Target demographic Total Superannuation Pool (2010^) ~A$1.4 trn Baby boomers (45-65 yrs) 10 Source: Dynamics of the Australian Superannuation System: The next 20 years: 2011-2030
11 Operational strategy Distribution Product & Marketing
Challenger Group Distribution Product & Marketing (DPM) Goals in establishing DPM Activities aligned to either Funds or Life to increase growth and sales Annuity Distribution Advertising/marketing and development co-ordination Ongoing: Increased productivity and breadth of distribution (Multiply and Footprint) Ongoing: Enhance tools and education Ongoing: Build out of product range e.g. Guaranteed Pension Fund In progress: Improved capture of data and analytics CRM and Analytics Marketing & Advertising Distribution, Product & Marketing Product Development Boutique Distribution Aligned Investments In progress: Customer experience enhancements (online application, money transfers) More granular expense allocation across businesses 12
Challenger Group Early success from advertising campaign Increased consumer awareness 25% increase in target demographic recognising Challenger as retirement income provider 53% increase in those that agree or strongly agree Challenger well known company Adviser recognition Challenger 1 st company to come to mind as a retirement income provider (3 times greater response than second placed provider) 48% increase in knowledge of Challenger and what it does, now ranked 4 th amongst 13 major financial services brands Material improvements in target brand attributes such as Secure, Reliable, Good Value, Simple Products and Innovation 13
Challenger Group Campaign results financial advisers Unprompted Results Thinking about Retirement Income product providers, which company first comes to mind? 42% May-10 Dec-11 15% 11% 15% 15% 13% 9% 8% 8% 8% Challenger Peer 1 Peer 2 Peer 3 Peer 4 Source: Marketing Pulse Adviser study, May 2010 : n=161, Dec 2011 n=295 financial planners across Australia Prompted Results This company is a leader in providing retirement income products % advisers who said they agree with this statement (Agree + Strongly Agree) 85% Apr-10 Dec-11 64% 50% 62% 58% 58% 50% 49% 53% 43% Challenger Peer 3 Peer 2 Peer 1 Peer 4 14 Source: Marketing Pulse Adviser study, May 2010 : n=161, Dec 2011 n=295 financial planners across Australia
Managed funds Financial planning Retirement products Annuities Corporate trusts Life insurance Banking Mortgages Not sure Challenger Group Campaign results - consumers Which financial services or products do you think Challenger is mainly involved with? (prompted awareness) Challenger is a leader in retirement financial products To what extent do you agree that this statement describes Challenger? 70% 49% 44% 52% 48% 55% 39% 39% 41% 42% 27% 28% 18% 19% 18% 17% 17% 16% 8% 12% 10% 9% 12% 4% Strongly agree / agree Strongly disagree / disagree Not sure Feb-11 Dec-11 Feb-11 Dec-11 15 Source: Newspoll online survey: original n = 502 (Feb 2011) n= 505 (Dec 2011) n= 70 Consumers, aged 55-64 yrs who have heard of Challenger Feb 2011 n= 89 Consumers, aged 55-64 yrs who have heard of Challenger Dec 2011
Challenger Group Education and interactive tools Market leading retirement income calculator upgraded Launch of an online quote application in August resulted in a 90% increase in quote volumes Application tool now integrated with adviser workbench XPlan improving user interface 2011 roadshows saw strong turnout in February and September of 2,650 advisers Online tools for planners via PC or ipad Quote Volumes 16000 12000 8000 4000 Online Quote Tool introduced 0 01-Dec-10 01-Mar-11 01-Jun-11 01-Sep-11 01-Dec-11 Challenger prepared quotes Adviser / Challenger prepared quotes 16
Indexed to 2H08 Challenger Group Update on key projects Project Multiply 31% increase in BDM productivity in the last 12 months Number of active advisers continues to climb Project Footprint 25% of sales during the period came from targeted planner groups 57% of sales during the period resulting from new products High level of retention of maturing policies reinvestment rates continue at ~80% Average term of policies for new customers 5.3 years up from 4.5 years six months ago Increased productivity indexed sales per BDM per day 1.4 1.3 1.2 1.1 1 0.9 1HFY11 2HFY11 1HFY12 Increasing sales of longer term annuities 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Long term annuity sales Short term annuity sales 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 17
Challenger Group New product opportunities 18 Platform based guaranteed pension-style product (RCV0) series based on feedback from advisers Evolution of the existing Guaranteed Income Fund Product (RCV100) a unique retirement cash flow management tool designed to work seamlessly with allocated pensions on platforms Increase interest in white labelling of annuities two completed and a further under discussion Deferred lifetime annuities (DLAs) Require minor legislative changes to SIS and Income Tax Act to put the product on an equal footing with other superannuation products Positive outcomes from recent Tax Forum in October 2011: Bill Shorten and I have had a bit of a discussion about the drawdown phase that was discussed here today on the options like annuities and deferred annuities and we certainly are prepared to work with the industry to do more in this area. - Wayne Swan AFR 6 October 2011 January 2012: Superannuation Roundtable established - industry representatives supportive of DLA changes
19 Funds Management
$bn Challenger Group Funds Management transition Total funds under management has surpassed pre-gfc levels Strongly growing boutique partnership FUM is replacing reduction of historic retail FUM Reduction in retail FUM has abated with new Aligned & Other mandates being won Boutique Partnerships Continuing to grow faster than broader market Net flows underpinned by solid performance metrics Change in FUM composition over time 35.0 Boutique Aligned & Other 30.0 25.0 20.0 15.0 10.0 5.0 0.0 20
Challenger Group Performance driving Boutique Partnership flows 20% Boutique performance since inception Alpha Benchmark 15% 10% 5% 0% -5% -10% 21
1H12 Financial Results Andrew Tobin Chief Financial Officer 20 February 2012
$bn $m Challenger Group Group financial performance Financial Performance 1H12 1H11 % Mvt 1H11 1H12 Trend Assets Under $29.6bn $25.8bn 15% Management Normalised Net Income $255m $240m 6% Financial Performance 300 250 200 150 100 50 50% 45% 40% 35% 30% 25% Expenses $95m $88m 9% Normalised EBIT 1 $160m $152m 5% 0 20% 1H11 2H11 1H12 Normalised Net Income Normalised NPAT Expenses Cost to income ratio (RHS) Normalised NPAT 1 $127m $120m 5% Statutory NPAT $20m $118m 83% Assets Under Management 30 28 EPS (Normalised Basic) - cps 25.3 25.2-26 24 EPS (Statutory Basic) - cps 4.0 24.7 84% 1 Excluding investment experience and significant items 22 20 1H11 2H11 1H12 23
$bn $m Life Funds Mgmt Life financial performance Half Year Ended 31 Dec 2011 Financial Performance Financial Performance 1H12 1H11 % Mvt 1H11 1H12 Trend 250 200 50% 40% Average AUM Life Normalised Cash Operating Earnings $8.6bn $7.6bn 13% $211m $192m 10% Expenses $34m $21m 61% Normalised EBIT 1 $177m $171m 3% Investment Experience Post Tax ($107m) ($2.4m) Large Normalised RONA 2 23% 24% - Opening Net $1,549m $1,453m 7% Assets 150 100 50 0 1H11 2H11 1H12 Normalised COE Expenses Cost to income ratio (RHS) RONA (RHS) Average AUM 10 8 6 4 2 30% 20% 10% 0% 240 230 220 210 200 190 1 Excludes the impact of investment experience 0 1H11 2H11 1H12 180 2 Calculated on opening Net Assets Average AUM Normalised COE (RHS) 24
Life Funds Mgmt Sustainable margin Half Year Ended 31 Dec 2011 Investment Yield 8.5% Illustrative Margin 9.5% Annuity Funding (6.5)% (6.5)% Asset Spread 2.0% 3.0% Capital 1.3% 1.3% Normalised Growth Net Margin (normalised COE) 0.7% 4.0% 0.7% 5.0% 25
Life Funds Mgmt Investment Experience Drivers Half Year Ended 31 Dec 2011 During the half widening of credit spreads led to negative impacts on fixed income investments, tempered by a positive impact from CIF s unit price and benign direct property valuations Negative actuarial experience includes the impact of origination expenses (incurred upfront rather than over the term of the policy), reflective of stronger organic sales 150 100 50 0-50 -100-150 -200-250 -300 Widening of bond spreads due to negative sentiment from global markets volatility negative for investment experience but supportive for reinvestment spreads 1H12 Actual Normalised Growth Expectations Debt Equity Infrastructure Property Actuarial assumptions Total Investment Experience for the period $(145m) pre-tax Investment Experience Over the longer term our normalised growth assumptions / investment experience across our target assets classes has been in line with our expectations 26
$bn $m Life Funds Mgmt Funds Management financial performance Half Year Ended 31 Dec 2011 Financial Performance Financial Performance 1H12 1H11 % Mvt 1H11 1H12 Trend Average Funds Under $26.1bn $21.1bn 24% Management 40 30 20 10 100% 80% 60% 40% 20% Boutique Net Income Aligned & Other Net Income $15m $12m 19% $25m $32m 22% Expenses $30m $35m 14% EBIT $10m $9m 2% RONA 1 15% 17% - Opening Net Assets $123m $111m 11% 0 1H11 2H11 1H12 Boutique Net Income Expenses RONA (RHS) Average FUM 30 25 20 15 10 5 0 0% Aligned & Other Net Income Cost to income ratio (RHS) 1H11 2H11 1H12 Average FUM Net Income (RHS) 100 90 80 70 60 50 40 30 20 10 0 27 1 Calculated on opening Net Assets.
$m Life Funds Mgmt Funds Management - earnings drivers Half Year Ended 31 Dec 2011 Earnings on prior corresponding period impacted by the reduction in FUM from aligned investments of historical retail products offset by earnings from the increased FUM in boutiques Earnings on the prior period impacted by reduced performance/ transaction fees during the period FUM growth strong, up 28% despite turbulent markets Pipeline of FUM remains very strong FUM by business segment $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Aligned FUM Performance & Transaction fees 15 10 5 Boutiques FUM 0 1H09 2H09 1H10 2H10 1H11 2H11 1H12 28
Challenger Group Cost control across the Group Cost to income ratio maintained within our target range of 35-40% Ratio continues to stabilise in the mid-point of the range as continued business growth supports investment Prudent cost control has resulted in the cost to income ratio being maintained at 37% 55% 50% 45% 40% 35% 30% 25% 20% Normalised cost to income ratio over time Target Range of 35 40% 2007 2008 2009 2010 2011 1H12 Note - $22m of one-off restructuring costs incurred in 2009 29
Challenger Group Capital Management Interim dividend declared of 7.5 cents per share, unfranked Sustainable payout ratio of ~30% of normalised NPAT and dividend path maintained On-going share buy-back maintained supplemental capital management tool APRA has released partial draft standards as part of their LAGIC capital review Initial indications changes point to higher asset yield shocks, however liability treatment is yet to be determined APRA calling for further submissions over the coming months Dividends cents per share (cps) 12 10 8 6 4 2 0 Normalised EPS (cps) 30 25 20 15 10 1H10 2H10 1H11 2H11 1H12 Interim Dividend Normalised Payout Ratio 1H10 2H10 1H11 2H11 1H12 50% 40% 30% 20% 10% 0% Impact of early exercise of CPH Options in Oct 11 30
Outlook Brian Benari Chief Executive Officer 20 February 2012
Challenger Group Outlook Focus on retirement income sector unchanged Macro environment remains supportive of the key drivers of long term operating profitability for our business Retirees demanding greater income certainty and product simplicity Domestic corporate balance sheets healthy but increased liquidity premiums on fixed income assets remain wide Supportive structural and demographic trends will continue to play out over the next 20 years Advertising and marketing activities to lift brand awareness Strong Boutique Partnerships FUM pipeline Expanded demand for fixed income and guaranteed returns will support growing annuity sales Upgraded FY12 retail Life sales targeted to grow ~30% FY12 Life COE guidance upgraded to $435m, up 9% on FY11 32
Disclaimer: The material in this presentation is general background information about Challenger Limited activities and is current at the date of the presentation. It is information given in summary form and does not purport to be complete. It is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any particular investor. These should be considered with or without professional advice when deciding if an investment is appropriate. The presentation is not audited. In preparing the presentation, management has had its external auditor, Ernst & Young, prepare a review statement in relation to specific matters pertaining to the normalised profit framework, as described in the Directors Report and segment note of the Financial Report, presented herein for management s purposes. This statement has been included in the document for the information of readers; however it has been prepared solely for directors and management and should not be relied upon by any party other than the directors and management of Challenger Limited.