Challenger (ASX:CGF)

Richard Howes
MD & CEO
Market Cap (AUD): 4.15B
Sector: Financials
Last Trade (AUD): 6.78 +0 (+0%)
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1. About

Established in 1985 and listed on the Australian Securities Exchange (ASX:CGF) in 1987, Challenger Limited is an investment management firm managing $70 B in assets. Challenger operates two core investment businesses, a fiduciary Funds Management division and an APRA-regulated Life division.

Challenger's Funds Management division manages $66.9 B and comprises Fidante Partners, which teams with boutique fund managers striving to deliver superior performance, as well as the Challenger Investment Partners business. CIP is a relative value investor, accessing opportunities globally across real estate and fixed income on behalf of institutional investors, including Challenger Life Company.

Challenger Life Company Limited is Australia's largest provider of annuities and a life company registered under the Life Insurance Act 1995. Challenger Life guarantees the capital and interest in annuitants' regular payments, providing reliable income to around 60,000 investors through its management of more than $15 billion in assets. It is regulated by the Australian Prudential Regulation Authority and must hold a minimum amount of capital, set by APRA, to ensure it can meet all investors' payments into the future.

2. Business model

 

The Company operates the following divisions:[1]

 

Division

Revenue ($M)

% of Revenue

% of Profit (before Int & Tax)

Profit drivers[2]

Life

$669.6

81.5%

101.7%

  • $5.6 B of total Life sales, up 12% on 2017, $4.0 B of annuity sales, unchanged from 2017; and $1.6 B of other Life sales, up 65% on 2017
  • Life normalised EBIT increased by $31.5 M (up 5.9%) due to higher normalised COE (up $38.2 M or 6.1%), which was partially offset with operating expenses increasing by $6.7 M(or 6.7%)
  • Life annuity sales declined slightly from the prior period (down 0.3%), with both increased fixed term sales (up 4.0%) and other Life sales (up 65.2%) offset by reduced lifetime sales (down 13.4%)

Funds Management

$151.2

18.4%

10.5%

  • Funds Management normalised EBIT increased by 28.4% in 2018, with increased net income partially offset by expenses increasing during the period
  • Fidante Partners’ net income increased for the period primarily as a result of performance fees (up $16.9 M), which was partially offset by lower Fidante Partners’ income than in the prior period (down $4.0 M), mainly due to lower transaction fees

Corporate and other

$1.0

0.1%

(12.1%)

N/A

3. Strategy

 

Key strategies include:[3]

 

Challenger’s vision is to provide its customers with financial security for retirement. Challenger has four strategic pillars to ensure that it achieves its vision over the long-term. The four strategic pillars are:

  • increase the Australian retirement savings pool allocation to secure and stable incomes
  • be recognised as the leader and partner of choice in retirement income solutions with a broad product offering
  • provide customers with relevant investment strategies exhibiting consistently superior performance
  • deliver superior outcomes to customers and shareholders through a highly engaged, diverse and agile workforce committed to sustainable business practices and a strong risk and compliance culture

4. Markets

 

[4]

Industry (Australia)

Industry Revenue (2018)

  Growth rate (annual 13-18)

Financial Planning and Investment Advice

$5 billion

0.3%

Funds Management Services

$8 billion

 3.8%

Superannuation Funds

$289 billion

7.9%

5. Competition

 

Major competitors include:[5]

 

  • AUB Group Ltd (ASX: AUB)
  • CVC Limited (ASX: CVC)
  • Clime Investment Management Limited (ASX: CIW)

6. History

 

1985[6]  

Established

 

1987  

Listed on the Australian Securities Exchange (ASX:CGF)

 

2005  

Acquired UK based Inexus Group Holdings Ltd (Inexus)

 

2006  

Formed property joint venture with Kenedix Inc, a Japanese real estate management and investment advisory company

 

2007  

Led a consortium of investors which acquired the UK-based water and sewerage company Southern Water Capital Limited (“Southern Water”)

 

2009  

Sold its Mortgage Management division to National Australia Bank (NAB)

 

2010  

Acquired Credit Suisse Investments (Australia) Limited

 

2013  

Challenger Acquired SMSF services firm

 

2014  

Challenger Life was named winner of the AFA/Plan for Life 'Annuity Provider of the Year' for the seventh year in a row

 

2015  

Challenger sold Kapstream equity interest and entered new distribution and service agreements with Kapstream and Janus

Fidante acquired investments group Dexion Capital

Challenger sold Kapstream stake and entered distribution agreement

 

2016  

Challenger’s Fidante Partners expands European presence acquired Alternative Investments Group Dexion Capital

 

2017  

Challenger life company limited issues $400 million of subordinated notes

7. Team

 

Board of Directors[7]

 

Peter Polson – Chairman

Richard Howes – Managing Director & Chief Executive Officer

Graham Cubbin[8]

John M. Green

Steven Gregg

JoAnne Stephenson

Duncan West

Melanie Willis

Leon Zwier

 

Management Team

  

Richard Howes – Managing Director & Chief Executive Officer

Tony Bofinger – Chief Risk Officer

Angela Murphy – Chief Executive, Distribution, Product and Marketing

Natalie Nicholson – Chief Human Resources Officer

Chris Plater – Chief Executive and Chief Investment Officer, Life

Ian Saines – Chief Executive, Funds Management

Michelle Taylor – Chief Executive, Corporate Affairs and Sustainability

Andrew Tobin – Chief Financial Officer

Michael Vardanega – General Counsel & Executive General Manager, Corporate Affairs


read more

8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/18 (ended 30 June):[9]

 

Division

Revenue ($M)

% Change

Profit/(Loss) (before Int & Tax) ($M)

% Change

Life

$669.6

6.1%

$562.7

5.9%

Funds Management

$151.2

12.8%

$57.9

28.4%

Corporate and other

$1.0

25.0%

($67.2)

(1.8%)

Total

$821.8

7.3%

$553.4

8.4%

9. Risk

 

[10]

The Life and Funds Management segments is subject to the following key business risks:

  • regulatory and political changes impacting financial services participants;
  • demand for and competition with Challenger products, including annuities and managed funds;
  • market volatility; and
  • general uncertainty around the global economy and its impact on markets in which Challenger operates and invests.

 

Major risks include:

 

Market Risk

Market risk is the risk that the fair value and/or future cash flows from a financial instrument will fluctuate as a result of changes in market factors. Market risk comprises (amongst others) interest rate risk (due to fluctuations in market interest rates), price risk (due to fluctuations in the fair value of equities or credit spreads) and currency risk (due to fluctuations in foreign currency exchange rates).

 

Interest Rate Risk

Interest rate risk is the risk of fluctuations in the Group’s earnings and equity arising from movements in market interest rates, including changes in the absolute levels of interest rates,the shape of the yield curve, the margin between the different yield curves and the volatility of interest rates.

 

Price Risk

Price risk is the risk that the fair value of a financial instrument will fluctuate as a result of changes in market prices (other than those arising from interest rate or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments. The Group is exposed to equity price risk on its holdings in equity securities, which include a range of investments in absolute return strategies where returns are considered to be generally uncorrelated to listed equity market returns, and credit spread risk on its fixed income securities. The Group is required to fair value all equities and fixed income securities held to back life contract liabilities. Equity risks will arise as a natural result of CLC’s Asset Allocation Plan. Equity prices can be driven by a range of risk factors specific to an individual exposure including broad macro-economic and instrument specific factors which may be uncorrelated with broader equity markets. The Group’s primary tools for managing investment price risks are CLC’s Internal Capital Adequacy Assessment Process (ICAAP) and Asset Allocation plan.

 

Currency Risk

It is the Group’s policy to minimise the exposure of all statement of financial position items to movements in foreign exchange rates. Currency exposure arises primarily as a result of investments in the Eurozone, Japan, the United Kingdom and the United States, so currency risk therefore arises from fluctuations in the value of the Euro, Japanese Yen, British Pound and US Dollar against the Australian Dollar. In order to protect against foreign currency exchange rate movements, the Group has entered into foreign currency derivatives. In addition, the Group has exposure to foreign exchange risk upon consolidation of its foreign currency denominated controlled entities and materially mitigates this by designating foreign currency derivatives as hedges of net investments in foreign entities in equity to match its foreign currency translation reserve exposure. The SPV entities hedge exposure to foreign currency risk arising from issuing mortgage-backed securities in foreign currencies. The currencies impacted are primarily the British Pound, Euro and US Dollar.

 

Credit Default Risk

The Group makes use of external ratings agencies (Standard & Poor’s, Fitch, Moody’s or other reputable credit rating agency) to determine credit ratings. Where a counterparty or debt obligation is rated by multiple external rating agencies, the Group will use Standard & Poor’s ratings where available or otherwise in accordance with the current APRA Prudential Standards. All credit exposures with an external rating are also rated internally and cross-referenced to the external rating, if applicable. Where external credit ratings are not available, internal credit ratings are assigned by appropriately qualified and experienced credit personnel who operate separately from the risk originators.

 

Liquidity Risk

Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet cash commitments associated with financial instruments. This may result from either the inability to sell financial assets at their face values, a counterparty failing on repayment of a contractual obligation, the inability to generate cash inflows as anticipated or unexpected increase in cash outflows.

References

  1. ^ Annual Report 2018, P. 59
    https://www.listcorp.com/asx/cgf/challenger/news/2018-annual-report-1948637.html
  2. ^ Annual Report 2018, P. 13-14
    https://www.listcorp.com/asx/cgf/challenger/news/2018-annual-report-1948637.html
  3. ^ Annual Report 2018, P. 03  
    https://www.listcorp.com/asx/cgf/challenger/news/2018-annual-report-1948637.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=1823
    http://www.ibisworld.com.au/industry/default.aspx?indid=1822
    http://www.ibisworld.com.au/industry/default.aspx?indid=523
  5. ^ https://quotes.wsj.com/AU/XASX/CGF
  6. ^ http://www.challenger.com.au/about/index.htm
    https://www.asx.com.au/asxpdf/20050901/pdf/3s3z8b9fhm7zp.pdf
    https://www.asx.com.au/asxpdf/20061206/pdf/3zzbhddn1ndzq.pdf
    https://www.asx.com.au/asxpdf/20071009/pdf/3150kzlnw3yb00.pdf
    http://www.asx.com.au/asxpdf/20091030/pdf/31lrq2lrx4snyf.pdf
    https://www.anz.com/resources/6/f/6f15ef00431bbefe8e559e5b4fbd8721/Changes-To-Credit-Suisse.pdf?MOD=AJPERES
    http://www.asx.com.au/asxpdf/20131216/pdf/42lmr31yflccrn.pdf
    http://www.challenger.com.au/group/Documents/Challenger_sells_Kapstream_interest_and_enters_distribution_agreement_with_Janus.pdf
    https://www.challenger.com.au/group/Fidante_Partners_acquires_alternative_investments_group_Dexion_Capital.pdf
    https://www.listcorp.com/asx/cgf/challenger/news/challenger-life-company-issues-400m-of-subordinated-notes-1742413.html
  7. ^ http://www.challenger.com.au/about/BoardOfDirectors.asp
    http://www.challenger.com.au/about/ExecutiveManagement.asp
  8. ^ https://www.listcorp.com/asx/cgf/challenger/news/changes-to-challenger-board-1969653.html
  9. ^ Annual Report 2018, P. 59
    https://www.listcorp.com/asx/cgf/challenger/news/2018-annual-report-1948637.html
  10. ^ Annual Report 2018, P. 09 & 86-90
    https://www.listcorp.com/asx/cgf/challenger/news/2018-annual-report-1948637.html