Research by Morningstar has pointed to insufficient entry barriers to stop existing competitors and potential new, major entrants from eroding the firm’s dominant position in the annuities sector.
“We believe Challenger’s 80 per cent market share of the annuities market is under threat, though solid system growth is supportive,” Morningstar analyst Nathan Zaia said.
“Large and well-funded competitors could re-enter the annuities market, particularly if regulatory and taxation reform make the products more attractive and profitable for issuers,” he said.
“However, at this stage, the major banks and AMP are not keen because of their low appetite for investment risk and the fact that annuities are a capital-intensive business.
“We expect long-term growth in demand for retirement income products, and we see the major banks, AMP or a major international life company moving more actively into the retirement income product sector.”
Challenger’s investor returns are limited by strong competition from alternative retirement income products such as bank term deposits, limited pricing power and regulatory capital requirements, Mr Zaia said.
While the firm benefits from a strong brand and marketing campaign, one “competitive disadvantage” for Challenger is its reliance on product distribution via non-aligned advisers, he said.
“Challenger must take on investment risk to provide clients a margin over the bond rate, as well as make an acceptable return for the firm,” Mr Zaia said.
“Miscalculating this risk, or severe economic shocks, could result in capital destruction.”
Last month, Challenger recorded a fifth straight year of retail annuity sales growth, up 28 per cent to $2.8 billion in the 12 months to 30 June.
