Challenger reported a 5 per cent profit drop in financial year 2019, with the company’s fund management and life businesses copping volatile investment markets and the lingering effects of the royal commission.
Challenger’s statutory net profit after tax came to $308 million, down 5 per cent from the prior year. Revenue for the group came to $2.3 million for the year, up by 8 per cent.
Meanwhile the fund management business posted $2.4 billion in net fund outflows, a stark contrast to FY18, where it gained $5.3 billion in net inflows. Challenger's multi-boutique platform Fidante lost $3.6 billion in funds under management, while institutional manager Challenger Investment Partners’ (CIP) saw $2.1 billion in inflows.
Challenger said its earnings were impacted by investment market volatility, creating lower asset returns in the Life business and lower funds management performance fees.
Total group assets under management stayed steady, increasing by 0.8 per cent to $81.8 billion.
As a result of the group’s performance outcomes being below expectations, Challenger’s key management personnel (KMP) has reduced its variable reward pool for the year to its lowest in five years, 9.4 per cent of normalised net profit (its target range was between 10 per cent and 15 per cent).
The bulk of the cuts have come from their short-term incentives being reduced by 36 per cent compared to the year before. The board was paid $9.7 million in total, 25 per cent slashed off their collective remuneration of $12.9 million the year before.
The group’s normalised earnings per share came to 61.2 cents, down from 64.6 cents the year before, while dividends per share were 30 cents, decreasing from 32.5 cents.
Challenger’s cost to income ratio was at a new low of 32.6 per cent in FY19, falling by 18 percentage points during the last 10 years.
Challenger Life still feeling effects of royal commission, but it has plans to bounce back
The Life segment, comprising the group’s annuities provider Challenger Life Company and SMSF specialist Accurium, saw its book growth plummet by 74 per cent to $500 million from FY18.
Total sales for Life fell by 18 per cent from FY18 to $4.6 billion. Normalised cash earnings for Life came to $670.1 million, a slight increase of 0.1 per cent while its normalised EBIT marginally climbed by 0.2 per cent to $563.6 million.
The company’s annuity sales were reduced by 4 per cent, a consequence of the royal commission, Challenger said. MS Primary sales in Japan were named as the biggest cause of the sales decline, which were down 54 per cent due to higher US interest rates relative to Australia.
“Over the short term, the Australian wealth management and adviser market has been disrupted, which is impacting Life domestic annuity sales,” Challenger said in its results report.
“The major financial advice hubs have been impacted more than independent financial advisers, and as a result Challenger annuity sales via major hubs were reduced by 16 per cent in 2018 and represented 62 per cent of total Australian annuity sales.”
However, partially offsetting the decline in sales by major advice hubs were independent advisers coming to the fore, with their sales of Challenger Australian annuities increasing by 26 per cent in 2018.
Lifetime annuity sales were also down by 22 per cent year-on-year from the major hubs, while independent advisers raised their sales by 35 per cent.
Challenger said it will be adapting its service model to the overarching change in the sector, moving to support an increased proportion of advisers becoming independent.
In 2020, the group intends to invest up to $15 million in a range of initiatives to drive annuities growth, with the goal to make the product a mainstream option for retirement.
It noted the number of Australians over the age of 65, Life’s target market, is expected to increase by around 56 per cent during the next 20 years. Superannuation industry assets are expected to double over the next 10 years, Challenger said.
The annual transfer from the retirement savings phase was estimated be around $67 billion in 2019. Industry annuity sales represented less than around 5 per cent of the annual transfer.
Based off research Challenger conducted this year, it has identified two areas of focus to propel annuities: building bottom-up customer demand through greater engagement and education and targeting financial advisers to increase the allocation made to annuities.
Challenger is aiming to improve the adviser experience by focusing on increased efficiency and simplifying its product offering. The group removed more than 1,000 lifetime product permutations form its Liquid Lifetime product range in 2019 and product positioning was also refined, with updated marketing collateral.
Challenger also expects its Life business will gain from changes afoot in superannuation, including government regulatory reforms, which it believes provides an opportunity to increase the proportion of savings allocated to longevity products such as annuities.
“The Life business is resilient and well positioned to capture the long-term growth opportunity through increased superannuation savings and a greater allocation made to annuities,” Challenger said.
Fund management business cops outflows
Total funds under management in the group slightly increased by 1.3 per cent to $79 billion, and its average funds under management increased by 5.5 per cent.
Net income for the segment slipped by 0.9 per cent, or 1.3 million, to $149.9 million, with Challenger blaming reduced fee income from Fidante Partners and reduced income from CIP.
The fund management business’ normalised EBIT fell by 12.1 per cent to $50.9 million.
However, chief executive Richard Howes commented: “In funds management, when removing the impact of performance fees, we saw solid growth in underlying earnings before interest and tax of 23 per cent.”
Net income from Fidante Partners decreased by 6.7 per cent to $86.7 million. Fidante’s total FUM came to $58.9 million, down 1.2 per cent from the year before.
Fidante is aiming to launch more ETFs across its boutique managers throughout the next year, following its first active income ETF rolling out in December.
Partnering with a local provider to expand into Japan
In March, the group entered a new agreement with MS&AD Insurance Group Holdings owned MS Primary, Japanese annuity provider.
The two commenced reinsuring a 20-year term US dollar annuity product from 1 July, with MS&AD increasing its holding in Challenger to more than 15 per cent of issued capital.
While MS&AD is projected to have a representative join the Australian investment manager’s board in FY2020, Challenger is opening a Tokyo office to support the relationship and to also develop distribution in the region. It has gained a Japanese real estate funds management license and an investment advisory license to distribute its products.
Guidance: at best, profit will stay flat
For 2020, Challenger has forecast a normalised net profit before tax in the range of $500 million to $550 million, assuming its profit will stay steady at best, from this year’s $548.3 million before tax.
The group also anticipates lower normalised growth for equity and other investments, increased expenditure in distribution, product and marketing to support growth initiatives of up to $15 million as well as lower expected interest rates reducing the return on shareholder capital.
Challenger’s dividend is expected to be 35.5 cents in FY20.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].