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Challenger cops $416m loss

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Challenger saw a $416 million loss for the full year and it scrapped the final dividend, with the group suffering hits from the COVID-19 pandemic and ongoing fluctuations to the financial advice industry.

The fund management and annuities group recorded a statutory net loss after tax of $416 million for financial year 2020, from a $308 million profit the year before.

The loss was said to include Challenger’s investment experience post-tax (around $750 million) from the COVID market sell-off and boutique impairment and wind-up costs during the first half (approximately $9 million).

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The board flagged it would not be paying a final dividend to shareholders, given “uncertain conditions, investment market volatility and intention to maintain a strong capital position while optimising earnings”. 

Challenger managing director and chief executive Richard Howes commented: “While investment losses resulting from the major COVID-19 market event have impacted our net statutory performance, our strategy of growing funds under management and diversifying our revenue base demonstrates underlying business reliance.

“Total funds under management was up 4 per cent to $85 billion, notwithstanding both the fall in markets during the COVID-19 pandemic and the increased need for our superannuation fund clients to maintain higher levels of liquidity driven by financial market shifts and the federal government’s early release scheme,” he said.

The group’s annuity sales, which were down by 12 per cent to $3.1 billion, had felt the impacts from structural changes to the wealth management market, along with the new age pension means test rules and the COVID-19 disruption. 

Domestic annuity revenue, which came in at around $900 million had dropped by 27 per cent year-on-year.

Total life sales were up by 13 per cent to $5.2 billion, offsetting the drop in annuity revenue with a 101 per cent surge in other life sales.

Angela Murphy, chief executive of distribution, product and marketing noted Challenger’s annuities had been affected by the substantial exodus of major banks from advice following the royal commission, and previously advised clients who were priced out by the rising cost of the service.

“In FY18, sales from major banks were almost half of total term annuity sales. In FY20, this proportion declined to just 12 per cent,” Ms Murphy said. 

“…A growing number of customers that were once advised, but as a result of adviser exits and increased costs of advice, are no longer in active adviser relationships. Between June 2018 and June 2020, the number of our direct customers increased more than [threefold] and direct customers now represent about 17 per cent of our total customers.”

While domestic annuity sales were down, the group saw growth in its Japanese sales from MS Primary, which were up 177 per cent.

Challenger has pursued annuity growth through shifting its distribution channels, pivoting towards boosting its relationships with independent financial advisers (IFAs). 

As at the end of June, IFAs made up around 72 per cent of the advice market, Challenger noted in reference to the ASIC advice register, up from 60 per cent five years ago.

The group is also pursuing growth through superannuation funds, working on developing retirement solutions. During FY20, it saw a 12 per cent increase in new institutional clients, to more than 260 institutional relationships.

“The actions we’ve taken to provide targeted support to IFA channels, broaden our product range and deepen our engagement with institutional investors will drive growth in Challenger’s annuities business over time,” Mr Howes said.

Meanwhile group assets under management (AUM) were up 4 per cent, finishing the year at $85.2 billion. 

The funds management segment saw its net income increase by 5 per cent to $8 million, while earnings before income tax were up by 13 per cent to $58 million. 

The division saw $2.5 billion in net flows during the year, in contrast to $2.4 billion in net outflows the year before.

Challenger has forecast as normalised net profit before tax for FY21 of $390 million to $440 million, building on FY20’s result of $344 million.

 

Challenger cops $416m loss
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Sarah Simpkins

Sarah Simpkins

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].

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