Challenger Limited
The company is a leader in retirement incomes and related strategic thought. The strategic thought leadership consists of assisting funds and advisers in the implementation of retirement income strategies which are robust. The entire industry is now adopting the point of view that retirement is different and super funds are starting to focus on retirement solutions and meaningful super balances are becoming more common. The thought leadership initiatives focus on influencing the regulatory debate on retirement income (such as CIPRs), enabling product innovation and influencing philosophies about retirement income.
Retirement based philosophies (Source - Company Reports)
Regarding the status update on regulatory reforms, coalition has rejected further "comprehensive review" of the retirement income system and the government response to the FSI final report is awaited. The Treasury review of retirement income stream regulation such as deferred lifetime annuities and pension minimum drawdown rates is being conducted. The 2015 budget will concern itself with assets test and taper rate changes and the 2015 Intergenerational Report confirms the fiscal impact from increased longevity.On the question of turning CIPRs into practice, a joint submission to the FSI with Mercer focuses on CIPR implementation and suggesting that the primary objective is to support super provision of retirement income. They should be required to address the key retirement risks of longevity, inflation and market very similar to the current NEST consultations in the UK.
Annuities on platform (Source - Company Reports)
Retirement income philosophies hinge around Ying and Yang probability based investing and safety first planning. Super fund thinking on retirement has to be guided to take into account the separation of accumulation from drawdown, difficulties in retirement income planning, the role of different products and income bucketing. Progress has to be made from talking about the problem to the implementation of solutions. Starting with the right philosophy is important and the aim should be to deliver action.
Distribution product and marketing
Income layering is becoming increasingly prevalent for annuities which secure essential income needs related to retirement. In constructing retirement income portfolios, partial annuitisation with a modest allocation is about the closest to a silver bullet for the product. The company will soon launch initiatives with the leading retail platform provider. Colonial First State (CFS) owns the platform FirstChoice which is the most widely used platform in Australia offering CBA aligned dealerships as well as well as prominent non-aligned advice dealerships. CFS is also the largest provider of account based pensions in Australia and Challenger annuities will be available on First Choice and FirstWrap from August 2015.
Annuities in a low rate enviorment (Source - Company Reports)
Annuities on platform VicSuper represent a successful integration with the first major super fund. Formally launched in June, guaranteed "income for life" products built to the specifications of VicSuper are offered. They are CIPR ready and income layering and the need to secure essential income are integrated into the advisory processes and the business rules. Key statistics include $ 15 billion in FUM with 20% in the pension phase, 90,000 members over the age of 50 years with between 6000 to 7500 people expected to retire every year. The average retirement balances are attractive and 50 planners are involved
In a low interest rate environment, the focus is on securing essential income and not on interest rates. Interest rates in Australia and other countries like the USA have been declining for some time. However, over the past five years, the sales trajectory of the company has shown increasing sales volumes and an increase in the average policy tenor and similar trends can be observed in fixed term annuity sales in the US. These demographic trends are being driven by baby boomers retiring and looking for secure income streams for their livelihood. Product innovation has introduced new features to produce higher income despite the low interest rates. For instance, the guaranteed Income for Life Pension developed with VicSuper delivers a lifetime pension to meet the need for higher incomes by trading off liquidity and death benefits by integrating with their ABP. Other developments include DLAs which await regulation to finalise design but market feedback is positive. DSS is a positively assessed new offering for Social Security status and the care replacement specification has been market tested to seek confirmation.
Results for first half 2015
The company announced strong results for the first half of 2015 with total annuity sales of $ 2.1 billion making a total of $ 12.1 billion now managed by them. Retail annuity sales hit a record figure of $ 1.6 billion up by 8% driving a net book growth of 7.2% and an FY 2015 target in the range of 11% to 13%. Fund management net flows were $ 6.8 billion and total FUM is up by 17% to $ 55.2 billion. The organic flows of $ 2.1 billion were directed principally into fixed income funds and commercial property. The interim dividend was up 16% at 14.5 cents per share with an increase in franking to 70% because of higher tax payments. Normalised EBIT was up 7% to $ 206 million and normalised NPAT was $ 156 million while statutory profit came to $ 130 million.
The total net fund flows were $ 6.8 billion up from $ 1.1 billion in the previous year and average funds under management (FUM) grew by 22% to $ 52.6 billion resulting in an EBIT of $ 21 million and a pre-tax ROE of 32.5% compared to 31.3% in the previous year.
The latest developments
The boutique fund management division Fidante Partners has agreed to acquire 100% of Dexion Capital Holdings Ltd which is an European alternative investments group with three specialist fund managers as well as an investment distribution business based in London. The acquisition will expand the European presence and provide a scalable platform to replace the successful multi-boutique model in Europe. The company has also announced the sale of its 25% interest in the Australian-based global fixed income fund manager Kapstream Capital Pty Ltd to U.S.-based Janus Capital Group Inc for $ 45 million and the company said that this provides an opportunity to develop business for both this boutique and Fidante Partners. A $ 40 million pre-tax profit will be recognised in FY 2016.
Though analysing and understanding the risks and liabilities of the annuity business is not easy because of the complexity, there are several positive factors about this company. An increasing number of Australians are moving into that phase of life where securing a retirement income on which to live is becoming increasingly important. In this context, annuities are especially appealing and this company is the leading provider. They are increasingly becoming major mainstream products thanks in part to the efforts of the company to educate people on their benefits. We think that the increasing availability of the company's products on various mainstream platforms will lead to sustained and healthy growth. We would therefore rate this stock as a Buy at the current price of $7.20.
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