CGF Details
Robust performance due to increasing demand for annuities: For Q3FY17, Challenger Limited (ASX: CGF) reported for a sustained and robust performance across its business verticals with growth in assets and funds under management (FUM), net flows and sales. Assets and funds under management (FUM) grew by 3% to $66.6 billion driven by strong net flows ($1.0 billion) and positive investment markets ($1.1 billion). FUM increased by $2.1 billion for the quarter to $64.3 billion. Fidante Partners’ FUM was up by 3% ($1.4 billion) to $48.4 billion, with net inflows of $0.4 billion and positive investment market movements of $1.0 billion. While, Challenger Investment Partners’ FUM grew by 5% ($0.7 billion) to $15.9 billion driven by an increase in fixed income managed on behalf of the Life business due to strong annuity sales. Annuity sales increased by 53% year on year (yoy) largely led by strong growth in lifetime annuities (up 68%). Total Life sales for the quarter stood at $1,258 million, comprising annuity sales of $880 million and Other Life sales of $378 million, were above Q3 FY16 but below the sales of Q2FY17. Moreover, the significant increase in lifetime annuity sales reflects the durable and growing demand from retirees for comprehensive retirement income plans post retirement. Notably, recently launched CarePlus product (designed specifically for the aged care market) witnessed a rapid growth of 207% to $46 million led by increasing adviser awareness and education. 

Life Quarterly Sales (Source: Company Reports)
 
Lengthened annuity book tenor: As of Q3FY17, 56% of total annuity sales were long term in nature (being either lifetime annuities or 20 year MS Primary fixed term annuities) and this is comparable to 23% of sales in previous corresponding period. With robust growth in long term annuity sales, company continues to reweight towards longer tenor sales as it improves the future maturity outlook by benefitting from lengthening annuity book tenor.
 
Earnings guidance and capital position: For FY17, CGF expects Life’s Normalized Cash Operating Earnings to be around mid of $620-$640 million and remains targeted to achieve to 18% pre-tax return on equity. During Q3FY17, Challenger further strengthened its capital position by offering $460 million worth of Capital Notes to fund Challenger Life Company’s (CLC) qualifying additional Tier 1 regulatory capital.
 
Stock Performance: CGF stock has been continuously touching up in line with the business performance and has risen 40% and 21.4% over the past one year and six months, respectively as at April 21, 2017, and is nearing its all-time high level. The management’s optimistic outlook on the business (Life division and annuities) and earnings seem to be now fairly incorporated in the current price and trading scenario. Further, the price to earnings ratio and trading levels look high in comparison to peers. Given the group’s products and demand scenario, there may be a slight upside but the run up in share price over the past couple of years indicates that investors can take profits on the stock now. We recommend a “Sell” at the current market price of $ 12.86
 

CGF Daily Chart (Source: Thomson Reuters)

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