Annuities boom boosts Challenger's results

A BOOM in demand for annuities has led Challenger to claim a commanding position in a transformation of how Australians pay for their retirement.

By InvestSMART · 23 Aug 2011

By InvestSMART ·
23 Aug 2011

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A BOOM in demand for annuities has led Challenger to claim a commanding position in a transformation of how Australians pay for their retirement.

Challenger yesterday reported a 7 per cent increase in its preferred measure of "normalised" net profit for the full year. Challenger's shares rose 17? to $4.67.

Yesterday's results showed Challenger's sale of annuities to retail investors grew by 56 per cent, from $933 million to $1.46 billion.

Challenger chief executive Dominic Stevens predicted Challenger would increase the sale of annuities by a further 25 per cent this financial year, as a wave of retirees looked to convert savings into reliable income streams.

"There is a significant and growing amount of money now moving into retirement. The baby boomer demographic currently owns 60 per cent of the funds in the [superannuation] industry," Mr Stevens said.

"Over the next 20 years these people will be thinking of stable cash-flow income streams and less-volatile [options]."

Mr Stevens attributed the popularity of annuities to investors in recent years being confronted by the risk and volatility in the sharemarket.

He described the product as "effectively providing very long-term deposits", then paying investors 6.5 per cent interest annually.

Challenger makes money on the product by making a return of about 2 per cent to 3 per cent above the interest it pays, or a return of about 8.5 per cent to 9.5 per cent on its investment portfolio.

He said a study by UBS showed banks were making a similar return on their portfolios of loans.

Challenger has extensively marketed annuities to retail investors based on the security of the returns over a long period.

Challenger, whose share price fell to 88? during the global financial crisis, arrives at its "normalised" profit by adjusting the contribution of its investments in line with long-term market performance, rather than the actual experience due to volatility.

Its net profit reported in line with statutory accounting standards fell 7.5 per cent, from $283 million to $261 million.

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Frequently Asked Questions about this Article…

Why did Challenger report stronger results this year and what drove the profit increase?

Challenger reported a 7% rise in its preferred “normalised” net profit for the full year, driven largely by a boom in demand for annuities. Strong annuity sales and investor interest in stable retirement income pushed the result higher and lifted the share price.

How much did Challenger’s annuity sales to retail investors grow?

Challenger’s annuity sales to retail investors jumped 56%, rising from $933 million to $1.46 billion over the year, reflecting a significant shift toward annuity products among retirees.

What is Challenger’s ‘normalised’ profit and how does it differ from statutory profit?

Challenger’s ‘normalised’ profit adjusts the contribution of its investments to reflect long‑term market performance rather than short‑term volatility. By contrast, its statutory net profit—measured under accounting standards—fell 7.5%, from $283 million to $261 million.

What kind of returns do Challenger annuities offer to investors?

Challenger describes its annuities as effectively very long‑term deposits and said they pay investors about 6.5% interest annually, positioning them as a stable income option for retirees.

How does Challenger make money from selling annuities?

Challenger makes money by earning roughly 2–3 percentage points more on its investments than the interest it pays to annuity holders—equating to about an 8.5–9.5% return on its investment portfolio.

Will annuity sales keep growing and why does Challenger expect further growth?

Challenger’s CEO Dominic Stevens predicted annuity sales would increase by a further 25% in the coming financial year. He cites demographic trends—baby boomers own about 60% of superannuation funds—and a large cohort moving into retirement seeking stable cash‑flow income.

Why are retirees choosing annuities instead of staying in the sharemarket?

According to Challenger, many investors are turning to annuities because they’re wary of sharemarket risk and volatility. Annuities are being marketed as a way to convert savings into reliable, less‑volatile income streams in retirement.

What happened to Challenger’s share price after the results and how has it fared historically?

After reporting the stronger results, Challenger’s shares rose 17% to $4.67. The company has experienced volatility in the past—its share price fell to around 88 cents during the global financial crisis—but it has since emphasised long‑term investment performance and annuity demand in its strategy.