Annuities give Challenger a timely boost

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 after tax for the full year. Its shares rose 18? to $4.68.

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

The chief executive, Dominic Stevens, said the company would lift the sale of annuities by 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 being confronted in recent years with risks and volatility in the sharemarket.

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

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

Mr Stevens said a study by UBS showed banks were making a similar return on their loan portfolios.

Challenger has extensively marketed annuities to retail investors based on the security of the returns over a long period, using the line: "Future-proof your retirement."

Like many other financial services companies, Challenger was hit hard by the global financial crisis, with its share price falling to 88?.

The company 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 by 7.5 per cent to $261 million.

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Frequently Asked Questions about this Article…

What caused Challenger’s recent rise in profits and share price?

Challenger reported a 7% increase in its preferred “normalised” net profit after tax for the full year and strong annuity sales, which pushed its shares up about 18% to $4.68. The company’s growth was driven largely by a boom in demand for annuities from retail investors seeking reliable retirement income.

Why are annuities becoming more popular with Australian retirees?

The article says many retirees are shifting toward stable cash-flow products after recent sharemarket volatility. Baby boomers — who currently hold around 60% of superannuation funds — are increasingly looking to convert savings into less volatile, long-term income streams like annuities.

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

Challenger’s sales of annuities to small retail investors grew 56%, rising from $933 million to $1.46 billion over the period reported in the article.

What interest rate do Challenger annuities pay to investors?

The article describes Challenger’s annuities as effectively very long-term deposits paying investors about 6.5% interest annually.

How does Challenger make money from selling annuities?

Challenger earns a margin by investing the annuity funds and achieving returns about 2 to 3 percentage points above the interest it pays out to annuitants — roughly an 8.5% to 9.5% return on its investment portfolio, according to the article.

What does Challenger mean by its “normalised” profit measure?

Challenger’s “normalised” profit adjusts the contribution of its investments to reflect long‑term market performance rather than the actual short‑term experience affected by volatility, giving a smoother view of ongoing earnings.

What are Challenger’s sales expectations for annuities this financial year?

Challenger’s CEO Dominic Stevens said the company plans to lift annuity sales by about 25% this financial year to meet rising retiree demand for stable income products.

Are banks making similar returns on comparable products?

The article notes a UBS study cited by Challenger that showed banks were making a similar return on their loan portfolios, suggesting the returns Challenger targets on annuity funds are in line with some bank lending returns.