Annuities give Challenger a timely boost

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.