CHALLENGER Financial says it is entering a period of "sustained growth" after the life insurer and fund manager swung back to a full-year profit, helped by a push into fast-growing annuity-style retirement products.
Challenger is betting that sales of savings products designed to deliver retirees a guaranteed income regardless of sharemarket returns will grow in popularity, particularly as market volatility has been turning many off traditional superannuation products.
Challenger chief executive Dominic Stevens said regulatory changes in the retirement savings industry were likely to benefit annuities, while the ageing population was starting to work in the company's favour.
"We're at the beginning of a structural shift in demand for our products," Mr Stevens told BusinessDay.
Challenger shares surged 8.2 per cent after it said it was aiming for a 20 per cent increase in annuity sales over the next year.
Challenger's net profit for the year to June 30 came in at $282.5 million, a turnaround from the $90.7 million loss a year earlier when downbeat investment markets hurt returns. But normalised net profit, which excludes mark-to-market movements in Challenger's investment portfolio, was $233 million. This was up 6 per cent over the year. Revenue fell 2.3 per cent to $1.63 billion.
The new-look Challenger is a far cry from the financial powerhouse envisaged by the previous management, who had aspirations at various stages for the company to be a big fund manager as well as key player in the mortgage market.
Mr Stevens has since offloaded the mortgage-management business and scaled back direct funds management, a key step in making Challenger more predictable and boosting shareholder returns.
Proceeds from asset sales over the past year have helped Challenger pay down its entire debt and launch a share buyback, as well as expand its boutique fund-management business.
Earnings across Challenger's flagship life insurance arm were up 33 per cent to $304 million, boosted by threefold growth in sales of guaranteed products to $2.2 billion.
Challenger is aiming to increase profit from its life business in 2011 by 11 per cent to $375 million.
Profit in Challenger's funds arm dipped 5 per cent to $17 million.
Fee income dropped as the company moved away from direct funds management and pushed deeper into boutique funds.
Challenger believes that building up its exposure to boutique fund managers is more likely to increase revenue than direct funds management, but at much lower cost.
Challenger's total assets under management increased by 22 per cent over the year to $23.9 billion.
It will pay a final dividend of 8.5? a share on October 15, taking the total for the year to 14.5? up 16 per cent on the previous year.
Challenger shares closed 29? higher at $3.81.
Frequently Asked Questions about this Article…
Why did Challenger swing back to a full-year profit and what were the key numbers?
Challenger returned to a full-year profit driven largely by stronger sales of annuity-style retirement products and improved performance in its life insurance arm. The company reported a net profit of $282.5 million for the year to June 30, compared with a $90.7 million loss a year earlier. Normalised net profit (which excludes mark-to-market movements) was $233 million, up 6%.
What are annuity-style retirement products and why is Challenger focusing on them?
Annuity-style products are savings products designed to give retirees a guaranteed income regardless of sharemarket returns. Challenger is pushing into these products because market volatility has been turning some investors away from traditional superannuation products. The company and its CEO, Dominic Stevens, also say regulatory changes and an ageing population are likely to boost demand for annuities.
How big is Challenger’s target for annuity sales growth?
Challenger said it is aiming for a 20% increase in annuity sales over the next year. The announcement helped push Challenger shares up, with the stock surging 8.2% after the target was revealed.
How did Challenger’s life insurance and funds businesses perform?
Earnings in Challenger’s life insurance arm rose 33% to $304 million, helped by a threefold increase in sales of guaranteed products to $2.2 billion. By contrast, profit in the funds arm dipped 5% to $17 million as fee income fell while the company moved away from direct funds management.
What strategic changes has Challenger made to improve predictability and shareholder returns?
Under CEO Dominic Stevens, Challenger has offloaded its mortgage-management business, scaled back direct funds management, and expanded exposure to boutique fund managers. Proceeds from asset sales helped the company pay down its entire debt, launch a share buyback and invest in its boutique fund-management business.
What happened to Challenger’s assets under management (AUM) and revenue?
Challenger’s total assets under management increased by 22% over the year to $23.9 billion. Revenue fell slightly, down 2.3% to $1.63 billion for the year.
What did Challenger say about dividends and recent share price moves?
The company said it will pay a final dividend of 8.5 (as reported) a share on October 15, taking the total dividend for the year to 14.5 (as reported), up 16% on the previous year. Challenger shares also closed higher at $3.81 following the results and guidance.
What factors could influence Challenger’s future performance?
According to the report, Challenger’s results are linked to demand for guaranteed retirement income products, broader investment market conditions, and regulatory changes in the retirement savings industry. The company’s recent turnaround also reflects its strategic shift away from higher-cost direct funds management toward boutique fund managers and more predictable life-insurance earnings.
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