New Challenger looks to acquisitions for a return to growth

The James Packer-backed financial services group is sitting on a cash pile of about $350 million, bolstered by last week's sale of part of its mortgage management operation to National Australia Bank.

This had left Challenger well placed to grow through the acquisition of either annuities assets for the life arm or by acquiring fund management portfolios to increase scale, chief executive Dominic Stevens said yesterday.

The $350 million sale of the mortgage business was an important step in the turnaround of Challenger, given shareholder equity in its life insurance arm appeared to be partially funded by debt. At the same time, Challenger's solvency coverage ratios had started to drift lower over the past year.

With the sale and release of capital from the mortgage business, Challenger will be able to pay off almost all its debt.

Buffeted by investment markets, Challenger reported a net loss for the year to June 30 of $90.7 million, which compares with the loss of $44.2 million the previous year.

But normalised net profit, which excludes mark-to-market movements in Challenger's investment portfolio, was $218.9 million, which was steady on the previous year. Underlying operating cash flow for the year was $287 million, up 33 per cent.

Earnings across Challenger's life insurance arm were up 23 per cent to $228 million, boosted by the first-time contribution of the $1.29 billion annuity portfolio acquired from AXA Asia Pacific late last year.

Earnings across Challenger's funds arm fell 74 per cent to $18 million as a drop in assets under management reduced fee income. Earnings from the mostly exited mortgage management business were up 36 per cent

Challenger surprised investors with stronger than expected earnings guidance for its life insurance business, flagging operating earnings of about $300 million this financial year. This would be a rise of about 20 per cent on the life results for last financial year. Helping the rebound will be the first-time inclusion of the earnings stream from legacy mortgages not acquired by NAB.

"This year we proved our ability to generate strong operating cash flows and regenerate capital throughout the most difficult of market conditions," Mr Stevens said. "We're well funded and poised to add to our investment management capabilities."

Challenger will pay a final dividend of 7.5? a share on October 16. The total dividend for the year was 12.5? both flat on last year.

Challenger closed 1? higher at $2.82.