Challenger’s Resilience Highlighted

Australia | 10:00 AM

Annuity and funds management provider Challenger's March quarter indicated resilience to market volatility and management's confidence in its FY25 outlook.

-Challenger tightens FY25 profit guidance range
-Management's confidence apparent
-New relationships supportive
-Aging population an underlying driver

By Greg Peel

Challenger ((CGF)) provides a range of financial products aimed at older investors including lifetime annuities, term annuities, fixed term direct, income for aged care, managed investments and other products across an extensive range of investment options.

The highlight for analysts within Challenger's March quarter update was a tightening of its FY25 profit guidance range to $450-465m from a prior $440-480m, which, slightly above forecasts, has been universally determined to suggest management's increased confidence in the FY25 outlook, with yet two and a half months to go.

This suggests resilience in the light of current volatile market conditions and implies achievement of management's return on equity target which Citi has always thought was likely, but may have been the subject of some market doubt.

Challenger is usually exposed to investment market losses in a widening interest rate spread environment, but in this context Citi sees the increase in the prescribed capital amount (PCA) ratio over the quarter from 1.61x to 1.62x as an encouraging sign, as do all covering brokers.

Challenger also observed its investment portfolio has performed in line with expectations since end-March, with its alternative investments portfolio demonstrating low correlation to equity and credit markets.

Ups and Downs

The positive March quarter report came despite a net outflow in Challenger's annuity business, where its book contracted -$180m or almost -1% in the period, and a -5% fall in funds under management, which reflected funds outflows but more so the volatile market over the period.

Challenger's annuity book showed signs of qualitative improvement. Sales of its retail lifetime product grew 22%, underpinned by a 33% larger contribution from its Japanese-market distributors that proved greater than the minimum required under their contracts, Ord Minnett notes, despite there being another quarter remaining in FY25.

Sales of longer-duration products, as opposed to shorter fixed-term offerings, improve returns for Challenger while also strengthening its book. Challenger has been less focused on growing its term annuity book in recent quarters as the current pricing environment has made earning adequate returns difficult.

The March quarter is normally seasonally soft, Citi notes, and FY25 seems no different. Even so, a 20% increase in sales year on year is seen as encouraging with longer term Japan and lifetime sales at record highs as a portion of total sales.

Challenger Index Plus (guaranteed alpha fund) sales are a weak point with some shorter dated sales failing to reinvest, but more positively, Citi notes, Challenger flags an expected funding of longer dated Index Plus sales in the June quarter and the first half FY26.

Challenger reported it had won a new $500m mandate for three- and five-year Index Plus contracts.

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