Earnings: Higher earnings of $225 million driven by momentum in Life and growth in Funds Management. Return on Equity (ROE): Exceeded target, with post-tax ROE increasing 120 basis points to 11.6%. Interim Dividend: Increased by 12% to $0.145 per share. Normalized Net Profit After Tax: Increased 12% to $225 million. Statutory Net Profit After Tax: Increased 28% to $72 million. Life Annuity Sales: Record retail lifetime annuity sales, with Japanese annuity sales up 78% to $616 million. Funds Under Management (FUM): Closed the half at record levels with $121 billion under management. Cost-to-Income Ratio: Improved to 32%, down 110 basis points. Capital Position: PCA ratio at 1.61 times the minimum regulatory requirement. Funds Management ROE: Expanded 530 basis points to 17.8%. Net Flows: Total net outflows of $3.1 billion, driven by lower margin institutional fixed income strategies.

Warning! GuruFocus has detected 6 Warning Signs with ASX:CGF.

Release Date: February 17, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

Challenger Ltd (ASX:CGF) reported a strong first half of 2025 with higher earnings of $225 million, driven by momentum in Life and growth in Funds Management. The company achieved a 12% increase in interim dividend, reflecting confidence in the business and alignment with FY25 earnings guidance. Challenger Ltd's strategy to remix sales towards longer-duration business has improved the quality of its annuity book, with 80% of total annuity liabilities now for terms of three years or more. Funds Management saw a strong recovery in equity flows and private credit offerings, with Fidante achieving 95% outperformance over five years. The company is strongly capitalized, maintaining a PCA ratio in the top half of its range, supporting future growth and market volatility navigation.

Negative Points

The statutory net profit after tax was significantly lower than the normalized result due to non-cash accounting adjustments and property valuation reductions. Challenger Ltd experienced a decrease in term sales by 12%, attributed to challenges with longer-duration term sales amid an inverted yield curve. The COE margin moderated by 9 basis points to 3.1% this half, reflecting tighter fixed income credit spreads and lower property yields. The company faces challenges in the institutional fixed income strategies, resulting in total net outflows of $3.1 billion. There is a notable difference between normalized and statutory profits, raising concerns about the sustainability of return assumptions, particularly in the alternatives portfolio.

Story Continues

Q & A Highlights

Q: Freya Kong from BofA Securities asked about the trajectory of improvement in the COE margin and its potential for further improvement. A: Alex Bell, CFO, explained that while the COE margin has seen improvement over five consecutive halves, it is not the primary target. The focus is on ROE, which has increased. The COE margin is a result of business written over prior years, and while there is potential for further improvement, it is not explicitly targeted.

Q: Freya Kong also inquired about the difference between normalized and statutory profits, particularly regarding return assumptions in the alternatives portfolio. A: Alex Bell clarified that the differences highlight the need for a normalized framework due to volatility from AASB 17. The return assumptions are reviewed annually, and the alternatives portfolio's performance aligns with medium-term expectations, despite a dip in the current half.

Q: Andrei Stadnik from Morgan Stanley asked about cost management and the impact of the Accenture relationship on costs. A: Alex Bell noted that the Accenture and State Street partnerships are aimed at capability uplift and growth, with cost benefits. The cost-to-income ratio is expected to remain near the lower end of the guidance range, with savings from Accenture offsetting inflationary pressures.

Q: Nigel Pittaway from Citigroup inquired about the impact of interest rates on sales tenor and COE margin. A: Nick Hamilton, CEO, explained that longer-dated sales have reduced sensitivity to interest rates. The inverted yield curve has affected term sales, but a steeper curve could support longer-term sales. The COE margin is influenced by tight credit spreads, but opportunities in whole loans and ABS exist.

Q: Siddharth Parameswaran from JPMorgan asked about the outlook for book growth and the impact of new distribution platforms. A: Nick Hamilton highlighted the focus on longer-dated retail and Japanese reinsurance sales, with a lower maturity rate expected in the second half. The new customer technology platform is anticipated to drive retail business growth, with strong momentum in lifetime annuity sales.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.

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