Challenger Limited · ASX:CGF
Challenger — Challenger Financial Services Group — FY2006 Earnings Presentation
60 slides from Challenger's earnings presentation, Aug 28, 2006
Slide 1: Full-year results to 30 June 2006
Challenger Financial Services Group Limited Full-year results to 30 June 2006 Michael Tilley, CEO Paul Rogan, CFO 28 August 2006 1
Slide 2: Headlines
Headlines CGF invests to deliver double digit EPS growth • 49% increase in NPAT1 • Strong performance across the Group: — Quality products & services delivered 16% in Assets & Loans under Management — Scaleable business model delivered 30% in income, 12% in costs 1 and 58% in EBIT — Low cost model f
Slide 3: Financial Headlines
Financial Headlines Historic cost Portfolio volume $36.5bn 15.7% (Total assets & loans under management/admin) Net Income $446m 30.4% Expenses1 $236m 12.4% EBIT $209m 58.3% NPAT1 $125m 48.8% 1 Historic cost before significant items 3
Slide 4: Our model
Our model Focused on delivering returns INVESTMENT OBJECTIVES: RONA > 18% DOUBLE DIGIT EPS GROWTH1 ENVIRONMENT MARKETS GROWING > 10% A YEAR CORPORATE STRENGTHS PRODUCTS OPERATIONS DISTRIBUTION Experienced teams deliver Technology, systems, platforms Delivery via leverageable third party quality prod
Slide 5: Performance Highlights
Performance Highlights Focused in core markets exhibiting strong environmental growth Mortgages: System growth was 11%, third party origination ~ 45% and growing ENVIRONMENT Managed Funds: Total managed funds market up 21% to $1,019bn Superannuation: Superannuation funds under management up 22% to >
Slide 6: Financial Results
Financial Results 28 August 2006 6
Slide 7: Financial Highlights
Financial Highlights Statutory NPAT underlying1 $153m 27.8% NPAT $134m 12.3% EPS basic cps – underlying 28.4 25.1% EPS diluted cps – underlying 27.3 20.2% DPS 7.5c 50.0% 1 Underlying is before significant items 7
Slide 8: Financial Summary
Financial Summary Underlying statutory profits up 28% 9 (39) 61 28% 3 (14) 153 (9) (10) 13 134 $m 120 ` 1 ! " 1 # 1 Post tax 8
Slide 9: Financial Highlights
Financial Highlights Historic cost Portfolio volume $36.5bn 15.7% (Total assets & loans under management/admin) Net Income $446m 30.4% Expenses1 $236m 12.4% EBIT $209m 58.3% NPAT underlying1 $125m 48.8% NPAT $116m 38.1% EPS basic cps 21.6 35.8% EPS diluted cps 20.9 29.7% 1 Underlying is before signi
Slide 10: Financial summary
Financial summary Historic cost underlying result up 49% 104 (27) (18) (18) 49% 38% 125 (9) 116 $m 84 ` # $ % " &" ' ( ) 10
Slide 11: Key performance trends
Key performance trends Asset 500 100% Cost / Income / 04-06 CAGR Income Expenses 450 90% Ratio % 446 40% $MN 400 80% 350 70% 342 65% 300 61% 60% 53% 250 27% 50% 226 236 200 210 40% 150 147 30% 100 20% 50 31,592 36,547 23% 10% 24,285 0 0% 2004 2005 2006 Assets under Mgt Income Expenses Cost/Income Ra
Slide 12: Segment contribution
Segment contribution EBIT up 58% 23 2 1 209 34 17 132 $m ` * + "" $ ! * + " + " + " " 12
Slide 13: Mortgage Management
Mortgage Management Delivering profitable growth in competitive market Portfolio volume $18.3bn 14.0% (Residential mortgages under management) Net Income $134m 24.1% Expenses $56m 19.1% EBIT $78m 27.9% RONA 21.7% 15.4% Net Assets 1 July 2005 $360m FY06 Net Assets 30 June 2006 $412m FY07 13
Slide 14: Mortgage Management
Mortgage Management EBIT up 28% 24 2 (7) (2) 78 61 $m 2005 EBIT Residential net income Commercial net Employee expense Other expenses 2006 EBIT income 14
Slide 15: Mortgage Management
Mortgage Management Key performance trends Asset 160 04-06 CAGR 100% Cost / Income / Income Expenses 40% 90% Ratio % 140 $MN 134 80% 120 70% 108 100 60% 80 46% 50% 68 44% 42% 34% 40% 60 56 47 30% 40 31 20% 20 15% 16,033 18,258 10% 13,822 0 0% 2004 2005 2006 Residential Mortgages Income Expenses Cost
Slide 16: Mortgage Management
Mortgage Management Delivering profitable growth in competitive market • Net loan growth in Residential market driven by: – new product initiatives – systems integration - B2B connectivity to originators – superior service delivery • Outperforming the market while growing margin – focus remains on p
Slide 17: Funds Management
Funds Management Delivering performance, FUM growth and profits Portfolio volume $12.9bn 21.6% (Funds under management) Net Income $92m 61.4% Expenses $68m 1.5% EBIT $24m large RONA 18.6% large Net Assets 1 July 2005 $131m FY06 Net Assets 30 June 2006 $135m FY07 17
Slide 18: Funds Management
Funds Management EBIT strongly into profit Reduction in other expenses 2 24 33 (5) 4 $m 2005 EBIT Net fee income Employee expense Other expenses Other income 2006 EBIT 10 18
Slide 19: Funds Management
Funds Management Key performance trends Assets 120 120% Cost / 110% 117% Income / 04-06 CAGR Income Expenses Ratio % $MN 100 40% 100% 92 80 80% 73% 14% 67 68 60 60% 57 52 47 40 40% 20 20% 12,868 48% 10,579 5,891 0 0% 2004 2005 2006 Funds under Mgt Income Expenses Cost/Income Ratio RONA n/a n/a 18.6%
Slide 20: Funds Management
Funds Management Delivering performance, FUM growth and profits Alpha Generation Across Sectors / Strategies 35% 30% 25% • Solid alpha generation: 20% – across asset sectors 15% 10% – across strategies 5% 0% Select Micro Prop Sec High Yield Orion Kinetic Howrd Mortgage • Increasingly diversified, Be
Slide 21: Asset Management
Asset Management Steady growth as new business lines build Portfolio volume $3.7bn 13.2% (Total assets under management) Net Income — Spread $126m 3.1% — Fees $ 51m large — Total $177m 29.2% Expenses $54m 45.9% EBIT $123m 23.0% RONA 21.9% 5.8% Net Assets closing 30 June $561m1 FY06 21 Net Assets ope
Slide 22: Asset Management
Asset Management EBIT up 23% 36 (15) (2) 123 100 2 2 $m 2005 EBIT Yield Realised gains Net fee income Employee expense Other expense 2006 EBIT 22
Slide 23: Asset Management
Asset Management Key performance trends Asset 250 100% Cost / Income / Income Expenses 90% Ratio % $MN 04-06 CAGR 200 80% 42% 177 70% 150 60% 137 50% 100 40% 88 30% 30% 30% 27% 44% 50 54 20% 37 26 10% 3,665 12% 0 2,904 3,238 0% 2004 2005 2006 Assets under Mgt Income Expenses Cost/Income Ratio RONA n
Slide 24: Asset Management
Asset Management Spread business continues to perform Spread1 • Investment strategy: 3.0% – Long term predictable income streams 2.0% – Target asset allocation 1.0% • Property 30% 0.0% • Infrastructure 30% 2004 2005 2006 • Fixed Income 30% • Other 10% – Active investor with total return Realised gai
Slide 25: Asset Management
Asset Management Spread business continues to perform Asset Management Statutory Net Assets • Capital 1,000 m – S&P rating ‘A’1 800 m 600 m – Provides significant benefits 400 m – Disciplines and systems to 200 m maintain in place 0m 2004 2005 2006 *Policy liability at June 2004 valued at market val
Slide 26: Asset Management
Asset Management Fee income – the emerging new business Fee income • Investment in revenue producers 50.0 40.0 – Senior hires across investment classes 30.0 20.0 10.0 - • Future growth 2004 2005 2006 – High growth environment – Listed and unlisted property trusts Asset Management – environment growt
Slide 27: Financial Planning
Financial Planning Fundamentals improving Net Income $43m 10.3% Expenses $36m 5.9% EBIT $7m 40.0% RONA 4.9% 22.5% Net assets 1 July 2005 $144m FY06 Net assets closing 30 June 2006 $146m FY07 27
Slide 28: Financial Planning
Financial Planning EBIT up 40.0% 5 (3) (4) 3 1 7 $m 5 2005 EBIT Underlying growth Synergy platform Synergy cost Investment in brand Other income 2006 EBIT in fee income repricing savings and systems 28
Slide 29: Financial Planning
Financial Planning Key performance trends Asset 70 102% 100% Cost / Income / Income Expenses 90% Ratio % $MN 60 87% 83% 80% 04-06 CAGR 50 70% 37% 43 60% 40 39 36 25% 50% 34 30 40% 23 20 30% 20% 10 10% 7% 0 1,668 1,742 1,914 0% 2004 2005 2006 Funds under Admin Income Expenses Cost/Income Ratio RONA n
Slide 30: Financial Summary
Financial Summary Corporate costs (13) (71) (10) (8) (41) 1 $m ` * % 8 ! 9$ %* " # * 30
Slide 31: Balance Sheet
Balance Sheet Post deconsolidation of CIF $m FY 06 FY 051 Assets Cash 389 491 20.8% Investments 3,417 3,041 12.4% Goodwill 554 562 1.4% Other assets 564 361 56.2% Securitised assets 19,668 16,937 16.1% Total Assets 24,592 21,392 15.0% Liabilities Debt 636 601 5.8% Policy liabilities 2,138 2,271 5.9%
Slide 32: Cashflow
Cashflow Post deconsolidation of CIF $m FY 06 FY 051 Opening cash balance 491 626 21.7% Operating cashflows2 229 162 42.0% Investing activities 252 1,113 77.4% Financing activities (593) (1,410) 58.0% Cash acquired on acquisition 10 - - Closing cash balance 389 491 20.7% Available cash balance3 62 7
Slide 33: Debt & Gearing
Debt & Gearing $m FY 06 FY 05 Debt Financial debt1 Corporate facilities 120 70 71% Other - 2 large Total Financial Debt 120 72 Operating leverage2 within: MM – securitisation trusts 19,680 16,945 16 % MM – NIM facility 230 180 27 % AM – property trusts 286 349 18 % AM – CIF 1,135 - Total Operating L
Slide 34: Dividend
Dividend Board approved policy • Pay out a minimum of 30% of statutory profits after tax 7.5 35.0% • Final dividend declared 30.0% – 5 cents per share – fully franked 25.0% 5 • Full year dividend 7.5 cents Payout ratio % 20.0% – payout ratio 33% cents – 50% increase on FY05 15.0% • Dividend reinvest
Slide 35: Outlook 2006/2007
Outlook 2006/2007 • Continuing to build on core themes across all business lines — Mortgage Management: Continued focus on profitable growth through leading product, technology, and service offering; while maintaining cost to book size — Funds Management: Continued focus on delivering sustainable al
Slide 36: Summary
Summary CGF invests to deliver double digit EPS growth • 49% increase in NPAT1 • Strong performance across the Group: — Quality products & services delivered 16% in Assets & Loans under Management — Scaleable business model delivered 30% in income, 12% in costs 1 and 58% in EBIT — Low cost model foc
Slide 37: Key dates
Key dates 2006 27 September Dividend record date 20 October Dividend payment date 25 October Educational briefing for analysts 23 November Annual General Meeting 2007 26 February Half-year results to 31 December 2006 37
Slide 38: Appendix
Appendix 38
Slide 39: Consolidated Profit and Loss Statutory
39 Consolidated Profit and Loss Statutory Appendix - 1 AIFRS AGAAP AIFRS $m FY 06 FY 05 FY 04 2H 06 1H 06 2H 05 1H 05 Income Net rental income 95 63 96 46 49 33 30 Investment income 99 139 84 50 49 68 71 Net realised and unrealised gains/(losses) 97 136 166 60 37 29 107 Annuitant funding and policy
Slide 40: Reconciliation of Statutory to Historic Cost
Consolidated Profit and Loss Reconciliation of Statutory to Historic Cost Appendix - 2 $m FY 06 FY 05 2H 06 1H 06 2H 05 1H 05 Statutory net profit after tax 134 120 74 60 65 55 Recurring items i) Subtract excess of movement in fair value of investment assets over accrued investment income under hist
Slide 41: Consolidated Profit and Loss Historic cost
a4 Consolidated Profit and Loss _ Historic cost' Appendix - 3 $m FY06 FYO5 FY04? 2H 06 1H 06 2H 05 1H 05 2H 04? 1H 04? Income Net rental income M5 55 84 46 49 27 28 42 42 Investment income 100 138 82 50 50 67 71 44 38 Realised gains 53 51 29 36 17 15 36 24 5 Interest paid and selling costs (122) (12
Slide 42: Consolidated Balance Sheet AIFRS reconciliation
42 Consolidated Balance Sheet AIFRS reconciliation Appendix - 4 AIFRS AIFRS AGAAP $m $m $m 1 July 2005 Movement 30 June 2005 Movement 30 June 2005 Assets Cash and cash equivalents 490.7 - 490.7 (6) 496.4 Receivables 156.5 (2) 158.3 (131) 288.9 Debt securities - - - (754) 753.9 Investment assets 1,06
Slide 43: Issued Share Capital, EPS and DPS
Issued Share Capital EPS and DPS Appendix - 5 2H06 1H06 2H05 1H05 2H04 1H04 Ordinary Shares: Quoted (CGF) Opening Bona 534,269,048 528,441,048 2,866,703,735 2,439,035,735 - Additions (+) i) DRP 371,823 530,669 = = = = ii) LTIP 6,478,000 3,548,000 5,828,000 = 427,668,000 = iti) LTIP shares bought bac
Slide 44: Earnings per share
44 Earnings per share FY 06 FY 05 2H06 1H06 2H05 1HO5 Basic - reported statutory 24.9 22.7 13.7 11.2 12.4 10.6 Basic — underlying statutory 28.4 22.7 15.2 11.2 12.4 10.6 Basic — historic cost 21.6 15.9 10.8 10.8 74 8.6 Diluted — reported statutory 23.9 22.7 13.0 11.2 12.3 8.6 Diluted - underlying st
Slide 45: Divisional Performance - Mortgage Management
Divisional Performance —- Mortgage Management Appendix - 6 $m FY06 FY05 FY04 2H 06 1H 06 2H 05 1H 05 2H 04 1H 047 Income Net Investment Income = = = = = = = = = Fees received 282 235 149 145 137 122 113 97 52 Fees and commissions paid (74) (65) (43) (37) (37) (33) (32) (29) (14) Acquisition cost amo
Slide 46: Divisional Performance - Mortgage Management Residential
Divisional Performance - Mortgage Management Residential Appendix - 6.1 $m FY06 FY05 FY04 2H 06 1H 06 2H 05 1H 05 2H 04 1H 047 Income Net Investment Income = - - = - - = - - Fees received 259 214 127 133 126 112 102 86 4 Fees and commissions paid (74) (65) (43) (37) (37) (33) (32) (29) (14) Acquisit
Slide 47: Divisional Performance - Mortgage Management Commercial
Divisional Performance —- Mortgage Management Commercial Appendix — 6.2 $m FY06 FY0S FY04 2H 06 1H 06 2H 05 1H 05 2H 04 1H 04 Income Net Investment Income = - - = - - - - - Fees received 23 21 22 12 11 10 11 11 11 Fees and commissions paid - - - - - - - - - Acquisition cost amortisation - - - = - -
Slide 48: Divisional Performance Funds Management
48 Divisional Performance Funds Management Appendix - 7 $m FY06 FY05 FY04 2H 06 1H 06 2H 05 1H 05 2H 04 1H 04 Income Net Investment Income = - - = - - - - - Fees received 116 76 Py 65 52 44 32 40 35 Fees and commissions paid (27) (20) (28) (15) (12) (10) (11) (14) (14) Acquisition cost amortisation
Slide 49: Divisional Performance Asset Management
Divisional Performance Asset Management Appendix - 8 Historic cost'$m FY06 FY05 FY04 2H 06 1H 06 2H 05 1H 05 2H 04 1H 04 Income Net rental income 95 55 84 46 49 27 28 42 42 Investment income 100 138 82 50 50 67 71 44 38 Realised gains 53 51 29 36 17 15 36 24 5 Interest paid and selling costs (122) (
Slide 50: Asset Management Balance Sheet
50 Asset Management Balance Sheet Appendix - 8.1 FY06 1H 06 FY 05 $m Stat HC A Stat HC A Star HC A Cash 349 349 - 396 396 - 424 424 - Debt investments 728 726 2 900 892 8 751 745 6 Equity and other investments 50 53 (3) 104 82 22 176 170 6 Infrastructure investments 409 391 18 301 299 2 344 314 30 N
Slide 51: Divisional Performance Financial Planning
51 Divisional Performance Financial Planning Appendix - 9 $m FY06 FY05 FY04 2H 06 1H 06 2H 05 1H 05' 2H 04 1H 04 Income Net Total Investment Income = - = = = = = - = Fees received 155 132 61 80 75 69 63 31 30 Fees and commissions paid (114) (93) (38) (59) (55) (49) (44) (18) (20) Acquisition cost am
Slide 52: Corporate
Corporate Appendix - 10 $m FY06 FY05 FY04 2H 06 1H 06 2H 05 1H 05" 2H 04 1H 04 Income Net Income 2 - = = = = = Expenses Employee expenses’ (20) (17) (15) (11) (9) (8) (8) (5) (10) Other expenses (3) (8) - - (3) (4) (4) = = Total expenses (23) (24) (15) (11) (12) (12) (12) (5) (10) EBIT (23) (24) (15
Slide 53: Group Assets and Loans under Management
53 Group Assets and Loans under Management Appendix - 11 $m 2H06 1HO6 2H05 1H05 2H04 1H04 Asset Management Assets managed for the Life company Property’ (515 1,422 1,329 969 823 875 Debt investments (inlcuding hybrids) and cash 1,055 1,284 1,124 1,667 1,756 1,307 Infrastructure assets? 409 301 344 2
Slide 54: Reconciliation of Wealth Management segment reporting
54 Reconciliation of Wealth Management segment reporting to Funds Management and Financial Planning Appendix - 12 $m FY 05 FY 04 1H 06 2H 05 1H 05 2H 04 1H 04 Wealth Management EBIT reported under AGAAP' 6 (5) na 5 1 (1) (4) Less: Acquisition restructure adjustments under AIFRS ¢ HSBC Asset Manageme
Slide 55: Group EBIT & Operating Efficiency
Group EBIT & Operating Efficiency Operating efficiency Group EBIT (Historic cost) 250 90% 120 80% 200 70% 100 60% 80 150 $ millions 50% $ millions 60 40% 100 40 30% 50 20% 20 10% 0 0 0% 1H 04 2H 04 1H 05 2H 05 1H 06 2H 06 1H 04 2H 04 1H 05 2H 05 1H 06 2H 06 Net income Cost to income EBIT contributio
Slide 56: Divisional EBIT & Operating Efficiency
Divisional EBIT & Operating Efficiency Mortgage Management EBIT Operating efficiency - MM 80 50% 45 40 70 48% 35 60 46% 30 $ millions 50 25 $ millions 44% 20 40 15 42% 30 10 40% 5 20 0 38% 10 1H 04 2H 04 1H 05 2H 05 1H 06 2H 06 0 36% 1H 04 2H 04 1H 05 2H 05 1H 06 2H 06 Net income Cost to income Fund
Slide 57: Divisional EBIT & Operating Efficiency
Divisional EBIT & Operating Efficiency Asset Management EBIT (Historic cost) Operating efficiency - AM 70 100 50% 60 90 45% 80 40% 50 $ millions 70 35% 40 60 30% $ millions 30 50 25% 20 40 20% 30 15% 10 20 10% 0 10 5% 1H 04 2H 04 1H 05 2H 05 1H 06 2H 06 0 0% 1H 04 2H 04 1H 05 2H 05 1H 06 2H 06 Net i
Slide 58: Glossary
Glossary MM Mortgage Management division FM Funds Management division AM Asset Management division FP Financial Planning division Corporate All other non cash generating unit activity Net rental income (AM only) Gross rental income less trust expenses, financing costs directly associated with proper
Slide 59: Glossary
Glossary Acquisition cost amortisation Amortisation of upfront payments to mortgage originators (deferred acquisition (MM only) costs) spread over expected average life of loans plus upfront capitalised bond issuance and securitisation costs (deferred portfolio costs) spread over the expected life o
Slide 60: Disclaimer
Disclaimer: The material in this presentation is general background information about Challenger Financial Services Group activities and is current at the date of the presentation. It is information given in summary form and does not purport to be complete. It is not intended to be relied upon as ad
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