Challenger Limited · ASX:CGF
Challenger — Challenger Financial Services Group — FY2005 Earnings Presentation
57 slides from Challenger's earnings presentation, Aug 29, 2005
Slide 1: Add image for first slide
Add image for first slide 1
Slide 2: Full-year results to 30 June 2005
Challenger Financial Services Group Limited Full-year results to 30 June 2005 Michael Tilley, CEO Tim Foster, CFO 29 August 2005
Slide 3: FY05 Highlights
FY05 Highlights Î Historic cost net profit after tax and before goodwill up 100% to $94 million Î Revenue up 36% Î Historic cost EBIT up 107% to $122m Î EBIT margin up from 11% to 17% - significant reduction in headcount, controllable costs grew 4% year on year Î $1.5 billion reduction in debt in 12
Slide 4: Summary financials
Summary financials 12 months to 12 months to June 2005 June 2004 % $m $m Profit before interest, tax and goodwill amortisation: Statutory “MoS” basis 207 160 29 Historic cost basis 152 91 67 Profit after tax before goodwill: Statutory “MoS” basis 135 97 39 Historic cost basis 94 47 100 Profit/(loss)
Slide 5: Contents
Contents Business overview 6 Financial results 9 Challenger Life 13 Challenger Wholesale Finance 15 Challenger Wealth Management 16 Summary 27 Appendix 30 5
Slide 6: Our model
Our model Servicing the needs of financial intermediaries & their clients Challenger Life Challenger Challenger Wealth Management Wholesale Finance Structures & manages Provides quality Provides competitive global assets to generate investment products lending products to long term predictable for i
Slide 7: Milestones
Milestones 12 months to 30 June 2005 Challenger Group Over 100% increase in earnings on strong revenue and margin growth Strong growth across all business lines - RONA achieved in 2 divisions Net debt reduced by $1.5b to $601m 5 cent dividend declared Challenger Life Challenger Wholesale Challenger
Slide 8: Highlights
Highlights 12 months to 30 June 2005 2005 2004 Challenger Infrastructure Fund (CIFCA) North of England Gas Distribution Network July Nov launched acquired (5.8%) - $85m Funds under management increase 71% for the UK & US property sales settled - GBP287m and June year (HSBC adds $3b in FUM) USD71m Re
Slide 9: Summary of earnings
Summary of earnings 12 months to 30 June 2005 Consolidated - Life ‘MoS’ Consolidated - Life statutory basis Historic cost basis $m $m June 2005 June 2004 % June 2005 June 2004 % Profit pre-tax & corporate 207 160 29 152 91 67 charges Corporate charges Interest (17) (11) 54 (17) (11) 54 Goodwill (24)
Slide 10: Earnings by segment
Earnings by segment 12 months to 30 June 2005 Consolidated - Life ‘MoS’ Consolidated - Life statutory basis Historic cost basis $m $m June 2005 June 2004 % June 2005 June 2004 % Challenger Life 155 131 18 100 62 61 Challenger Wholesale 65 37 76 65 37 76 Finance Challenger Wealth 6 (5) - 6 (5) - Mana
Slide 11: Group profit & loss account
Group profit & loss account Historic cost EBIT margin from 11% to 17% 30 June 30 June 2005 2004 % 700 $m $m 600 Revenue 712 523 36 Expenses (492) (400) 23 500 EBITDA 220 123 79 400 Depreciation & amortisation (98) (64) 53 300 EBIT 122 59 107 Net interest (17) (11) 54 200 Net profit before 105 48 119
Slide 12: Assets under management/administration
Assets under management/administration as at 30 June 2005 Total Group assets increased 30% 30 June 2005 30 June 2004 $m $m % Net Life assets backing annuity 11 2,950 2,651 obligations Wholesale Finance loans 18,471 16,229 14 Investment FUM1,2 10,867 6,360 71 Funds under administration3 1,742 1,668 4
Slide 13: Challenger Life
Challenger Life Statutory result - 12 months to 30 June 2005 30 June 2005 30 June 2004 % $m $m Margins emerging: • Planned profit margins released 8 5 60 • Net experience items 11 30 (63) • Return from rent less interest used to repay annuitant principal 17 21 (19) • Earnings on excess assets 11 10
Slide 14: Challenger Life
Challenger Life Historic cost earnings – 12 months to 30 June 2005 Exceeds RONA target 12 months ahead of expectations 30 June 2005 30 June 2004 % $m $m Net rental income (less debt interest) 55 84 (34) Investment income 145 82 77 Profit on disposal of properties/assets 51 29 76 Fee income 8 2 300 T
Slide 15: Challenger Wholesale Finance
Challenger Wholesale Finance Profit before tax – 12 months to 30 June 2005 Achieves RONA target in line with expectations 30 June 2005 30 June 2004 % $m $m Commercial Lending 15 15 - Residential Lending 50 22 127 Total 65 37 76 Challenger Wholesale Finance returned 20% on RONA of $324m 15
Slide 16: Challenger Wealth Management
Challenger Wealth Management Profit/(loss) before tax – 12 months to 30 June 2005 Achieves profitability 12 months ahead of expectations 30 June 2005 30 June 2004 % $m $m Funds Management and 2 - - Administration Financial Planning 4 (5) - Total 6 (5) - 16
Slide 17: Corporate charges
Corporate charges 12 months to 30 June 2005 30 June 2005 30 June 2004 % $m $m Net corporate interest payable (17) (11) 55 Long term incentive plan1/Other (6) (4) 50 Goodwill amortisation (24) (20) 20 Non-recurring management fee - (8) - Goodwill write-off - (280) - Total corporate charges (47) (323)
Slide 18: Group balance sheet
Group balance sheet Statutory – as at 30 June 2005 Continues to strengthen 30 June 2005 30 June 2004 $m $m Cash 496 626 Property investments 1,678 2,535 Other Life investments 1,256 1,331 Goodwill / EMVONA 571 480 Other assets 600 704 Total assets 4,601 5,676 Debt 601 2,066 Policy liabilities 2,272
Slide 19: Debt composition
Debt composition as at 30 June 2005 Significantly de-risked the business 30 June 2005 30 June 2004 $m $m Within property trusts 349 1,689 Margin lending loans - 139 Group corporate debt facilities 250 235 Other 2 3 Total debt 601 2,066 Net debt1 / Net debt1 & SHF 12% 15% 1 Excludes debt within prope
Slide 20: Summary of cash flow
Summary of cash flow 12 months to 30 June 2005 Strong operating cash flows 30 June 2005 30 June 2004 $m $m Opening cash balance 626 660 Operating 244 163 Investing activities 1,113 (271) Financing activities (1,487) 52 Prior period reclassification/FX changes - 22 Closing cash balance 496 626 20
Slide 21: RONA targets
RONA targets to year end 30 June 2006 Net assets 2006 2005 % $m $m Challenger Life1 561 483 16 Challenger Wholesale Finance 360 324 11 Challenger Wealth Management 275 207 33 Target return of 18% on 2006 net assets • Life – 2006 • Wholesale Finance – 2006 • Wealth Management - 2007 1Historic cost ba
Slide 22: Capital management
Capital management • Dividend — 5 cent dividend declared – fully franked — After 2004/05 dividend, franking pool of $24m (tax effect) — Dividend re-investment plan initiated – no discount and not underwritten • $1.5 billion in debt reduction in 12 months • New core debt facility entered into in June
Slide 23: Capital management
Capital management Excess assets above solvency position Challenger Stat Fund 2 - Annuities 450 426 400 350 Excess 226 Assets over 300 Target 271 250 200 150 Target 199 Surplus 100 53 50 0 Jun-03 Jun-04 Jun-05 23
Slide 24: IFRS
IFRS Estimated change in 1 July 2004 opening balance sheet Reduction in shareholder equity $m Shareholder equity under AGAAP as at 30 June 2004 1085 LTIP loans and share capital treated as options (118) Internally generated EMVONA written off to retained earnings (25) Estimated opening shareholder e
Slide 25: IFRS
IFRS Estimated impact on 2006 accounts relative to 2005 Estimated impact on profit after tax $m LTIP amortisation (4) No Goodwill amortisation 24 Estimated change from known impacts 20 Investment and Insurance contracts: • Statutory accounting: - Annuity Liabilities – Fair Value compared to MoS - De
Slide 26: Outlook 2006
Outlook 2006 Î Building on our scaleable model Î Challenger Life - increased earnings from structuring, asset management and underwriting activities Î Challenger Wholesale Finance – positioned for growth Î Challenger Wealth Management - increased in-flows across product range and growth in member fi
Slide 27: Summary
Summary Î Strong performance across all three businesses — Challenger Wholesale Finance returns 20% RONA — Challenger Life returns 20.7% RONA a year ahead of target date — Challenger Wealth Management profitable 12 months ahead of target date Î Productivity gains across the Group including an increa
Slide 28: Key dates
Key dates 2005 16 September Educational briefing for analysts 21 October Dividend payment date 24 November Annual General Meeting 2006 27 February Half-year results to 31 December 2005 released 28
Slide 29: Questions/Discussion
€2 challenger Financial Services Group Questions/Discussion
Slide 30: Appendix
F Appendix
Slide 31: Challenger Life
Challenger Life 29 August 2005
Slide 32: Challenger Life Overview
Challenger Life Overview • Challenger Life delivers 20.7% RONA target exceeding 18% target 12 months ahead of schedule • Established infrastructure capability, invested $430 million in infrastructure assets and launched the Challenger Infrastructure Fund (CIFCA) • Significantly de-risked the busines
Slide 33: Challenger Life
Challenger Life Historic cost balance sheet - to 30 June 2005 30 June 2005 30 June 2004 $m $m Cash 424 583 Property investments 1,504 2,523 Other Life investments 1,229 1,340 Goodwill / EMVONA 83 84 Other assets 74 57 Total assets 3,314 4,587 Debt 331 1,783 Policy liabilities 2,230 2,050 Other liabi
Slide 34: Challenger Life
Challenger Life Historic cost earnings 30 June 2005 30 June 2004 $m $m Net rental income (less debt interest) 55 84 Investment income 145 82 Profit on disposal of assets 51 29 Fee income 8 2 Total net revenue 259 197 Annuitant interest 107 95 Expenses: Third party commissions - annuities 15 14 Overh
Slide 35: Challenger Life
Challenger Life Excess assets above solvency position – Statutory Fund No.2 Year Ending 30 June 2005 30 June 2004 30 June 2003 $m $m $m Total assets1 2,901 2,607 2,127 Solvency 2,475 2,336 2,074 requirements (MCR) Excess assets above 426 271 53 solvency Target surplus 199 - - Excess assets over 227
Slide 36: Challenger Life
Challenger Life Annuity sales - Historical 140.00 120.00 100.00 80.00 $m 60.00 40.00 20.00 0.00 Jul-01 Aug-01 Apr-02 Jun-02 Jul-02 Aug-02 Apr-03 Jun-03 Jul-03 Aug-03 Apr-04 Jun-04 Jul-04 Aug-04 Apr-05 Jun-05 Jul-05 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 May-02 Sep-02 Oct-02 Nov-02 Dec-02 J
Slide 37: Challenger Life
Challenger Life Current net asset portfolio 5% $153m • Diverse portfolio of assets 2 • Portfolio is actively managed – aim to 1210% turnover every 6 years $344m • Investment team looks for opportunities to add value 42 51% • $430m invested in infrastructure in 12 34% 43 $1678m months $1124m • Target
Slide 38: Challenger Wholesale Finance
Challenger Wholesale Finance 29 August 2005
Slide 39: Challenger Wholesale Finance Overview
Challenger Wholesale Finance Overview • First full year of Residential Lending (Prime, Non Conforming) and Commercial Lending (real estate, inventory finance) operating as one division • Achieved 20% RONA exceeding 18% target for 2005 • Residential loan book growth 38% above market • Net margin impr
Slide 40: Challenger Wholesale Finance
Challenger Wholesale Finance Financials - 12 months to 30 June 2005 Total Total 30 June 2005 30 June 2004 $m $m Revenue 244 149 Operating Expenses before amortisation & (71) (43) interest Overhead (47) (31) EBITA 126 75 Amortisation (61) (38) EBIT 65 37 Closing mortgage portfolio 18,471 16,229 Avera
Slide 41: Challenger Wholesale Finance
Challenger Wholesale Finance Financials - 12 months to 30 June 2005 Residential Commercial Total 30 June 2005 30 June 2005 30 June 2005 $m $m $m Revenue 223 21 244 Operating Expenses before (71) - (71) amortisation & interest Overhead (41) (6) (47) EBITA 111 15 126 Amortisation (61) - (61) EBIT 50 1
Slide 42: Challenger Wholesale Finance
Challenger Wholesale Finance Financials - 12 months to 30 June 20041 Residential Commercial Total 30 June 20041 30 June 2004 30 June 2004 $m $m $m Revenue 127 22 149 Operating Expenses before (43) - (43) amortisation & interest Overhead (24) (7) (31) EBITA 60 15 75 Amortisation (38) - (38) EBIT 22 1
Slide 43: Challenger Wholesale Finance
Challenger Wholesale Finance Residential - 12 months to 30 June 2005 Residential Residential 30 June 2005 30 June 20041 $m $m Revenue 223 127 Operating Expenses before amortisation & interest (71) (43) Overhead (41) (24) EBITA 111 60 Amortisation (61) (38) EBIT 50 22 Closing mortgage portfolio 16,03
Slide 44: Challenger Wholesale Finance
Challenger Wholesale Finance Commercial - 12 months to 30 June 2005 Commercial Commercial 30 June 2005 30 June 2004 $m $m Revenue 21 22 Operating Expenses before amortisation & interest - - Overhead (6) (7) EBITA 15 15 Amortisation - - EBIT 15 15 Closing mortgage portfolio 2,438 2,407 Average mortga
Slide 45: Challenger Wholesale Finance
Challenger Wholesale Finance Residential net margin 30 June 2005 30 Jun 2004 $m $m Revenue 223 127 % of average mortgage portfolio 1.49% 1.33% Operating expenses before amortisation 71 43 % of average mortgage portfolio 0.47% 0.45% Amortisation expense 61 38 % of average mortgage portfolio 0.41% 0.4
Slide 46: Challenger Wholesale Finance
Challenger Wholesale Finance Residential overhead 30 June 2005 30 June 2004 $m $m Overhead 41 24 % of average mortgage portfolio 0.27% 0.25% • 04/05 is first full period of CSFG infrastructure sharing • Costs reduced in second half 46
Slide 47: Challenger Wholesale Finance
Challenger Wholesale Finance Commercial Lending revenue & overhead expenses 30 June 2005 30 June 2004 $m $m Revenue 21 22 % of average mortgage portfolio 0.87% 1.00% Overhead expenses 6 7 % of average mortgage portfolio 0.25% 0.32% • Revenue marginally down due to : — Lower penalty interest with imp
Slide 48: Challenger Wholesale Finance
Challenger Wholesale Finance Operating cashflow 30 June 2005 30 June 2004 $m $m EBIT 65 37 Add back: Depreciation & amortisation 61 39 Deferred origination & portfolio costs (72) (67) Timing differences accrued income and payables (8) (4) Operating cashflow before interest & tax 46 5 • Portfolio rea
Slide 49: Mortgage book growth - Residential
Challenger Wholesale Finance Mortgage book growth - Residential 16% residential loan book growth 16,500 16,000 15,500 Total loan book ($m) 15,000 14,500 14,000 13,500 13,000 12,500 12,000 Mar-05 May-05 Sep-04 Nov-04 Apr-05 Jun-04 Jun-05 Aug-04 Dec-04 Jan-05 Feb-05 Jul-04 Oct-04 Total Residential 49
Slide 50: Mortgage book growth - Commercial
Challenger Wholesale Finance Mortgage book growth - Commercial Loan book growth 5% after sale of CMBS 3,000 2,500 Total loan book ($m) 2,000 1,500 1,000 500 0 May-05 Mar-05 Sep-04 Nov-04 Apr-05 Jun-04 Aug-04 Dec-04 Jan-05 Feb-05 Jun-05 Jul-04 Oct-04 Total Commercial 50
Slide 51: Challenger Wealth Management
Challenger Wealth Management 29 August 2005
Slide 52: Challenger Wealth Management Overview
Challenger Wealth Management Overview • Challenger Wealth Management profitable 12 months ahead of schedule • FUM increased 73% in 12 months to June 2005 • Legacy in the past – all systems integrated and highly scaleable • HSBC a good acquisition — Delivers economies of scale and immediately accreti
Slide 53: Breakdown of result - Funds Management
Challenger Wealth Management Breakdown of result - Funds Management 30 June 2005 30 June 2004 $m $m Net revenue 72 641 Expenses (70) (64)1 Pre-tax contribution 2 - 1 Includes re-classification on a “like for like” basis for changes to segmental reporting announced 4 August 2005 and to “gross up” 200
Slide 54: Breakdown of result - Financial Planning
Challenger Wealth Management Breakdown of result - Financial Planning 30 June 2005 30 June 2004 $m $m Gross revenue 97 27 Net revenue 24 6 Expenses (20) (11) Pre-tax contribution 4 (5) Revenue and cost synergies realised from FY05 13/8/04 Associated Planners acquisition and subsequent merger with Ga
Slide 55: FUM/FUA growth
Challenger Wealth Management FUM/FUA growth 14,000 12,000 10,000 8,000 $m's 6,000 4,000 2,000 0 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 FUA* Institutional Retail * FUA excludes Corporate Superannuation (sold March 2004 Quarter) 55
Slide 56: FUM by type of fund/mandate
Challenger Wealth Management FUM by type of fund/mandate at 30 June 2005 2% • Revenue diversification strategy contributing to profit growth and 26% 26% robustness of FUM • Australian equities FUM reflects 10% multiple sources — In-house capabilities 31% 5% — Manage-the-manager — Alliances Australia
Slide 57: Movement in FUM/FUA
Challenger Wealth Management Movement in FUM/FUA Retail Funds Institutional Platform/Wrap Total Administration $m $m $m $m Opening Balance 5,175 942 1,668 7,785 Acquired with HSBC 1,508 1,486 0 2,994 (inc flows to June 05) Net Inflow (ex HSBC) 602 296 (105) 793 Investment Earnings (net of distributi
Challenger Financial Services Group — FY2005 Earnings Presentation on 6ix