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Edited Transcript of CGF.AX earnings conference call or presentation 13-Aug-19 12:30am GMT

Full Year 2019 Challenger Ltd Earnings Call

Sydney Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Challenger Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Tobin

Challenger Limited - CFO

* Richard J. Howes

Challenger Limited - MD, CEO & Director

* Stuart Kingham

Challenger Limited - Head of IR

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Conference Call Participants

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* Ashley Dalziell

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Brendan Carrig

Macquarie Research - Research Analyst

* Brett Le Mesurier

Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance

* Daniel P. Toohey

Morgan Stanley, Research Division - Executive Director

* Kieren Chidgey

UBS Investment Bank, Research Division - Executive Director & Research Analyst

* Matthew Dunger

BofA Merrill Lynch, Research Division - Research Analyst

* Nigel Pittaway

Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst

* Rodney Forest;W.H. Soul Pattinson;Analyst

* Siddharth Parameswaran

JP Morgan Chase & Co, Research Division - Research Analyst

* Simon Fitzgerald

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

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Presentation

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Stuart Kingham, Challenger Limited - Head of IR [1]

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Good morning, and welcome. I'm Stuart Kingham, Challenger's Head of Investor Relations, and welcome to our 2019 full year results briefing. In a moment, I'll ask Richard Howes, our Chief Executive Officer, to open today's session. That will be followed by a question-and-answer session. We are being webcast today, so could I just please remind those present just to flick your mobile phone on to silent?

I'll hand you over to Richard to get us underway.

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Richard J. Howes, Challenger Limited - MD, CEO & Director [2]

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Thank you, Stu. Good morning, everyone, and welcome. Welcome to Challenger's 2019 Financial Results Briefing. The results we're sharing with you today demonstrate the resilience of our business in the face of a challenging operating environment. And they show that we continue to be well positioned for growth as conditions improve. Now it will come as no surprise that we're operating in a disrupted environment. The broader financial services industry and the wealth segment in particular have experienced considerable structural and regulatory change as businesses deal with compliance concerns, business model uncertainty and change across many dimensions following the Royal Commission.

Evidence of this disruption can be found in the churn among financial advisers as they move around within the industry or exit the industry altogether. This disruption has had a clear impact on our performance this year with our earnings growth being lower than we expected when we set our targets 12 months ago.

I'm really pleased that despite the challenging operating environment, we've delivered stable earnings for the year and made good progress in implementing our strategy. This demonstrates the resilience of our business and is an acknowledgment of the strong foundations upon which Challenger has been built over the last 10 years of disciplined execution of our strategy. This morning, I'll provide a summary of our high-level results and key outcomes for the year. Andrew will provide more detail in our financial performance, and then I'll finish with insights into our priorities and our outlook before turning over to questions.

Overall, in FY '19, we've delivered a solid set of numbers considering the high level of disruption in our market. Group assets under management were up slightly on FY '18 at $81.8 billion. AUM was impacted by lower Life sales, including a significantly reduced contribution from MS Primary and net outflows in our Funds Management business. Breaking this down across the 2 businesses, Life AUM was up 5% on FY '18 and Funds Management FUM was up 1%.

Normalized profit before tax was up $1 million to $548 million for the year, which is in line with the revised guidance we provided in January. Normalized NPAT was down $10 million, reflecting the higher effective tax rate. Statutory profit after tax was down $15 million to $308 million, including $88 million of negative investment experience. You can see from the third chart that the negative investment experience of $193 million in the first half was partially offset by $105 million in positive experience in the second half.

Importantly, this capital position -- importantly, our capital position remains strong with $1.4 billion in excess regulatory capital. Our PCA ratio of 1.53x is towards the top end of our range, that being 1.3x to 1.6x the minimum amount set by APRA. Our strong capital position supports future growth in our annuity book and helps make sure we're well positioned to manage the business through this period.

The resilience in our earnings this year reflects the continued progress we've made in implementing our growth strategy. Challenger is recognized as the clear leader in retirement incomes. Our strong brand is particularly valuable in this environment as trust in our sector is significantly challenged. In the latest Marketing Pulse Adviser Study, 95% of advisers rated Challenger as a leader in retirement income. This is 36% clear of our next closest peer and is evidence of the high level of trust that advisers have in our brand and in the quality of our products.

Alongside this strong brand position, we've also built a diverse distribution network. In FY '19, we launched Challenger annuities on 3 leading investment platforms used by independent financial advisers, these being BT Panorama, Hub24 and Netwealth. These partnerships allow us to reach a broader range of financial advisers with our products.

A highlight in FY '19 was the announcement of our expanded partnership with the MS&AD group. From 1 July, we commenced reinsuring U.S. dollar annuities in Japan, which will result in a significant increase in annuity sales in FY '20 and beyond. This initiative is off to a great start. In the first month of this financial year, our MSP sales have significantly exceeded the total sales through this channel in the fourth quarter of FY '19. The expanded partnership also brings opportunities for an even closer working relationship between our 2 businesses, with an MS&AD representative joining our Board. Moreover, it's seen MS&AD increase their shareholding, and this is something I take as a vote of confidence from them in our business and in our strategy.

In our Funds Management business, we're focused on launching new boutiques and new products. We're currently working on expanding our ActiveX Series of active ETFs, which we launched in December [last] year. ActiveX broadens our product offering and directly addresses the growing popularity of exchange-traded funds. It makes it easier for investors to access the extensive expertise of our boutique managers. XARO, which is Ardea's active ETF and the first of our funds on this platform, is off to a great start. So it's now attracting inflows of $4 million to $5 million a week.

We've achieved a record-low cost-to-income ratio of 32.6%. This demonstrates that we have a highly efficient, robust and scalable operating platform. Finally, our best asset is our people, and I'm proud to have a highly engaged team with a strong risk and compliance culture. Our 2019 employee engagement survey revealed a sustainable engagement score of 84%, which is one of the highest in the industry. The survey also highlighted our strong risk culture, with scores in these areas -- in this area averaging 85%. This, along with our strong capital position, reflects our broad commitment across the business to risk management.

Now it's clear that the current environment is presenting challenges for our business. So I'd like to spend a few minutes talking about what's happening in the market and how we're responding. Adviser churn, low productivity levels and ongoing structural change have characterized the disruption we've seen in the financial advice market over the last 3 quarters. This has translated into fewer advisers across a more diverse and dispersed market. Since December, more than 2,500 advisers have left the industry, representing a 9% reduction in their numbers. And advisers continue to be distracted by consumer remediation programs, evolving compliance requirements, business restructurings and uncertainty.

According to industry research, March was the lowest quarter of retail investment flows in 15 years. Now this disruption has affected our domestic annuity sales, particularly in the second half, as you can see from this chart.

The chart also shows the changing composition of sales between major hubs and IFAs. Sales in major hubs were down 16% on FY '19, while IFA sales were up 26%. IFA sales represented 43% of the fourth quarter sales, which is up from 29% in the prior corresponding period. While some of these disruption will be temporary, higher education standards, increased regulation and evolving business models will see lasting changes. However, I see that the fundamental need for advice remains. And advisers and advice businesses will continue to play an important role, particularly for people at the point of retirement. These people place complex and critical decisions and benefit from the help that good advice can bring.

To address the evolving adviser market, we've been focused on supporting and nurturing advice groups and regions that had been less impacted by the disruption. This has involved leveraging our new platform partnerships and adjusting our service strategy to ensure we reach a wider range of financial advisers and supporting those advisers in writing annuities. These initiatives have helped drive the strong growth in sales in the independent financial adviser channel, particularly in the second half.

We've also increased our focus on directly engaging more with our customers, with the aim of building bottom-up customer demand for annuities. In FY '19, we launched a new brand campaign and a new website. These are aimed at building awareness about Challenger and about annuities. These initiatives have been informed by extensive customer and adviser research, and they leverage the expertise and tools that Challenger has built. Now there's more content and tools scheduled for release during FY '20.

As we announced at our Investor Day in June, we're investing up to $15 million in a range of new distribution, product and marketing initiatives to support data integration into the advice process and further build bottom-up customer demand for our products. Now I'll comment on this further when I talk about our priorities to drive long-term growth later in the session.

Against this backdrop, our business has demonstrated its resilience. Retail flows across the industry were down considerably in FY '19, with the sector experiencing $4.4 billion in outflows in the 3 quarters to March '19. Despite this, our domestic annuity sales were down just 4%, with lifetime annuities holding flat for the year. And we continue to generate strong returns in our front book of new annuities, as we illustrated in detail at our Investor Day.

In Funds Management, our performance was impacted by lower performance fees, which were down $16 million on the year. Now when you remove this impact, we saw strong underlying EBIT growth, up 23%, excluding performance fees. Fidante Partners net flows were impacted by significant redemptions from one major superfund, which is predominantly driven by the internalization of their equities portfolio. When we remove this impact, net flows were positive $1.5 billion for the year. Our remaining client portfolio is only a very small exposure to funds known to be pursuing internalization strategies.

At a group level, we remain strongly capitalized with $1.5 billion in excess regulatory capital and group cash. We've generated a strong pretax ROE of 15.8%, which represents an attractive relative return for shareholders. For FY '20 and beyond, we've revised our through-the-cycle ROE target to be 14% above the RBA cash rate or 15% based on the current cash rate. As you can see, our underlying business outcomes are solid in the face of challenges in our operating environment this year. These results demonstrate the resilience of our business and show that we remain in a good position to capture opportunities for change and growth as conditions improve.

I'll now hand over to Andrew to take us through the detailed financial results.

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Andrew Tobin, Challenger Limited - CFO [3]

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Great. Thanks, Richard, and good morning, everyone. As Richard has mentioned already, the financial services industry has seen significant disruption and change this year, which has clearly had an impact on our performance. Sales and book growth have been impacted by adviser disruption, and earnings growth has been below our expectations that was set at the start of the year. Despite this, Challenger's normalized earnings have remained steady for the year, highlighting the resilience of our business.

Looking at the group result, the key headlines are as follows. Net income for the year was $821 million, similar to last year, with income impacted by lower Life equity distributions in the first half and lower Funds Management performance fees in the second half and throughout the year. We remain disciplined on expense management, with expenses down $1 million on last year, and we achieved this while continuing to invest to support our growth, including the further expansion of our retail distribution footprint and the build-out of our Tokyo office.

Overall, group net profit before tax increased by $1 million to $548 million, and the EBIT margin increased slightly to 67.4%, as shown on the right-hand chart.

Now looking at the result in some more detail. Both the Life and Funds Management results were supported by growth in assets under management, which increased by 1% to $81.8 billion. However, a lower Life COE margin and lower Funds Management performance fees offset the benefit of higher assets under management. Life's first half COE margin was impacted by lower equity distributions, with the margin in the second half expanding as equity distributions return to more normal levels.

Funds Management performance fees were modest at $3 million for the year, down from $19 million last year. The lower performance fees offset the benefit of higher average funds under management, which increased by 6% for Funds Management. Consistent with our guidance at the start of the year, the normalized tax rate was 28%, up 2% on last year and resulted in normalized profit after tax decreasing by 2% to $396 million.

In terms of statutory profit, which includes valuation movements on Life assets and liabilities, we saw a negative investment experience of $88 million after tax, resulting in a statutory net profit after tax of $308 million. This was $15 million or 5% lower from 2018. A significant portion of the investment experience in the first half reversed in the second half as credit spreads contracted and we generated strong returns from infrastructure. I'll provide further details in investment experience shortly.

Now moving on to Life performance. Total sales for the period were $4.6 billion, down 18% on last year. The sales outcome reflects 3 themes: lower sales volumes from Japan; lower reinvestments on our institutional products; and domestic adviser and industry disruption.

The lower sales outcome translated into lower book growth, with growth of 3.4% for the year achieved. Annuity book growth was higher at $686 million for the year or 5.8% growth in annuity liabilities. Life cash operating earnings was stable on the prior year, and EBIT increased by $1 million to $564 million. Life return on equity was 17.8% for the year, down 70 basis points compared to 2018. This really reflected the higher shareholder capital levels that were held over the course of the year.

Now let me talk through Life key metrics in a bit more detail. Firstly, focusing on Life sales. Total Life sales decreased by 18% or $1 billion to $4.6 billion. Annuity sales were $458 million lower, and Other Life sales were $548 million lower. Domestic annuity sales declined by $140 million or 4%. And I regard this outcome as positive, given the disruption we've seen in the advice market over the past 9 months or so. It also demonstrates the resilience of our business and our leading retirement incomes brand. Domestic term sales were 6% lower, and pleasingly, we saw Lifetime sales post $853 million to be in line with the FY '18 sales volume. The June quarter saw $252 million of Lifetime sales, with higher sales of the Lifetime regular products ahead of the new means test rules that came into effect on 1 July.

MS Primary sales were down 54% or just over $300 million and represented 8% of annuity sales compared to 15% last year. Sales were impacted by higher U.S. interest rates relative to Australia, increase in the attractiveness of U.S. dollar annuities in Japan over Australian dollar products. As Richard has mentioned, these sales trend has reversed from 1 July with the commencement of our new U.S. dollar reinsurance agreement with MS Primary, where we expect to see volumes increase to approximately $660 million in FY '20.

Other Life sales representing Challenger's institutional Guaranteed Index Return products and the Challenger Index Plus Fund were down by $548 million on last year, mainly as a result of one client not reinvesting a mandate that matured in the period.

Now looking further at book growth. The maturity rate on the portfolio -- on the annuity portfolio was 24% for the year, down from 25% in 2018. However, as I have mentioned, lower MSP sales volumes and disruption across the domestic advice market have led to lower book growth outcomes for the year. Total Life book growth was $475 million or 3.4% and includes annuity net inflows of $686 million, and Other Life outflows were $211 million for the year. Our total Life book now stands at a record level of $14.8 billion. We continue to see a positive shift, with long-term annuities now representing 41% of the total Life book, double what it was 4 years ago and representing nearly half of our total annuity book. We remain confident of being able to continue to grow long-term annuities, with the revised MS Primary reinsurance agreements and the new means test rules supporting domestic Lifetime income streams.

Now looking at Life cash operating earnings margin in more detail. Life margin for the full year was 3.62%, down from 3.93% in 2018. However, the COE margin in the second half was 3.67% and expanded by 10 basis points compared to the first half, as shown on this chart. Key movements in the margin during the period were [11] basis points product margin expansion and a 1 basis point impact from lower normalized growth. The product margin increased by 11 basis points, with both higher asset yields and lower interest and distribution costs. Asset yields increased by 4 basis points, benefiting from higher equity distributions in 2H '19 relative to the first half, partially offset by lower fixed income yields. Interest and distribution costs were 11 basis points lower, reflecting lower annuity pricing and lower sales volumes. Within the product margin, other income was 4 basis points lower in the June half, impacted by timing on the wholesale Life Risk business. Full details on the movement and drivers of the COE margin, including a full analysis of the full year, are outlined in the analyst pack as well.

Now looking at Life investment portfolio. We consistently apply a strong risk management approach and a focus on optimizing return on equity for our shareholders. With strong demand from offshore capital driving our property valuations, the relative attractiveness of holding specific properties over fixed income has reduced over the past year. We have now completed our sales process of lower ROE properties, disposing of approximately $1 billion of property holdings over the course of the year. This has reduced the property allocation from 21% last year to 18%. The allocation reduced by an additional 1% post June 30 following settlement of the final property sold.

Following the property sales, the allocation to fixed income increased by 1% to 66%. We continue to target an investment grade of 75% in the fixed income portfolio and are just sitting just below this at 30 June.

Within the equity portfolio, we continue to move toward a lower beta portfolio, which includes a collar strategy that provides downside protection and also limits the participation upside share price appreciation. Low beta investments now account for approximately half of our equity portfolio. Within infrastructure, the allocation remains stable at 4%, with listed exposures increasing following the sale of the U.K. logistics asset during the last 6 months.

Now turning to investment experience. This chart outlines a breakdown of the pretax investment experience for the year. For fixed income, credit spreads across our portfolio contracted by approximately 30 basis points for the year, resulting in a valuation gain of $41 million. Credit defaults continue to be below our assumed 35 basis points per annum and with 27 basis points or $32 million for the year. After allowing for a normalized default allowance of $42 million, fixed income produced an investment experience gain of $51 million. For our property portfolio, the valuation gains were $44 million, representing both gains on the sale of properties and property revaluations. The office portfolio experienced strong positive revaluations and gains on properties sold but were offset by lower retail property valuations in the period.

The valuation gains represented just over 1% of the property portfolio, which was less than our normalized growth assumption of 2% and so resulted in a negative investment experience of $28 million for the asset class. The equity and other portfolio outcome reflects an actual capital loss of $91 million or negative 4.3%, underperforming Challenger's annual normalized capital growth assumption for 2019 of 4.5%. This was driven partly by benchmark returns for market beta, low beta and absolute return funds being lower than Challenger's total return expectations. In addition, the timing of asset allocation changes and portfolio tracking differences impacted the actual capital growth compared to expected returns. We also experienced lower returns on insurance-linked assets in our alternatives portfolio.

Looking at infrastructure. Infrastructure generated a strong gain of $87 million due to healthy listed valuation gains and a gain on sale of the U.K. logistics asset. And looking at policy liabilities. New business strain of $33 million was offset by a gain of $6 million in relation to assumption and valuation gains. This also includes the benefit of recapturing part of our longevity reinsurance with a global provider during the second half of the year.

Turning now to capital. Challenger's position remains strong, with $1.5 billion of excess regulatory capital, including group cash at balance date. Challenger Life Company's regulatory capital increased by $111 million as a result of increased retained earnings generated in the year. The prescribed capital amount increased by $76 million, mainly reflecting growth in Life's investment assets, offset by a reduction in capital intensity. And this capital intensity fell as a result of a reduced allocation to property in the period and also after implementing the low beta equity portfolio. Overall, the PCA ratio remains stable at 1.53x, APRA's minimum requirement, and is towards the upper end of our target, 1.3x to 1.6x range. The common equity ratio increased slightly to 1.06x at 30 June. Overall, our strong capital position and targeted asset allocation provides significant flexibility and ensures that we are well placed to support future growth of the organization.

Now looking at Funds Management. Net flows for the year were $2.4 billion, and average funds under management increased by 6% to $77.5 billion. Net income growth was impacted by lower performance fees, which was $16 million lower than last year. The performance fee outcome reflects the equity market volatilities during the year, with most mandates not achieving their requisite performance benchmarks.

Excluding the impact of lower performance fees, underlying net income grew by 11%. Expenses increased by $6 million or 6%, predominantly due to the build-out of the Japanese office and increased marketing and technology costs associated with FM's new product and growth initiatives.

Overall, Funds Management EBIT was $51 million, down $7 million. And excluding the impact of lower performance fees, underlying EBIT increased strongly by 23%.

Now turning to Funds Management net flows. Net outflows for the year were $2.4 billion. This includes a single profit-for-member superannuation fund redemption of $3.9 billion, mainly due to that fund internalizing its investment management capability.

As noted in the chart on the right, the risk of further outflows due to internalization is considered low given the current client profile. Only 2% of FUM is managed for a profit-per-member fund, which is actively pursuing an internalization strategy. However, this mandate is in global equities, and at this stage, the client has no intention of internally managing this asset class.

Fidante Partner's retail inflows were very solid at $900 million, especially when considering the disrupted retail advice market. And Challenger Investment Partners net flows were positive $1.2 billion. This mainly reflects additional Life company fixed income mandates following the reduction in Life property allocation.

And finally, in relation to dividends, the Board has declared a final dividend of $0.18 per share fully franked. This represents the full year dividend of $0.355 per share fully franked, unchanged from 2018. The dividend payout ratio was 54.2% and above our targeted range, reflecting the Board's confidence in future growth opportunities and the strength of our capital position. With the Dividend Reinvestment Plan in place, the net cash dividend payout ratio is expected to reduce by approximately 2%. And looking ahead, we also plan to maintain the FY '20 dividend at the same level, being $0.355 per share.

So overall and in conclusion, our results today demonstrate the resilience of our business against the backdrop of advice disruption and market volatility. Our capital position remains very strong, and our business is well positioned to navigate the current operating environment.

I will now hand back to Richard for his comments on strategy and outlook before taking questions. Thanks, Richard.

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Richard J. Howes, Challenger Limited - MD, CEO & Director [4]

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Thanks. Okay. I've talked to you today about the strong foundations underpinning our business, which I credit for the steady performance in FY '19. Looking ahead, I'd now like to talk more about how we plan to build on these foundations, responding to the challenges and opportunities in our operating environment.

The long-term structural tailwinds that drive our business remains strong. Our world-class accumulation system continues to grow strongly, with assets expected to double over the next 10 years. 1 in 4 superannuation dollars are now in retirement, and Australians are retiring with significant household wealth. The average household financial wealth, outside principal place of residence, is approaching in retirement an estimated $680,000 at the point of retirement.

Industry and government recognize this trend and have been increasing their focus in retirement income. New means test rules that came into effect on 1 July this year are designed to encourage the use of innovative retirement income streams, while the government's retirement income framework emphasizes the role of superannuation funds in providing options for retirees that deliver both security and flexibility.

I'm also realistic about the near-term headwinds we face in our operating environment. Ongoing disruption in the financial advice market will continue to impact this important distribution channel. The increased market volatility that we saw through much of FY '19 can reasonably be expected to continue. However, we're well placed for this given our strong capital position. Moreover, volatile markets remind our target market of the value of secure and stable income.

While we have little control over the external factors in our operating environment, we do have a clear strategy to respond to these challenges and capture opportunities driven by the growth in retirement savings. Our priorities build on more long-term strategy for growth and are consistent with our vision to provide financial security for retirement.

Advisers remain an important distribution channel for Challenger. Retirement is complicated and very different to the accumulation phase. Retirees are navigating a myriad of complex social security, tax and aged care rules, while facing a range of risks which are unique to retirement. We recognize that managing all this, while ensuring their pursuit for specific financial goals is difficult. We're therefore big believers in the value of financial advice.

And the disruption to the financial advice industry represents a significant opportunity for Challenger as advice groups fragment and new operating models emerge. As advice groups seek to refine and review the quality of their approach to retirement advice, Challenger as the thought leader and the leading retirement income brand can provide the support and direction to assist them in achieving this. By providing tools, marketing collateral and more tightly integrating into the advice process, we can support advisers providing high-quality retirement advice that deals with the unique risks and challenges in retirement.

Now I'm sure you've seen our new brand campaign, which is in the market currently. It's an integrated campaign and part of our strategy to engage and educate our customers more directly than we've ever done before. Our brand campaign, along with the new website, which we launched in December, are designed to increase awareness and understanding of Challenger and of our annuities in order to drive bottom-up demand for our products. As part of these efforts to partner more closely with advisers and to drive bottom-up customer demand, we're investing up to $15 million in these areas.

Further diversifying our earnings, I will expand upon -- our extended [expanded] strategic partnership with the MS&AD group will see significant increase in the contribution from MSP annuity sales and promote a closer working relationship between our 2 businesses. We're also working on strengthening our relationships with profit-for-member funds to better support them as they increase their focus on providing retirement income solutions for their members.

Fidante Partners is one of the fastest-growing active fund managers in the country. And in FY '20, we'll continue our focus on expanding our products and distribution and on adding new boutiques. This includes increasing and building out our ActiveX offering with additional active exchange traded funds. As always, we'll maintain our focus on our leading operating and people practices to enable the delivery of customer and shareholder outcomes in FY '20. Finally, we'll maintain our strong capital position through prudent financial management.

Turning now to our FY '20 financial outlook, which we shared at our recent Investor Day. We're guiding normalized profit before tax of between $500 million and $550 million. This reflects a $23 million impact on earnings from the lower normalized growth assumption in our equities portfolio, and it also includes the investment of $15 million in a range of DPM initiatives designed to drive the next phase of our customer growth. Moreover, it reflects the lower interest rate environment that we factored into our forecast at the time.

While the disruption of the financial advice market is expected to continue through FY '20, which will impact our domestic annuity book growth, total annuity book growth will be driven by substantial increase in the contribution from MS Primary.

Going forward, we will target an ROE of 14% above the RBA cash rate. And by removing interest rates as a variable from this target, we're focused on achieving a transparent and attractive relative return. The disciplined application of our ROE target reflects our commitment to running our business in a way that delivers strong returns for our shareholders.

We expect the FY '20 dividend to be in the $0.355 per share over the year, and the decision to hold the dividend constant through the year demonstrates our confidence in the future growth of our business.

And finally, we'll continue to be strongly capitalized, with our business in good shape to navigate the current challenges and well positioned to capture opportunities as they emerge.

As we've detailed this morning, our business has proven its resilience this year by delivering a solid result, despite the challenging operating environment that we've experienced. While our earnings growth has been impacted by lower investment returns and lower performance fees, we've seen robust business outcomes and made good progress in implementing our strategy for growth.

We've attracted solid retail flows into both Funds Management and Life, despite retail flows across the industry being at record lows this year. While the disruption in the advice industry is expected to continue in FY '20, we're responding to this environment with a range of initiatives that will support our strategy for growth. While I'm realistic about the challenging operating environment and the impact this has on our performance, I'm confident we're in a good position to manage through this period and capture opportunities for growth as conditions improve.

So that concludes the formal part of the presentation, and Andrew and I will now be delighted to receive your questions.

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Questions and Answers

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Stuart Kingham, Challenger Limited - Head of IR [1]

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Thank you. As a matter of protocol, we'll take questions in the room first before going to the phones. Could I just remind you, if you are asking a question though, if could you just state your name and the company you represent. Thank you.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [2]

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Kieren Chidgey, UBS. Richard, I might just get you to start on the annuity sales, some of the commentary you made around Japan. If you can just clarify, I think you provide some commentary on sales momentum post 1st of July under the new U.S. dollar contract. And if you can maybe contrast that to what you're seeing in the fixed term annuity book here in [August], given lower interest rates post 30 of June?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [3]

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Great. Kieren, thanks for your question. So what I said in the presentation was that the first month MSP sales under our revised partnership was significantly greater than the sales we saw through the MSP channel during the fourth quarter. So it's off to a really good start and in line with our expectations that, that partnership will deliver, at current exchange rates, $660 million of sales over the course of this financial year.

Your next question was on, I think, fixed term annuity sales?

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [4]

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Yes. Just I mean looking at the fourth quarter composition, I think the fixed term booked domestically was down 30%. And we've obviously seen the 3-year bond drop another 30 basis points since the end of June. So I'm just wondering how the sales there are progressing.

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Richard J. Howes, Challenger Limited - MD, CEO & Director [5]

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Yes. Okay. Actually -- so Lifetime sales were up 17%. So that was a good outcome. And that reflected, among other things, in this disrupted environment, some pull forward on our regular premium Liquid Lifetime contracts. Maybe just to touch on that for a second, fourth quarter sales there were $95 million compared to a prior corresponding period of $77 million. So that gives you a sense of some of that -- some of the uplift there.

You're right in saying fixed term annuities were down in the fourth quarter, so 34% lower. There's a number of factors there, most notably the industry disruption more broadly. And there are some hubs that have been historically very big writers of our fixed term annuities that have been affected in that space. I would say also that albeit low interest rates generally I don't see as an issue for annuity sales more broadly, in particular given where -- what annuities compete with in terms of Lifetime annuities in particular, the shape of the short-term yield curve at the moment where current cash rates are higher than 1 year swap rates does create some challenges as investors adjust to them.

So we're effectively competing with 3-month term deposits and at-call accounts that because of the structure of the yield curve, are offering high rates. And so that is certainly having an impact in addition to disruption.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [6]

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And just related to that, maybe Andrew, the new business strain coming through in the second half looked like a positive number. Why was that the case?

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Andrew Tobin, Challenger Limited - CFO [7]

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Kieren, thanks for the question. So that's right, $33 billion of new business strain for the year. We had a reversal in the second half and it was a slight positive number the second half. And it really reflects the sales volumes slowing in the second half, particularly around those longer dated sales. So if you think about sales from Japan, for example, slowed significantly in the second half, the Lifetime sales slowing in relation to the rest of the portfolio.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [8]

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You still had net book growth through that second half?

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Andrew Tobin, Challenger Limited - CFO [9]

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That's correct. But it's really the composition of the sales that came through in that second half.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [10]

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Okay. And just a final question on the Life margins. In the presentation, you said the asset yields were up 4 bps second half on first half. Just wondering if you can decompose that in terms of sort of the higher benefit that came through in second half from equity distributions as opposed to probably a lower yield coming through in fixed income.

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Andrew Tobin, Challenger Limited - CFO [11]

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Yes. Thanks, Kieren. So again, really it was driven by that equity distribution. We called out in the first half below expectations in terms of the equity distributions. I think from memory, it was about $10 million in the first half of the year. We saw that return to more normal levels, about $23 million in the second half. So that's really a key driver of that margin expansion there.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [12]

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Daniel Toohey from Morgan Stanley. Just a follow-up question on the Lifetime sales. You've talked about the pull forward effect. But previously, you talked about the changes to the new means test rules being favorable for sales of Liquid Lifetime. How have sales in that product grown post this -- post since 1 July?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [13]

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Thanks for the question, Dan. Well, the good news is in many ways, you won't have to wait too long for our quarterly sales to see the clear answer to that. I would say a few things around that. The first is that we've definitely seen the ongoing effects of disruption in the market, and it's our expectation that, that will play out over the course of -- continue to play out over the course of FY '20. So that is moderating what might otherwise be a strong uptick.

More broadly, with the advisers distracted, the extent to which they've been able to focus on those new rules can be limited. But we are seeing steady and -- steady quote volumes that we're happy with. We've got a lot of engagement out there in the market around these rules, and we are getting a lot of interest in that. As you know, we've got the largest BDM team of any pure product provider in the country, and so we're getting a lot of good color on how that's landing.

The fourth quarter numbers that I spoke to, obviously the rules weren't applying at that point. So they're only relevant from the first quarter of this year. And of course, it takes advisers a little time to get used to all of that and get used to all of the support collateral and the tools we're providing around that as well.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [14]

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Okay. Just stepping back a little and looking forward on the product margins, can you just comment that -- or interested in your view as to the pressure on product margins. If interest rates or the backdrop continues to progressively fall, does it get harder to maintain that spread in that environment?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [15]

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One of the things we were really quite keen to address on Investor Day is questions around this, how profitable is that front book compared to our back book and do we have an ability to maintain those margins. And so one thing -- so what we shared with you is that we -- and it continues to be the case, we're in broad terms, pricing our annuities at 120 over the swap rate. And we continue to generate returns on our asset portfolio today, which are consistent with our ROE target of 14% above the cash rate. So now I'm confident that even in the low interest rate environment, that we're able to put on business which is in line with our target ROE. And we maintain a lot of discipline around that.

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Daniel P. Toohey, Morgan Stanley, Research Division - Executive Director [16]

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Okay. And then just finally, I thought the capital strength would actually possibly improve the PCA multiple half on half with the property sales and the shifts. I think maybe you seem to have gone more into a bit of the sub-investment grade on the reinvestment. So maybe just comment as to what changed in the thinking and the actual expectations around the capital benefit we thought that might come through.

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Richard J. Howes, Challenger Limited - MD, CEO & Director [17]

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Well, nothing has really changed on the thinking. We continue to invest on a relative value basis and take opportunities as they emerge. We're sitting significantly towards the top end of the range at 1.53%, and so I'm really comfortable with that. We have seen some compelling relative value opportunities in the fixed income portfolio, which we've taken advantage of in the context of completing that $1 billion sell-down of our property portfolio. So from my perspective, everything is on track from that perspective, Dan. Thank you.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [18]

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Brett Le Mesurier from Shaw and Partners. The increase in the sub-investment grade fixed interest assets was about $400 million in the second half and there was no increase in investment grade. So when you talk about maintaining your ROE, are you looking at achieving that through increasing the risk in the business?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [19]

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No, not all, Brett. So as you would understand, the -- any risk that we take on the balance sheet, we hold a commensurate amount of capital against. That's both from a statutory point of view and having regard to our target surplus framework. So putting on risk is not the way to generate higher returns, and that's certainly not the way we run our business. We have seen some compelling relative value opportunities in the fixed income portfolio, and that explains some of those moves. But broadly speaking, we're in line with that target 75% investment grade. In fact, the fact that it posts 74% is more of a rounding error than anything else, and we remain committed to that target going forward.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [20]

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So if you didn't get an ROE benefit from taking on more risk, why did you take on more risk?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [21]

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As I said, we invest on a relative value basis. Sometimes that will be on riskier assets. Sometimes that will be in highly liquid, less risky assets. It will depend on what relative values are. So coming out of the global financial crisis, for example, we lend hundreds of millions of dollars at AA levels of risk to replace CMBS transactions that we're filing to fund, and that was where the very high return on capital was.

At times, at the moment, we're seeing opportunities in sub-investment grade. But we're also seeing very compelling opportunities in short-dated AAA RMBS. And you will have noticed that, that increased about $300 million in the portfolio as well. So there's relative value at different spots within the portfolio. And importantly, any risk we take, we hold commensurate capital against.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [22]

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The average duration of your sub-investment grade is 4 years, and the average duration of your investment grade is 3.3 years. What did your 75% become, 75% target of your fixed interest being investment grade if you adjust for the higher duration of the sub-investment grade?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [23]

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Actually, when you consider the investment grade component of the portfolio, which is used for interest rate hedging as well, that can move those numbers around. And we don't do the math on that basis. I can understand why you would on a credit sensitivity point of view. All I can do is reiterate the fact that we hold -- to the extent that we've got a greater interest rate sensitivity to sub-investment grade debt, we're holding commensurate capital against that.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [24]

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Simon Fitzgerald here from Evans & Partners. Just another question on profit and equity sensitivities around the equity risk. Gone up from 125.9 to 162.1. That's fairly reflective, I think, of the increase in equity investments in terms of the Life assets. But I was just thinking that perhaps that equity cap and column might have had a bit more of a play into those equity sensitivities. If you can sort of talk about that a little bit.

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Andrew Tobin, Challenger Limited - CFO [25]

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Sure, Simon. I might grab that question. So those sensitivity measures is a very blunt measure of sensitivity. It just shocks the portfolio by a certain percentage rate, Simon. So it's not reflecting or trying to depict a benchmark expectation. We've got those disclosed elsewhere in the analyst pack. But those particular shocks really are taking a specific percentage, shocking the portfolio. So the increase that you described really reflects the increase in the total equities portfolio over the course of the year.

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Brendan Carrig, Macquarie Research - Research Analyst [26]

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Brendan Carrig from Macquarie Securities. Just maybe just a follow-on to the investment mix questions. Just on the cash and cash equivalents, obviously, there's a $1.4 billion reduction. And then we've seen the $1.2 billion into corporate credit. Maybe just a little bit more color just on to the decision behind that specifically, because it is quite a material reallocation of investment assets when looking at balance sheet there.

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Richard J. Howes, Challenger Limited - MD, CEO & Director [27]

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Yes. Thanks, Brendan. So we think about the liquidity of the fixed income portfolio and the balance sheet overall in aggregate. So the liquidity -- the fixed income portfolio has large amounts of liquidity right across it. So we were holding excess amounts of liquid assets at the last half, and we're now at the lower end of what we would normally see in terms of those allocations. It's very consistent with both our asset allocation limits and well within our liquidity management strategy as well. But really, the reasons behind it are relative value. As we explained, we've down-weighted property exposure and put that into fixed income. So as we've released capital from property exposure, we've put more investment risk into the fixed income portfolio. And part of that involved in deploying the liquids component of the...

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Brendan Carrig, Macquarie Research - Research Analyst [28]

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Is it fair to say that that's what's driven the majority of the increase in the asset risk charge in the half, those -- that reallocation of those fixed income asset?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [29]

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I think the best thing to look at is the PCA ratio itself, because as the asset portfolio itself grows, the asset risk charge can grow with that. As we're allocating out of property into fixed income, it doesn't necessarily move the asset risk charge. And I would note as well that the capital intensity of the portfolio overall is reduced from 14.1 down to 13.8.

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Brendan Carrig, Macquarie Research - Research Analyst [30]

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It was up 80 basis points in the half?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [31]

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Yes. Look, I think we're at 1.53 PCA ratio, which is towards the top end of the range and that's a very comfortable place to be.

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Brendan Carrig, Macquarie Research - Research Analyst [32]

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And one more just on the insurance risk charge as well. So that had fallen off in the last few halves and it's spiked up again. Any color just around what kind of investments they are? Is that similar to the catastrophe kind -- or linked bonds that were there previously?

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Andrew Tobin, Challenger Limited - CFO [33]

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Brendan, so really the insurance risk charge increase really reflects the recapturing of our reinsurance agreement. I called that out in the presentation. So Challenger historically has had reinsurance agreements around some of the longevity risk exposure that we've had. We've recaptured one of those particular agreements. And so that's caused an increase in insurance risk charge. But the important thing to note is that after the aggregation benefit, you do get an aggregation benefit between asset risk and insurance risk. The net increase is very modest, less than $20 million from memory.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [34]

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Siddharth Parameswaran, JPMorgan. A couple of questions, if I can. Just firstly just on the ROE targets for the group. You're targeting 15% for next year. Can I -- what would that translate to for Life? There seems to be about a 2% differential. Should we take it that -- at least from what you achieved in FY '19, should we take it that the implied target is 17% target ROE for Life?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [35]

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Well, we set the target in relation to group, because we want to be able to allocate capital across the group according to relative value and with our shareholders in mind. But I think as a rule of thumb, that's not a bad place to start, Sid.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [36]

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Okay. Great. Okay. And what kind of organic growth do you think you can fund to hold your capital levels static with the current ROEs that you're attaining?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [37]

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So one of the primary reasons why we're operating towards the top end of the range is that we do recognize the growth that we expect over the medium term in the annuities book. So one of the benefits of having that capital is that it does fund growth. Of course, there's many levers we can pull in that regard. We can reduce the capital intensity of the book. It depends on the profit that we're making from year-to-year as well, which, obviously, also funds future growth. So there's quite a bit of flexibility within that. And I'm comfortable that we've got available capital to fund a decent period of growth.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [38]

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But I mean organically through the cycle, what could you fund?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [39]

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So you could do the math on that, Sid. You've got 13.8% capital intensity on the asset portfolio. So if you assume that's flat and then we're earning normalized pretax profit of between $500 million and $550 million, then that gives you some capacity for growth. And then if we're at 1.53 in a range of 1.3 to 1.6, which itself is $1.4 billion of excess regulatory capital, if you use that 13.8% capital intensity, you can infer what the growth is, bearing in mind that we can move the lever on the capital intensity in order to make way for that growth.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [40]

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Just a question on margins then. Obviously, a tick-up in the COE margin in the second half. As you're looking into next year, I mean what are the things we should be thinking about? Obviously, I mean, some of the things you've called out, obviously, you're changing your equity assumption -- sorry, normalized capital growth assumptions on equity, but you're also flagging that you'll be growing stronger in MS Primary as well. Are there any other factors we should be thinking of in terms of margins into next year? And I mean as you see it, is this -- are we near the bottom?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [41]

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One of the reasons we provided the front book economics slide on Investor Day was to give you a real sense of what the front book economics look like. And so that reflects our broader annuity portfolio. So that's both domestic annuities and the MSP annuities as well. So that's kind of factored into that analysis. And then the asset returns that we've put forward there remain consistent with the sorts of returns we're targeting on the book.

So you can see, when you break that down, we had -- we've got -- if we do break that down, if you can bear with me for a sec, we had asset returns there of 6.5% and annuity funding costs of 3.44%. I think going forward -- that was for the back book, and that's what you can see in the disclosures today. Then going forward, we had asset returns of 5.3, and then based on annuity funding of 120 over swap, that was a 2.7% funding return there. So if you think about it, that's 100% -- that's 100 point drop in the asset return, a 70 point drop in the funding returns. So you can say okay, over the long period of time, there will be 30 points of margin or spread that's going to get compressed through that.

But bear in mind that about 12% -- 12 points of that is just the change to the normalized growth assumption itself. So I think -- I don't want to call it a bottom in anything, but what I will say is we're putting on business which is very close in terms of margin to where the back book sits today and I think that talks to the stability and resilience of the business.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [42]

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So I mean things are better than what you're suggesting at the Investor Day. If it's similar to the back book, then effectively at Investor Day, you're suggesting margin compression?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [43]

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At Investor Day, we're suggesting margin compression of 30 points, 12 of which was from change in the normalized growth assumptions, and I'm just reiterating that and stand behind those numbers.

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Rodney Forest;W.H. Soul Pattinson;Analyst, [44]

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Rodney Forest, W.H. Soul Pattinson. Well done on the result in light of the conditions. Just 2 questions. On the buyback, if you look at your mix of ROE versus price-to-book, you're the cheapest of all financials. Have you considered looking at a buyback? And the second question is on dividends. It was pleasing to see that being maintained into '20. Is there a catalyst or event that would cause that payout ratio to rise, given the balance sheet is rock solid? Or could we see that potentially rise?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [45]

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Thanks, Rodney. I've talked a lot about the underlying strong fundamental drivers of the business, and albeit that we've got near-term headwinds, ourselves and the Board and the leadership team remain very confident about the growth profile of the business going forward. So the fact that we're towards the top end of our capital range has not put us at the point where we consider a buyback at this point. In terms of the dividend payout ratio, yes, we're a little above that ratio. And that reflects the confidence the Board and the management have in the growth prospects of the business and the ongoing profitability of the business. So we're certainly happy with that range, even though we'll operate above it during FY '20. Thanks, Rodney.

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Stuart Kingham, Challenger Limited - Head of IR [46]

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We'll now turn to questions on the phone.

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Operator [47]

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Your first question comes from Matthew Dunger with Bank of America.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [48]

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It's Matt Dunger here. Looking at the Life maturity profile, which you've guided to at 25% next year, given you're expecting the shift into the longer duration Japanese and Lifetime annuities, why are you guiding to an increased maturity rate into FY '20?

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Andrew Tobin, Challenger Limited - CFO [49]

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Thanks very much for the question. So I reiterated today 24% is the current maturity rate for this year. It came down from 25% last year. As you point out, we're forecasting 25% for next year, but I expect after next year, given, to your point, the longer-dated Japanese sales, the longer Lifetime sales, et cetera, I'd expect that maturity rate to come down. So it's really a timing issue or a lag effect, if you like. By writing those Japanese sales in increased volume in 2020, you don't automatically see that maturity rate ticking down in that particular year. It'll be sort of a lagged effect after FY '20.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [50]

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Andrew, and just another question. On the 11 basis point improvement that you called out in the second half of '19 from the lower interest and distribution cost, should we expect a follow-through of that repricing benefit into FY '20 for the margin?

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Andrew Tobin, Challenger Limited - CFO [51]

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Again, it's Andrew. So again, I think you're quite familiar with our pricing process. As interest rates generally come down, the rates that we offer to clients generally come down as well. So you'd expect that to come down as interest rates continue to fall. The other element in there is distribution-related costs. Some of that is volume-related and it depends on where volumes go. That will impact that component of the margin as well.

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Operator [52]

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Your next question comes from Nigel Pittaway from Citigroup.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [53]

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Sorry to harp on this capital point, but obviously, at a time when you've been trying to lower the capital intensity of your investments, your capital intensity ratio has gone up third -- from 13% to 13.8% since the half. So I mean I guess the question is, if you look at that increase in the asset risk charge, have lower interest rates had an impact on that? Or is that all due to the change in the fixed interest book?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [54]

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No, lower interest rates have not impacted the asset risk charge per se. And I wouldn't describe our objectives in moving -- reducing our property exposure and putting that into fixed income and increasing the low beta component of our equity portfolio as an effort in reducing the capital intensity of the portfolio. When we think about capital, we're really managing that PCA ratio within the 1.3 to 1.6 range. So I think the fact that we're towards the top end of the range there is the most important consideration. Now over the year with -- the capital intensity is reduced from 14.1 down to 13.8, and I'm very comfortable with that.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [55]

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Right. So the increase in the asset risk charge is basically due to the change in the fixed income or pretty much all the increase, yes?

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Andrew Tobin, Challenger Limited - CFO [56]

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Yes. And the broader asset composition, Nigel.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [57]

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Yes. Okay. Secondly, just following up a bit on Matt's point on that lower interest expense, I mean you do say it's obviously due to repricing. Is there a mix impact in that, though, with the lower fixed term sales in Australia and the sort of reasonably robust Lifetime sales? Is that part of the reason why that lower interest expense came down the 11 basis points?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [58]

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I think it's just really that you've got lower interest rates working their way gradually into the book. There may be some small compositional change happening there, but one thing I would say is that the yield curve is obviously very flat at the moment. So the sorts of funding rates you've got on Lifetime annuities are pretty similar to what you're seeing on the fixed term annuities.

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Nigel Pittaway, Citigroup Inc, Research Division - MD of Insurance and Diversified Financials Equity Research and Lead Insurance Analyst [59]

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Okay. And then finally, just maybe some comments on that credit default, 27 basis points. I mean it's obviously still lower than the 35, but in the benign credit time, it's reasonably high. Were there sort of significant one-offs in that or...

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Richard J. Howes, Challenger Limited - MD, CEO & Director [60]

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There were a couple of one-offs. Obviously, it's a diverse portfolio with more than 1,300 securities across the portfolio. We do have -- some of the portfolio is very diverse exposure to broad credit indices. So if you get any small default picking up through there, that will show up in the numbers as well. But as you say, Nigel, it is -- 27 is below the 35 points that we're targeting and there's nothing underlying it in the way of trends that give me any concerns.

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Operator [61]

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Your next question comes from Ashley Dalziell from Goldman Sachs.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [62]

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I just wanted to pick up on the front book economics discussion. I think we spoke to a total return assumption of 5.3 versus funding costs of 2.7. Just on the funding cost pace, I mean you're talking to about 120 over swap, and at the time, we're using swap rate as kind of 1.5. The spot is sort of down 50 basis points on that. So in your comments with regards to staying behind the 30 basis points of margin pressure over the medium term from here, based on front book economics, are you saying that the total return assumption has effectively come down by a commensurate level, based on the disclosure that you gave at the Strategy Day?

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Richard J. Howes, Challenger Limited - MD, CEO & Director [63]

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Yes. So to the extent that interest rates drop, both the funding costs and the return on the assets will drop commensurately with that. So that's the broad principle. So to the extent that rates are lower than where they were on the Strategy Day, then that flows through into both the asset return and the funding return.

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Stuart Kingham, Challenger Limited - Head of IR [64]

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No further questions on the phones or in the rooms, so I'll just hand back to Richard to close today's session.

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Richard J. Howes, Challenger Limited - MD, CEO & Director [65]

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Yes. Thanks, everyone, for your interest today, for coming along and for dialing in and for your ongoing interest in Challenger. I look forward to meeting many of you in the coming weeks. Thanks a lot.