Challenger Limited (CGF) Earnings Call Transcript

Good morning. I'm Mark Chen, Challenger's General Manager of Investor Relations, and welcome to today's '22 full year results briefing. We're coming to you today from our Martin Place office in Sydney, and today's briefing will be conducted online. Today's presentation will be followed by a question-and-answer session. You can ask your question via the online portal or via the telephone. Today's presentation will be provided by our Chief Executive Officer, Nick Hamilton; and Chief Financial Officer, Rachel Grimes. They'll be joined by Peter Schliebs, our Life Chief Investment Officer, for Q&A. I'll now pass on to Nick to get us underway.

Thank you, Mark, and good morning. Let me begin by acknowledging the Gadigal People of the Eora Nation upon whose traditional lands we meet today and pay our respects to their elders, past and emerging -- present and emerging. So welcome to everyone who's joining us today. It is a privilege to be joined by Chief Financial Officer, Rachel Grimes, to deliver Challenger's 2022 full year result. Today, I'm pleased to report the progress we are making to meet our potential and to deliver for our customers, our employees and our shareholders. We are living our purpose of helping provide financial security for a better retirement. In today's result, we've demonstrated our capacity to meet the changing macro and market environment. We've demonstrated the value of our core franchises, the improving rate environment for annuities, our success building new customer channels, the strength of our funds management business and the benefit this diversification continues to make. In FY '22, Challenger delivered improved shareholder returns, with both ROE and dividends increasing. I'm sure we all recognize that the current market environment is very dynamic. And you will see in today's result, our business well positioned, with a strategy to deliver long-term growth and value. The macro environment is generally supportive for our business, and we are strongly capitalized as we move into the new financial year. We have achieved a lot as a business this year, and what I'm most pleased about is the great capacity of the Challenger team to remain focused, to understand our strategic imperatives and to work together. There are 4 areas we will be covering with you this morning: our positive financial performance; the operational highlights, which set us up for future success; the macro and market environment for which we are well positioned; and a view into the future in terms of strategy, and outlook, including comments on today's announced strategic review of the Bank. Normalized net profit before tax came into the upper end of our guidance at $472 million, an increase of 19% on the previous year. Widening credit spreads and market volatility saw unrealized mark-to-market investment experience of negative $81 million. Since June, we've seen credit spreads start to tighten. The unrealized mark-to-market impact can be seen in our statutory profit, which was $254 million for the year. Total Life sales were up an impressive 40% to $9.7 billion, with strong reinvestment rates on maturities. We're starting to see the positive impact of higher interest rates. For example, our 3-year benchmark term annuity is at 4.3% this week as compared to 1.4% this time last year, which is a materially better client proposition. In the second half, our retail sales benefited from higher rates in our lifetime and term business. And we have seen demand for longer tenor annuities increase. We recognize that the recent environment has proved challenging to deliver meaningful shareholder value. We remain committed to our group ROE target of RBA cash rate plus 12%. Our group ROE was 70 basis -- up 70 basis points to 11.9% and excluding the Bank, would have been 12.5% and above target, underscoring the strength of the business. Despite the market volatility in the final quarter, we ended the year with $1.8 billion of group excess regulatory capital. This represents 1.68x a minimum required amount and the Life Company's capital was towards the top end of our 1.3 to 1.7 range. The strength and flexibility of our capital position will give shareholders further confidence in Challenger's future. The Board has declared a full year dividend of $0.23 per share fully franked up 15% on last year. In FY '22, we made important strategic decisions that will support the future of the company. As we outlined in May at our Investor Day, we announced a plan to broaden our customer and product reach and to grow the role we play in our customers' lives, all underpinned by our One Challenger approach. This recognizes the whole such as our strong brand and unique capabilities across the group is much greater than their individual parts. The work supporting our One Challenger approach includes numerous initiatives, which are well underway and will continue to progress this year. CIP Asset Management will soon rebrand as Challenger Investment Management. Our multi-affiliate platform, Fidante, will undergo a brand refresh, maintaining a contemporary position of the business. We are expanding our brand to encompass a wider retirement offering. In March, the market-linked annuity was launched, providing our customers an expanded lifetime retirement offering and broadens the discussions we can have with financial advisers. We've seen good interest from financial advisers for a product that combines the benefit of a lifetime income stream and exposure to investment markets. With the passing of the retirement income covenant, we've seen a noticeable pickup in work by Australian superfunds to develop long-term retirement solutions. Recognizing this, we've brought together our group solutions and Life investment capabilities under single leadership to ensure we are focused on the role that we can play. The evidence of the role of a lifetime income is compelling. A retiree who shifts other assets from savings to a lifetime income stream is given the confidence to spend or, said differently, is directly linked to a retiree gaining greater enjoyment from the savings that they have accumulated through a lifetime of work. Australia has an opportunity to design the world standard in retirement income, which would maximize the welfare of Australian retirees. Our market-leading distribution capability was again recognized with Fidante named Zenith Distributor of the Year. To build group alignment, we have reorganized our sales, marketing product and servicing capabilities into a central customer division, streamlining and focusing our customer-facing teams. The needs of the customer are now very much at the center of our business. Through our Fidante team, we offer investors an exceptional range of managers and asset classes. This year, we added 2 new affiliates, OX Capital and Cultiv8, further diversifying our offering and building growth for the long term. We have progressed plans to expand our strategic partnerships via 2 new joint venture opportunities, with SimCorp for investment administration, and Apollo for lending, which I'll talk more about in a moment. Our operating performance can be summarized by the clear shift towards the One Challenger approach, putting the customer at the center of our business, launching innovative new products and establishing a range of new partnerships to support long-term growth. These initiatives will go towards building a more diversified business and meeting more customer needs. They support and build upon our core franchise and position us well for growth in the future. This is a strong sales outcome, benefiting from our diversification strategy and more recently, the changing and supportive macro environment. Total Life sales were up 40% benefiting from new institutional clients and strong reinvestment across institutional. In our retail business, there are signs that higher rates are starting to stimulate demand. Strong annuity sales across each of our segments translated to book growth of 14% for the year. Breaking this down, we can see the clear benefit in Life's diversification strategy. Institutional sales were particularly strong, up 68% to $6.7 billion, which included new clients and reinvestments. Our attractive term and Index Plus product offering is resonating broadly across institutional channels. This strategy has served us well with higher institutional sales working in recent years to offset lower retail sales. With the rapidly changing macro environment, we've started to see impact of higher rates across our retail sales, which were up 11% to $2.4 billion. In the final quarter, retail term sales were up by over 30%. Challenger has strong long-term relationships across IFA and adviser networks. And the team have been successful adding new relationships this half, further broadening our customer reach. These results demonstrate our Life business is in great shape, well positioned to capture the opportunities ahead. [indiscernible] over the past few years. Today's higher rate environment has become more supportive for savers, and we expect it will stimulate new business sales for Challenger whilst also supporting future profitability and ROE. As a practical example, our benchmark 3-year term annuity rate is up 290 basis points over the year. We've maintained our pricing discipline through this period, ensuring we balance returns and offering attractive rates to our customers. The steeper yield curve is starting to help lengthen the product tenor. The yield curve translates to higher pricing for longer durations, increasing the attractiveness of our longer-dated products. You can see this shift to longer-term products quarter-on-quarter over the year in the right-hand graph. In Q4, for example, around 75% of new business term sales were greater than 2 years, demonstrating the impact higher interest rates has on product tenor. Volatility in global and domestic investment markets and widening credit spreads impacted the valuation of Life's investment portfolio. This chart shows the expansion in credit indices over the second half and is consistent with the movements we saw across our fixed income portfolio, which resulted in unrealized mark-to-market losses. Given we hold our investments to maturity, our expectation is that these unrealized losses reverse over the duration of our holding period. Pleasingly, our capital position remains strong at 1.6x PCA. Looking forward, wider credit spreads are supportive for our new business margins, especially where we write longer-dated business. Funds Management has delivered a solid outcome this year, thanks to our retail distribution strength and diversified platform of managers. Higher earnings benefited from higher average FUM and stable margins. In what was a volatile market, we were especially pleased with the flows performance of our newer affiliates, which underpins future growth. Fidante welcomed 2 new managers this year with Ox Capital, an emerging markets equity affiliate, and Cultiv8, a new affiliate targeting emerging opportunities in the agricultural sector. There remains significant capacity for growth in funds management from both existing managers and new managers. The team have a growth strategy that includes new product and broadening our distribution reach. The recent appointment of Victor Rodriguez, the CEO of Funds Management, will support further growth in this business. Vic is a highly respected leader and has led significant success in our fixed income business, developing new products that have secured the highest investment ratings, winning new institutional clients, including the Australian Office of Financial Management, and overseeing a critical component of the Life investment program. I'd like to spend some time on our strategic partnerships. These are key to our diversification strategy because they build out from our core business to generate new and diverse sources of revenue and long-term value. We have a track record of building strong partnerships, evidenced by the suite of affiliates in our Funds Management business and MS&AD Group in Japan. We're building further on our MS&AD relationship with Challenger's real estate business recently awarded a mandate to acquire and manage Japanese real estate on behalf of MS Primary. With Apollo, we've now entered into a shareholder agreement to establish a joint venture to build a lending business in Australia and New Zealand. Challenger and Apollo have been working closely over the past period, building our relationship and deepening our understanding of the opportunity. The joint venture will provide various financing solutions across a range of sectors. The joint venture will be equally owned, bringing together Challenger's operating platform and domestic expertise with Apollo's extensive global scale and multi-asset credit investing capabilities. Our investment administration joint venture with SimCorp is progressing well. With our partner, SimCorp, we've now formed its Board and will soon announce an independent chair who is highly experienced and highly respected in investment management circles. Interest from prospective clients of this venture is encouraging, and we've commenced early-stage discussions with a number of parties. We expect the business to be formally operational later this calendar year. These are exciting partnerships given the global leadership position of the partners. We've established them because they combine the best -- our partner of -- of both partners' capabilities, creating competitive advantages in the areas where we've chosen to play, much of it unrealized or underserved. Our business is in great shape, benefiting from our diversified operating model. I'll now hand over to Rachel to take you through the financial results in more detail.

Thank you, Nick, and good morning, everyone. As you have heard, Challenger has delivered a very strong result that reflects the underlying strength of our platform and the diversification of our business. In FY '22, we achieved normalized earnings before tax of $472 million, which was towards the upper end of our guidance range of $430 million to $480 million. Normalized earnings before tax increased 19% driven by strong contributions from Life and Funds Management, which were up 19% and 17%, respectively. This was partially offset by losses from the Bank. Statutory profit after tax was normalized profit at $254 million due to lower investment markets and wider fixed income credit spreads, resulting in an unrealized investment experience after tax loss of $81 million. I will cover this in more detail later in this presentation. Looking at the group results in more detail. Challenger's total income increased by 14%, reflecting stable margins and growth in average assets under management. Expenses increased by 7% or $19 million, of which $13 million relates to the Bank. Excluding the Bank, expenses increased by only 2%. I'll take you through the drivers of income and expenses in more detail shortly. Normalized NPAT was $321 million, an increase of 15%. Significant items were a post-tax gain of $14 million with a $31 million gain from the sale of Whitehelm Capital and a $13 million gain from the sale of Accurium. This was partially offset by a $19 million impairment of goodwill on the Bank acquisition and $11 million relating to other costs. Pretax return on equity was 11.9%, which was up 70 basis points on last year and marginally below our ROE target due to the impact of the Bank. Excluding the Bank, Challenger's normalized ROE would have been 12.5%. Group assets under management closed the half at $99 billion, down 10% on the corresponding prior period with strong Life book growth offset by lower FUM from markets and outflows. Now looking at the income and expense drivers. Income was $777 million, an increase of $95 million or 14%, driven by an increase in average assets under management and stable margins across both Life and Funds Management. It's important to note that in Funds Management, while the income margin was stable in FY '22, we saw FUM-based income -- FUM-based margin increase. Life income or normalized cash operating earnings increased by 14%, reflecting greater cash earnings from a 14% increase in average investment assets. In Funds Management, the net income increase of 13% reflected a 13% increase in average FUM. Expenses were $301 million, an increase of 7%. This largely reflected costs associated with the recently acquired Bank and personnel costs due to higher FTE and lower levels of annual leave taken throughout the year. Other expenses were 5% down due to the nonrecurrence of a $10 million software impairment that we took in the second half of 2021. Excluding the Bank, expenses were up 2%, demonstrating our disciplined cost focus. The group cost-to-income ratio was 38.7% and decreased by 50 basis points on last year. Looking at the Life business performance in more detail. As mentioned by Nick, the continued success of our sales diversification strategy resulted in strong Life sales of $9.7 billion, including annuity sales of $5.1 billion. Institutional sales increased by 68% to $6.7 billion, reflecting our focus on expanding relationships with institutional partners. The strong sales translated into Life book growth of 14.3%, which in turn drove growth in investment assets. Average investment assets increased by 14% on FY '21 and with a stable normalized cash operating earnings margin of 2.6%, cash operating earnings growth was also 14%. Expenses decreased by $3 million or 3% largely reflecting lower brand and marketing costs and reduced travel expenses. With higher income and lower expenses, Life EBIT was $472 million, 18% above FY '21. Life's PCA ratio was down 3 basis points to 1.6x, which is towards the top end of Life's PCA ratio range of 1.3 to 1.7x. The Life company continues to remain very strongly capitalized and has significant financial flexibility. Now turning to Life's margin trends. We have provided you today a summary of the key margin movements, and there is further detail in the analyst pack. The FY '21 margin benefited from the early repayment of an asset-backed security representing $12 million or 6 basis points. In FY '22, we generated cash operating earnings margin of 2.6%, which is stable on FY '21. Excluding the impact of the asset-backed security fee, the product cash margin was up 1 basis point, with lower asset returns of 16 basis points, offset by a 17 basis point reduction in interest expenses. It is important to note that other income was stable despite the impact of the Accurium sale, which was offset by higher Life Risk income. Accurium historically represented 3 basis points of margin. Lower asset returns were due to lower yields on fixed income securities and lower property yields. These were fully offset by annuity pricing initiatives. We operate a spread-based model with the cost of funds or our annuity pricing adjusted for changes in investment yields in order to generate a net spread. You can see from the chart on the right-hand side that the product spread has remained broadly stable over the last couple of halves. Normalized capital growth was 4 basis points higher as a result of an increased allocation to equities and the return on shareholder capital was up, reflecting the higher interest rates. Life sales. Life continues to deliver strong sales and book growth underlining the success of our strategy to diversify our product offering and distribution channels. This has been against the backdrop of low interest rates and challenging market conditions, which also have included regulatory change and the impact of COVID-19. These conditions and the actions Challenger has taken to address them, including developing an institutional term annuity business, has reshaped our sales mix, which in turn has changed the maturity profile. The flattening of the yield curve post COVID resulted in customers not receiving a premium for term, which drove a greater proportion of annuity sales being a shorter duration, particularly 1 year. This slide highlights 1-year institutional term sales were 9% in FY '20. And this has increased to 35% in FY '22. As central banks have lifted interest rates in the fourth quarter, we have a steepening of the yield curve, which has resulted in customers seeking longer duration products. As shown earlier, 74% of new business term sales in the fourth quarter were for tenors greater than 2 years. This compares to 50% of new business term sales in the first quarter when the yield curve was flat. Following significant levels of 1-year institutional sales made in FY '22 of $1.8 billion, the maturity rate for annuities is expected to increase to 34% in FY '23. Excluding the institutional term annuity maturities, the FY '23 retail maturity rate is expected to be 24% with retail annuity maturities reflecting the focus on longer duration sales. We have a strong track record of reinvesting maturities. We have achieved reinvestment rates of greater than 80% across institutional annuities, which increases the effective duration. So while the maturity rate is increasing due to sales mix, what is important is the effective duration is longer through the high reinvestment rates. Now looking at the liability and asset portfolio. On a discounted basis, liabilities increased by 4% to $18 billion, driven entirely by index plus growth. The discounted value of annuity liabilities was reduced slightly at $13.6 billion with annuity book growth of $1 billion fully offset by an increase in the discount rate, reflecting the higher interest rates. Undiscounted liabilities were $19.8 billion, up 8% for the year, reflecting the Life book growth. Life investment assets were $22.2 billion, up 3% for the year. We continue to maintain a high-quality investment portfolio to allow us to meet our liability obligations. Fixed income represents 75% of Life's investment portfolio. Within the fixed income portfolio, investment grade represented 78%, which was above our target to hold at least 75% investment grade and 1% below FY '21, reflecting relative value decisions. Within investment grade, the quality of the portfolio improved with BBB reducing from 22% to 17% with increased holdings in cash and equivalents, AAA and AA rated securities. For the year, there was a 1% increase in the allocation to equities and a 1% increase in the allocation to alternatives with a corresponding decrease in fixed income and property. These changes reflect an increase in allocation to equities and alternatives, the outperformance of alternatives and fair value adjustments on the total portfolio included the impact of rising interest rates. Property reflects the sale of a single property. As highlighted at Challenger's Investor Day in May by Peter Schliebs, our CIO, we are not looking to make material changes over the next year. However, within the portfolio, the following small changes will be made. Proceeds from the sale of the property will be reallocated across other asset classes, primarily into insurance-linked securities and absolute return funds [ given the uncollected ] nature to equity markets. Looking at investment experience in more detail. Overall, we reported a pretax investment experience loss of $115 million for the year. This was mainly driven by wider fixed income credit spreads and lower equity markets. [ Fixed income ] brought a negative investment experience of $384 million. This reflected a significant widening of credit spreads in the second half. Investment-grade spreads increased by 80 basis points and sub-investment grade spreads increased by 210 basis points across the portfolio, resulting in the unrealized investment losses. As mentioned earlier, we have seen a partial reversal of spreads in July and throughout August. Credit performance remained resilient with only 5 basis points of default for the year, well below the 35 basis points per annum assumption. For property, the $153 million of positive investment experience largely reflects the reversal of unrealized losses we took across the property portfolio during the pandemic. All properties were subject to independent valuation in FY '22. The equity and infrastructure losses were $119 million, driven by lower domestic and international equity markets. The alternatives portfolio largely consists of absolute return funds and posted a gain of $89 million and delivered a return of 11% post distributions. For policy liabilities, which are also mark-to-market, the valuation impact was a $146 million gain and reflects $165 million illiquidity premium gain, which partially offset the impact of wider credit spreads on the fixed income portfolio. A gain of $23 million on policy liabilities held for hedging purposes, offset by a new business strain loss of $42 million. Now let's turn to funds management. Funds Management EBIT was $83 million for the half, an increase of 17%. The increase in EBIT was driven by higher FUM-based fee income with average FUM up 13% or $12 billion. This was partially offset by lower performance fees and higher expenses. While average FUM was up, it is important to note that closing FUM ended down $12.4 billion or 12% for the full year. I will cover the drivers of the movements in FUM in more detail shortly. Funds Management expenses increased by $11 million or 11% as we invested in our people and added capability to support our growth initiatives. Pleasingly, investment performance has remained strong with 98% of FUM outperforming the benchmark over 3 years. Now looking at Funds Management margins and fund growth. The total net income margin was 18.4 basis points, stable on the prior year. This reflected higher FUM-based income driven by a more favorable FUM mix, offset by lower performance fees. The FUM-based margin increased by 1 basis point to 17.1 basis points, supported by a change in business mix, including higher retail business and the sale of Whitehelm Capital. As stated, FUM closed the year at $93.4 billion, down $12.4 billion or 12%. The decrease can primarily be attributable to institutional outflows in Fidante and negative market movements. Looking more closely at the net flows. Funds Management net flows were $8.5 billion and were almost exclusively driven by Fidante. Fidante's Institutional business recorded outflows of $8.9 billion, reflecting the $5.2 billion derecognition of Whitehelm of the -- derecognition of FUM following the sale of Whitehelm Capital and $6 billion of institutional outflows that included a $5.6 billion low-margin fixed income mandate redemption by a single investor. Pleasingly, institutional outflows were partially offset by retail inflows, which remains strong at $2.3 billion for the year. The strength in our retail flows provides the opportunity to remix FUM and to optimize our margins. The Funds Management business continues to be well positioned in the current economic environment. We have a diversified model that consists of superior alpha solutions across fixed income, equities, real estate and alternatives. We continue to welcome new affiliate managers, including Ox Capital and Cultiv8 during the year. We are committed to delivering investors access to high-quality, differentiated investment management. Our alpha capability provides us with broad customer reach, especially in our domestic retail advise channel. We see significant opportunity with approximately $130 billion of available capacity to support continued growth. Now let's turn to the Bank. In FY '22, the Bank incurred a loss of $11 million, largely reflecting costs associated with regulatory requirements and integrating the business. The net interest margin was 0.93 of a percent. Since acquisition, we have taken a disciplined approach to growing deposits as we build the Bank's lending capability. Bank deposit sales were $219 million since July 2021, and as you may recall, when we acquired the Bank, we have previously expected to break even in its first year, which would have been this year, FY '22. Bank earnings are not expected to improve in FY '23 with a loss of $10 million before tax forecasted. As Nick stated, we have commenced a strategic review of the Bank, and we have also impaired the Bank goodwill on acquisition, which has been included as a $19 million loss in significant items this year. Turning to capital management. We continue to be strongly capitalized and maintained significant financial flexibility across the group. We have provided a consolidated or Level 3 equivalent capital position for the entire business, which includes our 2 regulated APRA entities, the Life company and the Bank. Our group minimum regulatory requirement ratio closed the year at 1.68x, which means Challenger is holding 68% more regulatory capital than minimum requirements. As stated earlier, Life's PCA ratio finished the year at 1.6x, which is towards the top end of our target range of 1.3 to 1.7x. Challenger's financial strength was affirmed by Standard & Poor's, who recently reconfirmed Challenger Life's A rating with a stable outlook. Now on to dividends. Underscoring confidence in our business, the Board declared a fully franked final dividend of $0.115 per share, bringing the full year dividend to $0.23 per share, up 15% on last year. The normalized dividend payout ratio was 48.3%, in line with our target. So in conclusion, we have delivered a strong FY '22 result, which was toward the upper end of our guidance range. We remain strongly capitalized and our Life and Funds Management businesses are positioned for growth. I will now hand back to Nick, and I look forward to rejoining you for Q&A.

Thank you, Rachel. Our business is well positioned. It's an exciting time for the Australian retirement system. We focus moving from our world-class accumulation to developing a world-class retirement proposition. And that -- this sets Challenger up for a bright future. Challenger's significant competitive advantages will ensure we benefit from these structural shifts. We are a company enabled by talented people. Our businesses play in areas where we are leaders and innovators. Challenger is Australia's leading retirement income brand. Our Funds Management business is one of the country's largest active managers and with superior investment performance. We have a powerful fixed income franchise, which is Australia's largest. Supporting our capabilities are external tailwinds that will benefit our business in the long term. The macro environment is evolving, presenting both challenges and opportunities for our business, as we have outlined today. Higher rates are, of course, welcome news for many retirees, and we have begun to see the benefits of this in our annuity sales. At our recent Investor Day, we detailed our plans to leverage our strong brand, our expertise and capability to meet the needs of more customers in more ways. Our new customer division will support this, bringing together people from across the group with the skills, the resources and talent to deliver more for our customers. Ongoing engagement with the superannuation funds provides us with confidence of the role we can play, seeking to partner with them to bring better retirement solutions to their customers, and we'll further diversify our business via our announced strategic partnerships, which will create new revenue streams, leverage our core strengths and deliver long-term benefits for all parties. Turning now to the guidance. Challenger is well placed. We have a business that today has demonstrated our strength, our potential and the clarity of strategy to deliver long-term value. In FY '23, we expect normalized net profit before tax to be within the range of $485 million and $535 million. Our range reflects the variability of components of the income that we generate. It is a range we're confident to operate within. As we've outlined today, the underlying trends for the Life company earnings are supportive for growing our COE margin. We have reflected in our guidance the lower starting fund position in the Funds Management business, and we've reflected our expectations of a -- of the Bank operating earnings. Expenses are running slightly higher this year at 5% to 6%, which reflects the inflationary environment and some specific investments for growth. Since announcing the Bank acquisition in December 2020, market conditions have changed, and it is becoming apparent the Bank is unlikely to realize the assumed benefits in the time frame anticipated. As a consequence, today, I announced that we have commenced the strategic review of the business and that we have appointed Gresham Partners to assist in the process. This is not a reflection of the team in the Bank, rather external factors, meaning our original base -- original business case is unlikely to be realized. As noted, we do not expect Bank earnings to improve; and next year, we forecast a loss in the Bank of $10 million before tax. We expect the review to be completed in the first half of FY '23, and there will be no change to the Bank's operations while the review is occurring. We remain committed to our through-the-cycle ROE target of RBA cash rate plus a margin of 12%. Ensuring we remain strongly capitalized, we'll continue to operate within our target range of 1.3 to 1.7x the PCA and target a dividend payout ratio of 45% to 50%. To summarize, today's result shows our diversification strategy is delivering. Normalized profit result was strong and towards the upper end of our guidance range. Our core Life and Funds Management businesses performed well throughout significant market volatility. Capital is strong and towards the top end of our range. We have a business well positioned to benefit from the changing macroeconomic environment with rising interest rates supporting growth. Retirement income and financial security are needs of our community and core to Challenger's purpose. And we're delivering stronger shareholder returns with both ROE and dividends increasing. None of this could be possible without the incredibly committed team at Challenger, who I would like to thank for their dedication this year particularly for their support of my first 8 months as CEO. Rachel, Peter Schliebs, our CIO, and I will now look forward to taking your questions. I'll pass now back to Mark.

Thank you. We'll now turn to the question-and-answer session. As a matter of process, we'll take questions firstly over the telephone, and then we'll turn to the online portal. Operator, are there any questions via the telephone?

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

My first one, just on the second half '22 Life margin at 2.63%, you talked to the higher shareholder fund deal, lower funding rates. Are you able to talk to what the exit margin is?

Thanks, Matt, for the question. In relation to the 2.63% that -- we're not giving guidance for FY '24 on the margin, but that is -- we've seen really positive pieces come through in terms of the interest rate increase that really only took place in the fourth quarter. So we think that is the best step-off point that you should look to in relation to the margin.

FY '23.

FY '23. Apologies.

Okay. And just following on from that, you talked through some of the moving parts within that FY '23 guidance. It seems like the second half margin improvement would get you towards the momentum for that guidance. Are you able to unpack what you're thinking about Life or growth Fund Management performance fees, some of those swing factors?

Sure. I'll start and my colleagues can join in. So we've set the guidance range of $485 million to $535 million, Matt, and it's a range that we're confident we can operate within. In building this range, I'll make a few observations. We have -- there's a lot of moving parts with impacts of markets, et cetera, and we've actually recut the budget number of times leading up to it. The things that you've got to consider specifically are the lowest starting FUM for the Funds Management business. The loss that I've just spoken about in the Bank for FY '23, I spoke to slightly higher expenses to support some new growth initiatives. And as we say, there are elements of the result, which in any -- or our guidance in any given year, which will be less certain, if I think about that from the Life company side, that's the alternatives from the Funds Management side. That's the dividends we've received from the affiliates, depending on markets, but also performance fees. So we've factored all of that in. In terms of guidance on book growth, we don't provide that. We've spoken to the maturity rate on the book today and our confidence in what we've seen in terms of the trends for sales. So as we exit FY '22, we've seen very strong trends, particularly in the retail sales around some of the longer-dated term business. So I'd probably leave my comments there. Ms. Rachel, would you like to add anything?

No, I think you've covered that well. Thank you, Nick.

Sorry, Nick, just to clarify, are you saying the guidance factors in the 80% reinvestment rate that you've talked to?

Yes, our guidance -- yes, that's correct. Our guidance assumes reinvestment rates.

Your next question comes from Kieren Chidgey with Jarden.

A couple of questions if I can. Maybe starting on the Bank, Nick, I'm just hoping you can unpack a little bit to tell what exactly has changed over the last 12 months since you took ownership of the Bank. Is it competitive environment? Is it the additional investments in systems and technology? Just a little bit more clarity around sort of, I guess, what has changed the strategic outlook for the Bank would be useful.

Thanks, Kieren. So let me give you some -- as much as I can. So I've been in the role now for 8 months. We came to this conclusion just recently that it was right to call for strategic review. A number of things, a number of facts, frankly, have changed. And if I think about where we were with the original business case, we walked back from breakeven in FY '22. We just called out the continuing losses on the Bank. And so the additional -- whether it be that loss or the additional capital that would be required to drive the Bank to a reasonable outcome and a reasonable return is when you risk-adjust it just a very, very long way off at this stage. So the other countervailing force there is that the environment and circumstances for the rest of our businesses are very strong. So for the Life company, the rising rate environment is clearly a real positive. You pointed to technology, and that will definitely -- that's definitely a key part of it. To succeed in this space, you do probably need a technology advantage and the additional investment and cost to build that vis-a-vis the other opportunities for the capital have certainly been a consideration. Probably the final 1 is that through the original business case, there was assumptions around the ability to leverage group, the group capabilities and platform. That, for various reasons, has not proven to be the case. And so we've seen the cost base increase materially vis-a-vis the initial plan.

Okay. And the -- I mean, how long do you expect the strategic review to take? And I mean, you said it's business as usual for the Bank in the interim, but I guess, we had expected a ramp-up in activity in the Bank over the course of '23. Is that on hold?

Kieren, yes, that's a fair assumption. So we're not going to -- we don't want this to proceed beyond the first half of the financial year. We are committed to being open and transparent and in appointing Gresham Partners at this stage, we're definitely looking to get our skates on and move through the review quickly. But as you noted, we are still open for business. But the review is underway, and we look to conclude within the first half.

Okay. And just a point of clarity on the Bank guidance of negative 10%. Does that include impairments for '23. Is that a normalized impairment number?

Yes. No, that's just an operating loss. So that's the -- Rachel called out that we've impaired the goodwill on the Bank this year.

[indiscernible] provision credit impairments, largely it does. We've applied the ECL. We've seen that increase in this period and we would imagine that, that would be at similar rates, Kieren, so not looking for an additional impairment on top of that.

Okay. Secondly, just on the Life business maturity. Obviously, quite a step-up, and I think you've explained why that's the case in terms of the mix of sales that occurred sort of over the last 12 months being much shorter duration. But as you guided on Slide 8, on a quarterly basis, that is starting to reverse in terms of seeing more sales above the 1-year duration. So this 34% maturity rate, how transitional is the '23 year in regard to maturity rising? Can you give us a bit of feeling for where you see that trending sort of more over the medium term?

Okay. Well, I'll pick up on some comments. And I think, Pete might like to add or Rachel to this. But we've clearly been through an environment where with very low rates, it was -- we saw the tenor of the business shorten and with the institutional business, it was by virtue of the style of business shorter again. And so if I break that apart with institutional, we wanted to talk about the maturity reinvestment rate and the idea of effective tenor on the basis, we are seeing high reinvestments. We -- the opportunity there for us is not just rate, but it's about our ability to offer a competitive spread. And they're also using those strategies in various means across that portfolio. So it's quite a diversified rationale and increasingly diversified client base there. But it is institutional business. It's lumpy. And we would just need to be mindful of that. So we can feel confident, but I don't want to say it's by any means certain. What we have actively been trying to do across the whole book, both institutional and retail, is use the opportunity that's been presented by higher rate to push the tenor of the book out. Clearly, as you use the word transitional period, history will judge that, but we're certainly making every effort across both retail and institutional to extend the tenor of the business because we think it's a great opportunity for customers. But it's clearly, from our perspective, it's business that we can extract particularly liquidity premium on through the investment program, that's better, it's more profitable for us. You want to add to this?

Really, I think you've captured everything in there, Nick, but I just think our experience, Kieren, of what we're seeing of the tenor, people looking for greater than around the 2-year mark, and that's been our sales experience in the fourth quarter. So whilst not giving guidance on that maturity rate, it may move as a result of people trying to find the additional credit spread opportunities there in the institutional space.

Okay. And the experience so far, I know we're sort of only halfway through first quarter of '23. But can you just give us a feel for sort if that experience has continued and the pickup in retail annuity sales is persisting?

That trend has continued, Kieren. We feel good about how we've entered FY '23 on the retail side for sure.

Okay. And then just a last question on costs. You're guiding to 5% to 6%. Right. So I'm just wondering what sort of impulse the SimCorp and Apollo JVs are likely to have within that in '23?

They're all factored into that increase, Kieren. The pleasing thing about our expenses is that it is about positioning us for growth as well as some salary inflation, but it is -- those costs are built into our expense base.

Are they material costs then, Rachel, in terms of -- what do they add to the cost growth for the group?

No. Perhaps in terms of what sort of resources, skills, is that what you're asking me? Or dollars?

Just dollars.

Just dollars. It's immaterial at this point in time and as those 2 businesses build, they'll factor in. But it's early days in that piece, and it's not material at this stage for FY '23.

[Operator Instructions]

Your next question comes from Nigel Pittaway with Citi.

Just first of all, on the Challenger Index Plus sales, clearly, you've got to sort of sell quite a lot even to stand still in those institutional areas. So how should we think about the prospects for growth in that area, given as I say, you've got to sell a lot even to stand still as you reinvest those maturities?

Yes. Thanks, Nigel. So clearly, it's been a very successful sales program there. And the ticket sizes, as you know, are quite large for those sales. So what we've noted today is we've increased the number of clients, increased diversification of client, which obviously reduces the single client risks is 1 comment. However, I also spoke to the opportunities that we have with higher rate to drive longer-dated sales. So a real priority of ours is to push the tenor, whether it be the Index Plus, but that does tend to be short term, but across the whole Life book longer as a general statement of priority for us right now vis-a-vis outright growth of book. But I don't know, Pete, if you'd add anything to that?

The only thing I would add is that we continue to look at product development, both in the retail and institutional space. And a lot of that focus is around ensuring that we've got a product fit for longer maturity business. So it's not just retail product development that we're doing. We're also doing quite a bit of work on the institutional side as well.

And then just on your guidance, obviously, for COE margins to be up next year. I mean clearly, there is a bit of a tailwind there as you've said from investment income on shareholders' funds. So in terms of sort of the other forces sort of driving that more in the product margin, I mean, do you think favorable spreads will actually benefit margin? Or are you having to give it away in pricing? And clearly, there's a minor headwind from Life and presumably still some pressure from the short-dated nature of sales. So can you maybe unpick those forces for us as to how we should think about that moving forward?

Yes. Okay, Nigel, I'll kick off and just talk about margin for a second. So we price obviously over spread. And if you look at the inflation that we've released where we released around where our pricing is, and you look at that relative to swap, you'll see that we have been able to use this environment to be, as we frame it, more disciplined around our pricing, which has been supportive, which is clearly a strategy you can use in a rising rate environment as long as we can maintain a really attractive sales proposition or product proposition. And that is across the curve. And if you look at our 1-year pricing today, the spread to swap is in the 30s where that would have been in the 60s a year and a bit ago. So we're definitely being disciplined around pricing. In terms of the other trends, we note the widening credit spreads and higher rates, but that really supports future sales, which again goes to the comment of focusing on longer tenor business where those drivers can be more meaningful to us. Let me look at Pete again and see if you'd like to add anything to that.

Yes. I think the only thing I'd add, a lot of the commentary has been focused on margin. And where we're seeing a lot of our attractive opportunities are in fixed income. That is a lower capital-intensive business. By nature, it does come with a lower margin, so our focus from the investment side is actually maximizing ROE. So we feel like the opportunity is in front of us more, at this stage, slanted towards fixed income investments, which are accretive to our ROE but may not be as accretive to margin.

Your next question is from Anthony Hoo with CLSA.

Can I actually explore a little bit on the maturity side of the annuities? The institutional annuities has grown a lot over the past few years as a proportion of the sales. Is -- by its very nature these are more short term. Is there anything within your control that you can do to actually lengthen the tenor of institutional annuities? Or is it really just driven by the customer and by financials? Is it always going to be very short term as opposed to retail where you can use pricing perhaps to trend more?

Thank you, Anthony. I think your comments are sort of reasonably there. The experience to date has been -- they have been shorter term business. And if you recall, this is a new diversification line or customer channel really for the last 4 or 5 years. It's allowed us -- or 3 or 4 years. It's allowed us to build closer relationships with the superannuation funds, where on the Life Company side, we had fewer of them. So you're absolutely right to say there are ways that we can link the tenor, and we certainly are active in having those discussions and providing a really attractive proposition to them in these types of businesses is 1 way. I made the comments about these strategies are used across a range of their investment programs, so they're not just filling a cash replacement or a sort of a short-term fixed income replacement strategy. They do fit more broadly in our clients' portfolios than that. So we've had a very good experience of reinvestments over these past couple of years. And -- but it is a large business. We're working very closely with the funds around those, the funds who are clients and new clients. So I think those comments -- and the final one I'd make is that in building relationships with the super funds, now with the passage of the Retirement Income Covenant, we're engaged in more substantive discussions with supers about how they're going to develop products for their members in retirement. And clearly, for us, if we look long term, that is a very high priority of Challenger in an area where we believe we have a really strong proposition to support the super funds develop their strategy. So I'd see it in the context of, hopefully, those comments answer your question.

On the Retirement Income Covenant, the discussion in relation to that, how do you expect that to play out in terms of -- the product is a lot different to what you're selling at the moment? Or would it be kind of more of the same but perhaps even [indiscernible]?

So Anthony, I think what you -- I mean, for us, Challenger is a brand leader in retirement domestically. We have a significant balance sheet and set of skills around providing guaranteed incomes. And so we're having a really broad range of conversations across a lot of clients right now and prospective clients around how they're thinking of developing their retirement solutions. And it's hard to categorize exactly where the opportunities ultimately will fall for us, but we feel really good about it because there's a range of potential product and solution possibilities that we can support the super funds who have built very strong allegiance with their members and who are ideally placed to support their members through the accumulation to the decumulation phase.

Your next question comes from Simon Fitzgerald with Jefferies.

I've got 3 here, and I'll ask them fairly quickly. I just want to explore with you firstly about the ROE target. When Challenger first came up with this target that includes an RBA metric was probably more sort of a mind of a stable sort of environment. But now we've got these rapid rate rises. I mean, can you sort of talk to whether it's sort of suitable? I mean, you're talking about sort of 13.8% target from '23 onwards. I mean, even in the absence of those Bank losses, I think it would be hard to hit that target for you guys just given the jump that it would require. Maybe you can comment on that.

Well, not -- we're not going to hit our FY '23. Well, given what I have said about guidance to hit the -- if you were to extract what we expect as the loss in the Bank and also not earning the group ROE on that capital, we feel good about the rest of the business. We feel very good about where Life is tracking towards and clearly funds like capital business. But we've always said that the transmission of higher rate through the portfolio is just not mechanistic. There's a number of things that go into it, and it will take time. And so we're committed to lowering the target, but we do say it's through the cycle.

Sure. So you're saying that even in the absence of the Bank losses you wouldn't have been able to hit that target for '23.

No, in the absence of -- if we're able to earn ROE on the Bank capital, the prospect of hitting it on our forecast would have been far closer.

Okay. Understood. And the second point, just in terms of what some of the banks are suggesting at the moment in terms of deposit war, can you sort of talk to what sort of pricing environment is like at the moment for reinvestments and in terms of whether that sort of term deposit war is creating a bit of pricing pressure for you? Like are you in a more competitive environment at the start of '23 than you were at the start of '22?

Probably a couple of comments around this. I mean we saw the term deposit market shrink materially over the last number of years. So there's very significant potential expansion back even to where it was in the previous really low rates environment. If you think about it from the Life company side, we've made comments about the opportunity to [ activate ] the attractive rate but be disciplined around our pricing or our spread. That's an important lever for us. The term annuity or the annuity product does have different characteristics to the term deposit, which can be a feature benefit and also not -- the term deposit rates are not always available in all the places that customers are seeking and in particular, I'm thinking here about the retail advice market through platform. So it's a little bit more nuanced than that. We are on our term annuities right now, very competitive relative to the highest -- what we see is the higher term deposit rates. So we feel we can easily -- we can compete against term deposits.

Okay. And then also on the Apollo JV, when do you actually expect to start running your first loans in that JV?