Full Year 2024 Challenger Ltd Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Siddharth Parameswaran - JPMorgan Chase & Co - Analyst : Siddharth Parameswaran from JPMorgan. A couple of questions, if I can. Firstly, just on capital. The capital ratio improved significantly over the half. A lot of it seems to be -- because the combined stress charge dropped. And I think, Alex, you mentioned diversification as the key driver. Can you just explain that a bit more? Is that a change in your assumptions around diversification? Is there anything that you've changed in your asset allocation which has led to this, which you weren't able to get credit for? And related to that, I noticed a change in your wording around how you're actually seeking to operate versus your own targets as opposed to the regulatory targets. You want to be at the strongly capitalized. I presume that means you want to be at the upper end. I just want to be clear whether the improvement we're seeing is something that is changing the way you will operate or is this just an assumption change?

Question: Siddharth Parameswaran - JPMorgan Chase & Co - Analyst : Okay. Is there any cost to these hedging strategies? That seems to be the big change from 6 months ago. Is there a cost which we should -- it doesn't seem in your guidance, there's any expectation on your normalize guidance. But usually, if you derisk or if your capital position improves, usually your COE margin should go down. I just want to understand --

Question: Lafitani Sotiriou - MST Financial - Analyst : I just wanted to follow up on the guidance for FY '25 and whether you can add any color around the Life's net book growth, in particular, with some commentary around the 1-year term. So, during this project refresh last couple of years, the number of one-term annuities has gone from 52% of the book to 26%. Would you say that that's broadly the natural level you expect you to base out at? Or do you still see some churn in that book? And what is the midpoint of the guidance range from net book growth that you're assuming?

Question: Lafitani Sotiriou - MST Financial - Analyst : Okay. Got it. Why don't I move on. So, looking at the strong as your Life company result is on the flip side, it's actually pretty shocking. We're in a scenario now where the Funds Management business has a lower ROE than the Life company. So, there's a bunch of things you've talked through (technical difficulty) initiatives you've got for the next year to try and improve the Funds Management business. But as much as there was a project sort of refresh in the Life company to get the ROE reset, can you talk to how over the medium-term you're really going to see what should be a high ROE business improve its returns?

Question: Lafitani Sotiriou - MST Financial - Analyst : Just one very quick sort of macro question. So, we've seen a lot of currency volatility, particularly with the yen. You've got some assets over there. Could you just talk to -- and some obviously business coming out of there. Can you talk to the change in hedging costs or any change in outlook over the year ahead that may come from some of the volatility we're seeing?

Question: Andrew Buncombe - Macquarie Research - Analyst : Just one for me, following up from the comment before in relation to the timing of the FUM flows in Fidante. That's causing a fairly significant reduction in percentage terms for the rate in second half '24. Should we assume that, that rate gets back to the first half '24 level going forward? Or will it be somewhere in the middle for these structural changes in the portfolio?

Question: Scott Russell - UBS - Analyst : Can I just pick up on the conversation about Japan with the pretty extreme movements in the yen and JGB yields since the balance date? My understanding is that, you don't necessarily match -- naturally match the assets to the liabilities you've sold and then you manage the FX risk with derivatives at the group level. Can you just confirm that's true? And then I also look at the sensitivities, and I noticed the earnings sensitivity to yen movements has risen, albeit still a low number in absolute terms. But maybe if you could just tie the two together, the volatility we're seeing in markets together with the way you approach FX risk and the increase in yen sensitivity?

Question: Scott Russell - UBS - Analyst : Okay. And then in terms of the sales, I think I saw somewhere that 60% of the MSP sales came from the new yen-denominated sales. Can you maybe comment on how you see that evolving? I mean, there's obviously going to be some demand from the surging JGB yields since you started that business. But is Challenger agnostic as to what currency that business from MSP is written in?

Question: Julian Braganza - Goldman Sachs - Analyst : Just following up on the discussion on the capital benefit in the CSSA. Alex, just the reason why there is no cost to the hedge, I just want to understand that because is this change in the calculation predominantly driven by assumed management action that you would take in a stress scenario? And if so, just what has changed there? Just to understand as well why the cost of the hedges is 0 and there's no impact on the margin from that capital benefit. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 13, 2024 / 12:30AM, CGF.AX - Full Year 2024 Challenger Ltd Earnings Call

Question: Julian Braganza - Goldman Sachs - Analyst : Okay, great. Understand. And then just a second question on the product cash margin. So, if I look there, just in the second half, we sort of saw a 9 basis point underlying improvement in that product cash margins, excluding just the other income. Can I just kind of keen to understand what sort of benefits we should be seeing from here going forward? You have sort of been seeing a pretty regular benefit on that line over the last few halves. And this is the second -- I mean, it's a second observation as well because I sort of triangulate just your NPAT guidance and your ROE expectations into next year. It doesn't look like you're factoring a lot of improvement in COE margins. So, I'm not sure if -- so, one, is it the product cash margins expectations? Or is it, two, are you factoring interest rate cuts to come to that might offset as well? So, just interested in understanding that.

Question: Julian Braganza - Goldman Sachs - Analyst : Okay, great. And then just one last question. In terms of now, both Nick and Alex, just now that in 2025, it's looking like you meet the target. How does this change how you run the business strategically whether it be for growth -- a greater focus on growth? Or is it more competitive on pricing? So, just interested in how you think about the business now that you have to stay at the juncture where you're sort of achieving your ROE targets.

Question: Andrei Stadnik - Morgan Stanley. - Analyst : Can I ask my first question just around the guidance? And you've highlighted that the tax rate, you're looking for about 31.3%, which is I think, a little bit higher than you've run with in the past. But what's driving that? And is that something that would persist into the next couple of years beyond '25?

Question: Andrei Stadnik - Morgan Stanley. - Analyst : And look, my other question, just going back to slide 18 on the Life COE margin. When we compare all the drivers for the full year with the first half slide, it seems like the benefit of higher rates was just as strong in the second half as it was in the first half. So, the question there is, is there further benefits come from higher rates just given the lag in nature? So, should we expect all else equal that the COE margin would want to push higher in the first half of '25? Setting aside in sales growth potential, there's a -- is the lag benefit of high rates still coming through? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 13, 2024 / 12:30AM, CGF.AX - Full Year 2024 Challenger Ltd Earnings Call

Question: Siddharth Parameswaran - JPMorgan Chase & Co - Analyst : Maybe just two quick ones. Just the -- Alex, a key focus of what you've been saying has been driving the improved results is this focus on longer tenor annuities and the fact that it generates a higher ROE. You haven't really spelled out what that difference is. Can you give us some quantum? It's very hard to tell -- there's so much moving in the numbers around write-downs and just changes in asset mix to really be sure. So if you could just tell us, in your view, what the difference is on a go forward basis the difference?

Question: Siddharth Parameswaran - JPMorgan Chase & Co - Analyst : So, sorry, 1% to 2%, higher margin -- COE margin. So, for an ROE, how would that translate to an ROE?

Question: Siddharth Parameswaran - JPMorgan Chase & Co - Analyst : Okay. Just one final question, just the property write-downs. So can you just give us comfort that where you're up to now, you're happy with your valuation on property? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 13, 2024 / 12:30AM, CGF.AX - Full Year 2024 Challenger Ltd Earnings Call