Half Year 2025 Challenger Ltd Earnings Call Transcript

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

Question: Freya Kong - BofA Securities - Analyst : Freya Kong, Bank of America. Things are flagging the one-offs in the COE margin for H1. However, I guess even adjusting for this, the trajectory of improvement we've seen in margin seems to be slowing. Is this fair? And how much more can COE margins improve from here?

Question: Freya Kong - BofA Securities - Analyst : Okay. And second question, if I can. I guess there's quite a meaningful difference between the normalized profits and the statutory profits. And I understand some of that is due to timing but also higher return assumptions, especially in the alternatives portfolio. How often do you review the return assumptions and how much deviation and for how long are you willing to tolerate before you look at them? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 17, 2025 / 11:30PM, CGF.AX - Half Year 2025 Challenger Ltd Earnings Call

Question: Freya Kong - BofA Securities - Analyst : Freya, BofA. I guess as the rates come down at the start of a cutting cycle, your ROE targets will also move down. would this make you more inclined to be aggressive on pricing to solve for a lower ROE target? Or I guess now since there's been a more deliberate shift to longer-dated business, which is less sensitive to cash rates, would you move less?

Question: Simon Fitzgerald - Jefferies LLC - Analyst : Just a couple first on the margin. I just was hoping you could elaborate a bit more on the property. I think I heard you say a building or an entire asset had the vacancy. And at least if that's been relet, just the impact in the second half of how that will change? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 17, 2025 / 11:30PM, CGF.AX - Half Year 2025 Challenger Ltd Earnings Call

Question: Simon Fitzgerald - Jefferies LLC - Analyst : Okay. And then just on the cat bonds exposure. You mentioned that they paid Right. distribution in the second half of last year. I was just curious as to why cap ons or if they necessarily typically pay in the second half as challenges fiscal period and whether that might line up to a US hurricane season or something like that. Maybe you could just sort of elaborate on the timing of those?

Question: Simon Fitzgerald - Jefferies LLC - Analyst : Okay. And with those insurance-linked securities do they typically distribute in the second half rather than the first half? Is that a trend that we should be considering going forward?

Question: Simon Fitzgerald - Jefferies LLC - Analyst : Okay. That's very clear. And then just a little bit about the strategy of improving or at least encouraging longer-dated annuities. There were several months, I think, last year where the yield curve had flattened down. I think gender was an inverted yield curve for a period of time. Just in terms of the TAM book the five-year swap versus the three-year swap, what premium do you need on the five years to sort of try and really see that encouragement of the longer-dated annuity sales?

Question: Simon Fitzgerald - Jefferies LLC - Analyst : So maybe I could ask that a different way then, given it was flat for a period of time in the first half of the fiscal period, did you see that big impact on the term sales for, say, between five and three?

Question: Andrew Buncombe - Macquarie Securities Ltd. - Analyst : Just one from me, please. Just interested in how you're currently seeing the defined benefit sales pipeline over the last 12 to 18 months, that's really been a focus of discussions with the business and get there haven't been that many executed on? Just thoughts on the outlook.

Question: Andrew Buncombe - Macquarie Securities Ltd. - Analyst : Okay. So is it fair to assume that we shouldn't be expecting any of those block sales in the second half then? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 17, 2025 / 11:30PM, CGF.AX - Half Year 2025 Challenger Ltd Earnings Call

Question: Lafitani Sotiriou - MST Financial Services Pty Ltd. - Analyst : A few questions, if I may. The first is to better understand for -- if we look at investment experience and the timing differences that are reported from results result, the initial discussion that you gave us was along that further cycle that you should net out pretty even. So could you just add some color around where you think we are in the cycle with respect to those two items, but in particular, what a cut in interest rates is likely to do to those two items over the next few years. Yes.

Question: Lafitani Sotiriou - MST Financial Services Pty Ltd. - Analyst : Got it. Can I just move on to the cost to income and just a follow-up there. I understand that you only recently reset the cost-to-income ratio targets. But there's a lot of things that are still happening here. You're still talking to a structural change in the cost base, and there's still the Accenture of cost-out benefits flowing through each year. And you just started getting some of the cost out of the Funds Management business. It just seems like there's a little bit of disconnect where the cost to income currently is and that future cost out that we can see coming. Why is there not some scope to further explore reducing the cost-to-income ratio target even more. Is that being considered? Or could you talk us through some of those dynamics, given there's still a lot of cost coming out?

Question: Lafitani Sotiriou - MST Financial Services Pty Ltd. - Analyst : Okay. And just one final question. So just going into the ROE you are above your ROE target now and given that you've talked to, there's been a structural shift in your cost base. And it's clear in the fund management business, you're only at the start of improving the ROE. Is it possible that you could return to your ROE target and refresh that as part of your future guidance?

Question: Julian Braganza - Goldman Sachs Australia Pty Ltd. - Analyst : Just a first one for me. In terms of just the yields, the yields by asset cost that you provided there. Can you provide some color on how that's tracked over time, particularly for the alternatives portfolio, just interests in that and just the yields you've seen over the last few halves, now that it's 9.1% for this half?

Question: Julian Braganza - Goldman Sachs Australia Pty Ltd. - Analyst : Okay, sorry. Let's talk about the assumption, but more so about just the total return. The yield, just wanted to know how that tracked over the last years?

Question: Julian Braganza - Goldman Sachs Australia Pty Ltd. - Analyst : Okay. And then just to be this is the yields that you're referring to? Total returns, which is in the order of 9%, 10%, is that right?

Question: Julian Braganza - Goldman Sachs Australia Pty Ltd. - Analyst : Okay. Then just a follow-up question. And I just want to understand, in terms of the tailwind that you're seeing to your margin over the last few halves, how much of that is driven by the risk up into alternative vis-a-vis other asset losses. And if you strip out that effect, it's at a very high level. What has actually happened to underlying margins ex the after some of the balance sheet?

Question: Julian Braganza - Goldman Sachs Australia Pty Ltd. - Analyst : Okay. I understand. Just one more question from me to sit on, I think just following up on a question from earlier. Just on and to the extent that you're targeting more time, more lifetime policies, longer duration annuities, which are traditionally more capital intensive. So to retain -- to meet your ROE target, that means that the margin on that business needs to be higher. So just to be very clear then, to that extent, should we continue to see margin improvement to the extent that you're shifting that lift towards longer-duration lifetime annuities. Is that a fair assessment? So we should continue to see margin improvement in yields?

Question: Julian Braganza - Goldman Sachs Australia Pty Ltd. - Analyst : But just generally speaking, the mix you're targeting is longer duration. So therefore, should -- all else equal should be better, is that fair?

Question: Anthony Hoo - CLSA Limited - Analyst : Just a question on the asset side. You've talked previously about investing in the whole loan capability, also private credit opportunities to Polo, just wondering whether you can talk about which of your initiatives you see the most potential? And then can you make a comment around potential impacts or potential benefits on your spread on the asset spread and hence the margin?

Question: Marcus Barnard - Bell Potter Securities Ltd - Analyst : Yes. A couple of questions on Lifetime one. Firstly, I'm interested in the average age of utilization, Pete tell me what that is and how it's varied, I'm guessing you're seeing a trend of older people and utilizing and perhaps a bit of catch-up post low interest rates and COVID. Perhaps comment on that. And secondly, I'd like to interested to know what the sort of surrender rate is on lifetime in your us know you have a period where your people are a surrender option. What sort of take-up do you see on that? Is that a worthwhile option? Is that -- how does that vary? Is it quite random?

Question: Marcus Barnard - Bell Potter Securities Ltd - Analyst : Is it actually worth offering that surrender option?

Question: Marcus Barnard - Bell Potter Securities Ltd - Analyst : Yeah. I know about the death benefit. I'm just wondering why you put a surrender or option on. It's not something that's done in other markets. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 17, 2025 / 11:30PM, CGF.AX - Half Year 2025 Challenger Ltd Earnings Call