Challenger said its earnings were impacted by investment market volatility resulting in lower asset returns in the Life business, particularly absolute return fund distributions ($13 million lower than the pcp) and lower funds management performance fees ($4 million lower than the pcp).
The firm’s lower than expected earnings impacted its outlook.
Normalised net profit before tax slipped by 2 per cent to $270 million.
Normalised return on equity was lower at 15.6 per cent (pre-tax), impacted by lower normalised net profit before tax and higher capital levels held.
The company declared a fully franked interim dividend of 17.5 cents per share, unchanged on 1H18.
Challenger CEO Richard Howes said thatwhile the results reflect the challenging operating environment, he is confident the business is well placed to respond to the current market and capture opportunities for future growth.
“Our results for the first half have clearly been impacted by the difficult operating environment we’re expressing, with increased market volatility, industry disruption and political uncertainty playing out across the sector,” he said.
“While some of these factors are beyond our control, the fundamentals underpinning our business remain supportive.
“We continue to target a growing market of retirees, we have the leading retirement income brand in the country and our capital position remains strong.”
Average funds under management at the firm increased by 9 per cent to $77.4 billion, with Fidante Partners up by 8 per cent and Challenger Investment Partners up by 11 per cent.
Net flows were -$1 billion, impacted by a large Australian institutional fixed income mandate redemption.
Challenger said that its fund management was also impacted by market conditions resulting in lower performance, fees in the period.
Net income for the funds management sector was up by $3 million, or 4 per cent, with performance fees of $2 million, down by $4 million.
Earnings before interest and tax was $26 million, down by $1 million on the pcp.
In its Life investment management business, cash operating earnings (COE) was $330 million, down by 2 per cent on the pcp, with higher investment offers being offset by a lower COE margin.
Challenger said that it reflects the impact of lower absolute return fund distributions received in the first half.
The firm grew its Life book to a record $14.5 billion with Life book growth of 4.2 per cent in the half, which Challenger attributes to strong domestic sales and lower maturity rate.
“An increased focus on longer-term business over recent years had resulted in long-term annuities accounting for 38 per cent of the total book, up from 18 per cent,” Challenger said.
In capital, Challenger holds $1.4 billion in excess regulatory capital and cash above APRA’s minimum required.
In December, Fidante launched ActiveX, a series of active ETFs, with the first being an active income ETF from Ardea Investment Management.
Fidante expects to establish more active ETFs from its other boutiques in the second half.
Challenger also noted superannuation as an issue.
“While the retirement income reform process has been impacted by political uncertainty and the election cycle, there has been bipartisan support over many years for policy development to strengthen the retirement phase of superannuation,” Challenger said.
“Challenger is engaging broadly and leveraging our research to contribute to the public policy debate.”
As previously indicated, Challenger anticipates FY19 normalised net profit before tax to be between $545 million and $565 million.
The guidance, the firm said, reflects a number of factors including lower than expected earnings for the first half and flow-on effects in the second, along with impact from a reduction in capital intensity across Life’s investment portfolio.
The lower earnings have also meant it does not expect to reach its 18 per cent normalised return on equity before tax target for the full year.
Challenger does, however, continue to target a dividend payout ratio of 45 per cent to 50 per cent of normalised net profit after tax.
The company is also planning to launch its annuities on Hub24 and Netwealth platforms in the second half of the year, following its establishment of the BT Panorama platform in the first half.
Sarah Simpkins
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
