Challenger cashes in on strong growth in annuity sales

The financial services firm has upped its dividend, as record-high annuity sales help it to lift net profit by almost 10pc.

Challenger CEO Brian Benari. (Renee Nowytarger/The Australian)

Diversified financial services firm Challenger continues to be buoyed by strong growth in its annuity products, as the company rides booming income from Australia’s greying demographics.

Challenger booked a 9.6 per cent rise in net profit to $327.7 million for the year through June. Revenue was up 7.4 per cent to $1.81 billion, boosted by record-high annuity sales which rose 22 per cent to $3.4bn during the year.

Australia’s largest provider of annuities, Challenger (CGF) has nearly $60bn in funds under management and provides annuity and post-retirement products for a range of other financial players, including some industry super funds. The group notched up $2.4bn worth of organic net flows over the year.

The group’s annuity sales rocketed after the government’s budget decision to improve the attractiveness of retirement income products such as annuities, while parts of the $2 trillion superannuation industry moved to include Challenger annuities on their investment and administration platforms. Annuity sales were up 45 per cent over the last six months of the financial year.

“Over the past year Challenger has launched a number of distribution partnerships to make Challenger annuities more readily available to financial advisers and super fund members. These are already bearing fruit,” chief executive Brian Benari said.

Established in 1985 and listed in 1987, Challenger said momentum was building through its Colonial First State partnership, where sales volume had doubled over the first year annuities were offered on the platform.

Annuities are a form of longevity insurance which help to provide clients with a guaranteed income stream in retirement beyond average life expectancy.

Challenger said it was launching five new annuity partnerships over the coming six months and would be teaming up with Suncorp to white-label its term and lifetime annuity products.

Challenger will pay a final dividend of 16.5c per share, bringing the year’s total distribution to 32.5c — an 8 per cent lift on the prior year’s payout.

While the group’s funds management business recorded solid net flows, Challenger’s fund capital raising business in Europe was adversely affected by Brexit volatility, which in turn fed through to a lower return on equity.

Normalised return on equity has fallen 1 percentage point since the 2014 financial year, this year dropping to 17.8 per cent — below the group’s 18 per cent target.

But Mr Benari was confident in Challenger’s future, and said the group was expecting normalised cash operating earnings between $620m and $640m over the coming year.

“As Australia’s retirement income system develops, the superannuation industry is moving ahead of government reforms and is now beginning to adapt more rapidly to the income needs of retirees,” he said.

“As the market leader, Challenger will leverage its competitive advantages to develop innovative retirement income solutions and form new distribution partnerships to make Challenger products more widely available.”