Challenger slashed amid tech transformation double down

The wealth and retirement giant is targeting tens of millions of dollars in cost savings from deals with Accenture and State Street after mixed interim results.

Challenger CEO Nick Hamilton. Picture: Britta Campion

Investors have punished ASX-listed retirement income giant Challenger after missing interim profit expectations and revealing weaker sales.

Shares in the Australian financial heavyweight plunged 10.6 per cent on Tuesday, despite Challenger boosting its underlying profits and upping its dividends.

Underlying profits lifted 12 per cent over the six months to December, hitting $225.2m but coming in below analyst forecasts of $228m. Net profit jumped 28 per cent to $72m.

Challenger boss Nick Hamilton says the group was entering the second half “in great shape”, with continued growth in new business driving returns.

Mr Hamilton told The Australian Challenger was showing the momentum of its strategy, noting any shift in interest rates was unlikely to impact the profit line of the business.

Retail lifetime annuity sales hit a record at $583m, up 24 per cent.

While Challenger’s Japanese sales also hit a record of $616m, up 78 per cent.

Challenger has an annuity relationship with Mitsui Sumitomo Primary Life Insurance Company that reinsures Australian dollar, US dollar, and Japanese yen denominated annuities.

But total sales from Challenger’s life business slumped 12 per cent to $4.6bn, down on the $5.3bn posted by the financial giant in the same period last year.

Mr Hamilton said Challenger was hopeful the opening up of financial advice in Australia, after years of retreat, would see more retirees looking to access its products.

He said he hoped this would also see more international insurers enter the Australian market, expanding the life insurance and annuities market.

“We welcome that because the supply today is Challenger, more or less, but we need far more supply,” Mr Hamilton said.

Challenger is also banking on a major technology transformation of its Life platform, under a redesign with advisory firm Accenture that’s expected to deliver $90m in cost savings over seven years.

The company told investors it was on track to engineer a “structural reduction” in its expense base, with a number of deals aimed at slashing costs.

Challenger recently signed a deal with State Street to provide investment administration and custody services.

Mr Hamilton said the move to lower Challenger’s cost base was supporting the lift of its dividend to shareholders, up 1.5c to 14.5c on the group’s handout last year.

Funds under management rose 3 per cent to $121bn in the half. This includes a growing allocation to alternative assets in Challenger’s portfolio, up 1 per cent.

Challenger said its investment management operation was growing its presence in mid-market corporate lending as well as non-construction real estate lending.

The group has deployed more than $5bn in private credit.

Challenger reaffirmed its annual underlying profit after tax guidance of between $440m and $480m, with the midpoint of the range representing 10 per cent growth on last year.

Mr Hamilton said the work on Challenger’s operating platforms was a key plank of its growth strategy in the years ahead.

“Over the last three years, we have reset the business to deliver stronger earnings – uplifting our customer and investment platforms lays the foundations for the next phase of our growth strategy”,” he said.

Citi analyst Nigel Pittaway warned Challenger’s weak sales and investment earnings would drive its share price lower.

Mr Pittaway said the market will be disappointed by Challenger’s margins in its Life business “especially as one of the intended outcomes of its longer duration sales strategy is to improve this”.

Shares in Challenger were down 10.11 per cent or 62c by 1.50pm, falling to $5.51.