Challenger interim net profit halves on investment losses, but reaffirms annual guidance amid best outlook for annuities in a decade

Challenger’s interim net profit dropped 56 per cent from last year. But the group is upbeat about its outlook.

Challenger CEO Nick Hamilton

Higher interest rates have breathed new life into the long-suffering annuities market, providing the best outlook for new business in a decade, according to wealth manager Challenger.

Speaking to The Australian after handing down Challenger’s first-half results that showed total annuity sales soared 41 per cent over the six months, led by an 89 per cent surge in the retail segment, chief executive Nick Hamilton said interest rates had shifted from being a headwind to a tailwind for annuities, with the outlook now materially improved.

“Where we are today, with normalised rates – and we’ll see where they end up settling over time – our position for annuities is materially better because investors are giving up liquidity and they are taking that rate for a term,” Mr Hamilton said.

“Higher rates have re-energised activity around retail client interest … (delivering) a far better proposition for customers.”

Shareholders cheered the interim result and improved outlook, sending Challenger shares up more than 6 per cent, before the stock closed 4.4 per cent higher at $7.58.

With rates now higher than they have been in years and investment markets increasingly choppy, annuities – which offer a future income stream for a set price – are enjoying a long-awaited resurgence.

“Customers today are getting an annuity proposition we haven’t really seen for near a decade in the market here. The a normalisation of rates has created a far better environment for annuity sales and we’ve seen that through the very strong numbers in retail,” Mr Hamilton said.

Demographic tailwinds were now favourable for the wealth manager, he added.

“We’ve had some cyclical headwinds through rates. There’s been quite a lot of structural change through savings markets, particularly around advice, but it feels like those headwinds are abating … we feel really well positioned to be a really valued partner to the customer’s portfolio, whether it be an institutional or retail customer’s portfolio.”

Challenger’s interim statutory net profit slumped 56 per cent in the half, driven by unrealised investment losses. But the group reaffirmed its annual guidance, saying it expected normalised net profit before tax of between $485m and $535m for the 2023 ­financial year.

For the six months to December 31, the investment manager recorded normalised pre-tax profit of $250m, up 5 per cent.

Life earnings before interest and tax rose 13 per cent from a year earlier to $263m.

Funds management earnings, meanwhile, fell 14 per cent to $93bn, reflecting lower average funds under management following the sale of its stake in infrastructure boutique manager Whitehelm Capital, as well as last year’s market sell-off.

Funds management EBIT dropped 32 per cent to $31m, due to the lower average FUM compared to the prior period.

Mr Hamilton said the performance over the half year demonstrated the resilience of Challenger’s business model.

“We have positioned the business to benefit from rising interest rates, which have stimulated strong demand for retail annuities, particularly longer-dated products,” he said.

Total annuity sales soared 41 per cent, led by record retail annuity sales, which were up 89 per cent at $2.1bn.

“In funds management, our diverse offering has allowed our business to largely withstand market conditions, with total FUM remaining stable over the half,” Mr Hamilton said.

Challenger had also made progress leveraging strategic partnerships to drive future growth, he said.

The annuities provider in October said it had agreed to sell its banking operations to New Zealand’s Heartland Group for $36m, as it looks to focus on its life and funds management businesses.

On Tuesday, Challenger said the bank was strongly capitalised, with about $100m to be returned prior to sale completion. The deal is subject to regulatory approvals in Australia and New Zealand and should complete by the end of the financial year, Mr Hamilton said.

A fully franked interim dividend of 12c a share, was declared, up 4 per cent from last year.

UBS analyst Scott Russell said the result was broadly in line with expectations.

“Statutory NPAT (was) below our forecast due to negative investment experience. Life EBIT was ahead of consensus, Funds EBIT behind.

“In life, cash operating earnings margin has increased for the secnd half in a row, up 13 basis points half-on-half to 276bps. However only +2bps came from product margin, rest from shareholders’ funds.

“Annuity sales continue to rebound strongly and with a favourable skew towards longer-tenor retail.”