Challenger to raise $300m, scraps dividend on investment losses

Annuities provider Challenger has launched an equities raising as it scraps a final dividend, after investments took a $850m hit.

Challenger CEO Richard Howes. Picture: Jane Dempster

Annuities provider Challenger has launched a $300m equity raising to strengthen its balance sheet and give it flexibility to enhance earnings, as it warned shareholders it will not pay a final dividend after investments took a $850m hit in the COVID-19 market sell-off.

Challenger will raise $270m through a fully underwritten institutional placement at $4.89 per share, an 8.1 per cent discount to its last closing price, with a further $30m to be raised through a share purchase plan.

The funds will be used to strengthen Challenger Life’s capital position by initially increasing its regulatory capital position to 1.78 times APRA’s prescribed capital amount and its common equity tier 1 ratio to 1.17 times the required amount.

Alongside the equity raising announcement, Challenger flagged that it will not pay a final dividend later this year.

“Given the uncertain economic conditions, investment market volatility and intention to maintain a strong capital position while optimising earnings, the board’s current intention is that no final financial year dividend will be paid by Challenger in September 2020,” it said.

It is still forecasting a profit before tax result at the bottom end of its $500m to $550m range for the year, but warned that its statutory net profit had been hit by the recent market sell-off, with investment losses of $809m — half of which remain unrealised — dragging it to a net loss of $483m for the year to May 31.

Challenger on Monday said it would progressively deploy the raised capital by backing investment grade fixed income investments that it expects will be return on equity accretive for shareholders.

Once fully deployed, Challenger said it would maintain its defensive portfolio mix and it expects Challenger Life’s prescribed capital amount ratio to return to the top end of its target range of 1.3 times to 1.6 times on a pro forma basis.

Challenger CEO Richard Howes said in the wake of the market rout, the annuities provider had reduced capital intensity and repositioned its portfolio to more defensive settings, increasing the cash and liquids on its life division’s balance sheet to over $3bn.

“Following the pandemic market sell-off, fixed income asset risk premiums have widened significantly and we are now seeing opportunities, primarily in investment grade, to selectively invest this cash and liquids balance and generate pre-tax return on investment in excess of 20 per cent on the capital backing these investments,” Mr Howes said.

“This is well above our pre-tax return on investment target of the RBA cash rate plus a margin of 14 per cent. Importantly, we can capture these opportunities, while maintaining our current defensive portfolio settings, with a high weighting to investment grade fixed income.”

Raising additional capital will help the business to remain strongly capitalised so it can withstand and respond to further market volatility, he added.

The placement will be done at $4.89 per share, an 8.1 per cent discount to Friday’s closing price of $5.32 and a 5.7 per cent discount to the volume weighted average price of its shares last week. It will see 55 million new shares issued, representing 9 per cent of Challenger’s existing ordinary shares on issue.