Challenger benefits from increased retail distribution

Mike Taylor

Managing Editor and Publisher

24 April 2023

Challenger Limited’s investment in its retail distribution capability is paying dividends for the company, according to the latest analysis from research and ratings house, Morningstar.

The analysis, released late last week, has pointed to the manner in which Challenger’s retail and lifetime annuities sales have more than offset a drop in institutional sales.

Morningstar said Challenger’s third quarter results had been overall encouraging and broadly in line with expectations.

“Increasing proportion of group sales from retail and lifetime annuities in recent quarters illustrates the success of Challenger’s growing product distribution. The annuity growth was also supported by rising rates which make annuities look attractive,” the Morningstar analysis said.

“Retail and lifetime products are longer-dated than institutional ones, which support the compounding of Challenger’s investment asset book and hence, earnings growth. Warm sales leads are increasing, which bodes well for further retail sales.”

“We also think institutional annuity sales will still grow over the long-term, underpinned by the retirement income covenant. We project EPS growth in the midteens over the next five years, off a relatively low base in fiscal 2022.”

The analysis said Morningstar believed Challenger shares remained undervalued, with the market likely awaiting signs of margin expansion given higher interest rates.

“This will likely eventuate in time. We forecast greater cash operating earnings margins over the next five years, averaging 2.78% per year, above fiscal 2022’s 2.38%. At present, we expect this to be largely driven by higher returns from investing shareholder capital, rather than higher product margins (investment yields less interest paid to policyholders).”

“Challenger’s favourable sales mix (more retail and lifetime sales), plus the increase in new business tenor to 6.1 years (from 3.8 in the prior period) are all supportive of future margins—as proceeds can be reinvested into higher-yield assets.”