Challenger Limited (CGF) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Challenger Limited FY '20 Full Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Stuart Kingham, Head of Investor Relations. Please go ahead.

Good morning. I'm Stuart Kingham, Challenger's Head of Investor Relations, and welcome to you all online for our 2020 financial year results briefing. I'll ask Andrew -- I'll ask Richard to open the session in a moment, Challenger's Chief Executive Officer. And I'll remind you that today's presentation will be followed by a Q&A session. I'll now hand over to Richard.

Thanks very much, Stuart. Welcome to Challenger Limited's Full Year 2020 Results. I'm Richard Howes, Chief Executive of Challenger. Well, who would have thought we'd be sharing full year results under these circumstances, facing such an unusual situation. And having had to postpone our Annual Investor Day, we've decided to change things a bit for this results update. I'll kick off and then Andrew Tobin will go through the financials. Our business leads, Angela, Nick and Chris, are here to provide a bit more insight into their respective businesses. Then I'll finally make some statements about the outlook. At Challenger, we're here to help customers achieve financial securities for retirement. It's no small task, given the structural shift in the advice and wealth management sectors during the past 2 years and given the unprecedented health and economic challenges arising from the COVID-19 pandemic. The full year 2020 results is dominated by the impact that the pandemic has had on Challenger and financial markets more broadly. But our success in diversifying our Life business mix among retail and institutional investors and our success in building our funds management business has held the company in good stead. We've built on the foundation we already had in place to strengthen the business. This has allowed us to adapt our business during the COVID-19 challenges and will allow us to take advantage of opportunities created by more permanent structural changes in the domestic wealth and financial advice sectors. The events of the last 6 months confirmed that we've had the right strategy in place and the right people running the business to perform strongly in coming years. I'm pleased to report that we continue to deliver on our vision to provide our customers with financial security for retirement, with almost $4 billion in guaranteed payments to customers this year, irrespective of the economic and market climate. While losses resulting from falls in investment markets impacted our net statutory performance, growth in funds under management and diversification of business mix demonstrates our underlying resilience. Total assets under management were up 4% to $85.2 billion, notwithstanding both the fall in investment markets and the increased need for our clients to maintain higher levels of liquidity driven by the crisis. Our normalized net profit before tax was down 8% to $507 million, at the lower end of our guidance range. This reflects difficult market conditions and our decision to reposition Life's investment portfolio in response. Chris will discuss the repositioned portfolio in more detail later. Our statutory net profit outcome was a loss of $416 million. The investment market volatility over the past 6 months resulted in significant investment experience losses as previously disclosed, with approximately half of these losses realized. Andrew will provide more detail on our investment performance in a moment. Challenger maintained a strong capital position, which was further bolstered by a $270 million institutional placement in June and the completion of a $35 million share purchase plan in July. We have $1 billion in excess regulatory capital, ensuring that we're in a strong position in the event of further market volatility. Our PCA ratio of 1.8x is above the top end of our target range of 1.3x to 1.6x the minimum amount set by APRA. And our CET1 ratio was 1.2x, up from 1.06x a year ago. The statutory loss was certainly disappointing, but the underlying performance of both our businesses demonstrates our resilience and benefits in terms of business mix of our work to reposition the business in light of the structural change in wealth management industry. During FY '20, consistent with the core strategic pillars we've had in place for several years, we focused on responding to this structural change with new initiatives to build deeper customer engagement with targeted activity to support financial advisers, especially IFAs, and with an expansion in our work with leading superannuation funds. We also continue to build on our leading funds management capability. Underpinning this business strategy is our commitment to good corporate governance, risk management and sustainability. We're seeing the benefits of this. Angela will go into more detail. But Life sales were up 13%, reflecting strong growth in institutional sales and our partnership with MS Primary in Japan delivering above target sales. Our ability to grow the Life book in very difficult conditions demonstrated the benefits of broadening our product offering and diversifying our distribution channels. The work we're doing builds on our already strong foundation as a leader in return on income and provides a solid base on which to grow into the future. It has allowed us to successfully pivot our business towards IFAs and increase our direct customer engagement alongside enhancing our product offerings. As Australia's fifth largest active funds manager, our foundations in this area are already very strong. We have the market-leading institutional and retail distribution, and our clients include the largest 30 pension funds. Our funds management business -- our funds management result reflects this strength. Nick will provide more detail on how we're achieving net flows superior to our peers, including being #1 for Australian fixed interest flows for the last 3 consecutive quarters. I'm proud of our success in maintaining business continuity, strong governance and risk culture throughout the COVID-19 disruption. With almost our entire workforce at home, we processed a record number of transactions and achieved a high level of both customer and adviser interaction and satisfaction. Our employees remain highly engaged, and there's been no negative impact on customers from our changed work practices. The period of extreme uncertainty demonstrated the benefit to retirees of having a guaranteed annuity as part of a retirement portfolio. We've received many customer testimonials around the comfort this certainty has provided them in these very uncertain times. We continue to support advisers through the pandemic using digital means to provide increased education and customer support. During the March quarter, there were both significant gross outflows from the funds management business and significant redemptions from Life Index Plus products, highlighting the value that the liquidity we're able to provide to our clients during these times. As market conditions improved, the quality of our product offering underscored market-leading and large net inflows. Our business has proven resilient during the pandemic. While our investment experience has been significant and significantly hit by the fall in investment markets, which happened with unprecedented speed, we responded quickly by repositioning the portfolio and reducing capital intensity. Raising equity and the prudent decision not to pay a final dividend has further strengthened our capital position and ensures we're well paced for any further market volatility in these economically uncertain times. Our operating environment has been shifting for several years. Structural change into retail financial advice business models and their ownership and the rapid growth of relative -- and relative importance of the profit from member segment has meant we've had to reposition the business. COVID-19 pandemic and associated market and the economic uncertainty, together with a lower-for-longer interest rate environment, have highlighted the importance of these business adjustments. At the same time, the important industry trends toward focusing more on the retirement phase and towards higher active share managers continue to drive our business. Our foundations are stronger. We have a more diversified business from the growth in our institutional operations and from our more targeted customer and adviser engagement. This builds on the diversification provided by the ongoing growth in our funds management business. We remain the leading retirement income brand among financial advisers, which is helping us pivot towards independent IFAs as the major bank advice channels continue to contract. We've also increased our direct customer engagement and education activity. Challenger is now positioned for long-term growth with a broader product offering and more diverse income streams. I'll now hand over to Andrew Tobin to run you through the numbers in some more depth.

Thanks very much, Richard, and good morning, everyone. As you've already heard today, our 2020 financial results have been impacted by a challenging operating environment, with the second half dominated by the global health and related investment market volatility created by the COVID-19 pandemic. Looking at the group results, the main headlines are as follows. Net income for the period was $797 million, down $24 million or 3% compared to the prior year, with Life cash operating earnings down $31 million or 5%, partially offset by an increase in the funds management income of $8 million. We remain disciplined with our expense management with underlying expense growth of $4 million or just over 1%. Our expense base included one-off expenditure in our corporate segment in relation to restructuring costs and accelerated amortization of capitalized IT software, offset by lower variable remuneration outcomes across the group. On top of this, we have spent $13 million on distribution, product and marketing initiatives to drive longer-term annuity sales growth, slightly below the $15 million planned spend at the start of the year. Overall, group net profit before tax decreased by $41 million or 8% to finish at $507 million, at the lower end of our guidance range provided at the start of the year. We generated a normalized pretax return on equity of 14.8%, 20 basis points higher than our target of 14% above the prevailing cash rate as shown on the right-hand chart. Now looking at the group result in some detail. The decrease in normalized profit before tax was impacted by lower cash operating earnings in Life and higher group expenses, offset by growth in funds management income, which was supported by increased funds under management and higher performance fees. Normalized net profit after tax was $344 million, down $52 million or 13%, reflecting lower pretax earnings and an effective tax rate of 32% compared to 28% in 2019. The higher tax rate reflects the nondeductible interest expense on the Challenger capital notes and the inability to utilize foreign tax credits given the statutory loss incurred in the year. In terms of statutory profit, which includes valuation movements on Life's assets and liabilities, we posted a significant investment experience loss of $750 million after-tax as a result of the investment market sell-off in March. This final investment experience outcome is a $59 million improvement on the year-to-date May position that we announced as part of the equity placement 6 weeks ago. Approximately half of this full year loss is unrealized, and I'll provide further details on investment experience shortly. In addition to the investment experience loss, we also incurred a $9 million loss after tax in the first half in relation to the impairment and wind-up costs for 2 offshore funds management boutiques. Overall, we posted a statutory net loss after tax of $416 million compared to a profit after tax of $308 million in 2019. Moving on to Life financial performance. Total sales for the period were $5.2 billion, up 13% on 2019. The sales outcome reflects strong growth in institutional and Japan sales, offset by lower domestic annuity sales, which were impacted by the structural changes in the financial advice market and also transitioned to new means test rules. Angela will provide further details on the sales activity and outcome shortly. The annuity book posted an outflow of $251 million for the year. However, the increase in other Life sales translated into overall Life book growth of $316 million or 2.1% growth in total Life liabilities. Life cash operating earnings were down by $31 million or 5% to $639 million, reflecting a $20 million reduction in the normalized capital growth assumption on the equities portfolio and the impacts of the asset allocation changes made following the market sell-off in March. EBIT decreased by $39 million to $525 million after absorbing the increased spend on the distribution product and marketing initiatives for the year. Life's return on equity was 16.6% pretax, down 120 basis points compared to 2019, and that reflected the lower earnings outcome. Now let me talk through Life's key business drivers in a bit more detail. Firstly, looking at book growth. As I've mentioned, total Life book growth was $316 million, and this was largely driven by other Life inflows of $567 million, supported by new clients and an expanded Index Plus product offering. The decline in the annuity book of $251 million reflects lower domestic sales, offset by strong growth from Japanese sales. The retail annuity maturity rate finished the year at 26% and included an early redemption of $150 million across a single portfolio of clients as reported in our first half results. The overall positive book growth reflects the distribution diversification that has been constructed over the last few years, including building out new institutional opportunities as well as expanding our reinsurance relationship to cover both Australian dollar and U.S. dollar annuities with MS Primary in Japan. Challenger is focused on growing its long-term annuity portfolio as it locks in attractive margins and, therefore, embeds significant value for shareholders. This chart highlights the component parts of Life's total annuity and other liabilities, which now stands at $15 billion, up from $14.8 billion in 2019. The increased volume of Japanese sales, combined with the lifetime sales, meant that the new business sales tenor increased to 10 years, up from 9 years in 2019. This metric has steadily increased from 6.5 years back in 2016. The continued shift to longer-term annuities has resulted in a combined lifetime and Japanese policy liabilities now representing 45% of the total Life book. This is now larger than our term annuity portfolio for the first time, and this proportion has nearly doubled over the past 5 years, as can be seen by the dark blue shaded sections on the chart. Reflecting our diversification strategy, the institutional Index Plus Fund liabilities grew by 23% over the year to $2.4 billion and now represents 16% of the total Life book. Now looking at Life's cash operating earnings margin in more detail. Life's second half COE margin was 3.1% and decreased by 43 basis points compared to the first half. At a high level, this reflects lower capital and asset allocation changes following the market sell-off in March and also changes in product mix. Key observation for the margin movement in the second half of the year are as follows: The product cash margin declined by only 3 basis points over the half. Asset yields fell by 32 basis points, but this was partially offset by lower interest and distribution expenses of 12 basis points and higher Life risk income of 17 basis points. Life risk income included an uplift of $10 million in relation to the termination of a client contract in the period. Income on shareholder capital declined by 20 basis points due to the impact of lower yields given shareholder capital is not hedged for movements in interest rates. For example, the 3-month bank bill rate was 82 basis points lower in the second half compared to the first half. And finally, normalized capital growth was 20 basis points lower. This fell as a result of the reduction in the equity normalized capital growth assumption from 4.5% to 3.5% per annum from 1 July 2019, and this accounted for 10 basis points. And the balance of 10 basis points pertains to the asset allocation changes made in response to the market volatility we saw in March. On a full year basis, the COE margin declined by 30 basis points from 3.62% in 2019 to 3.32% in 2020. And pleasingly, the product margin expanded over the year by 9 basis points. A detailed walk and commentary for the change over the full year is included in the analyst pack for your information. This slide outlines the breakdown of pretax investment expense loss for the year. The $482 million loss in fixed income represents the significant widening of credit spreads in response to economic uncertainty pertaining to the COVID-19 pandemic and the disposal of the listed high-yield fund exposures in March. The outcome includes credit default experience of $66 million or 50 basis points, with approximately 2/3 of the total fixed income portfolio loss unrealized at 30 June. The $222 million loss on property reflects negative valuations across the portfolio of $155 million compared to our normalized growth expectation of $67 million. The outcome is supported by independent valuations of all our directionally held properties with the average decline being 5% and our retail segment declining by 8%. All of the property valuation loss is unrealized. The equity and other portfolio loss of $341 million reflects the impact from the market drawdown in March, with approximately $1.5 billion of the portfolio sold in order to reduce overall portfolio capital intensity. Approximately 25% of the loss is unrealized at balance date. And all unlisted -- all listed infrastructure was sold during March, resulting in an investment experience loss of $143 million on the portfolio. And looking at policy liabilities. The total valuation gain here was $118 million, supported by a $32 million positive contribution from new business strain and $86 million from assumption and valuation outcomes. The new business strain outcome reflects the negative book growth experienced in the year, and therefore, the net reversal of prior year new business strain. The assumption and valuation change mainly reflects changes to the illiquidity premium component of the discount rate used to value policy liabilities given the credit spread movement over the year. Chris will provide further details on the Life investment portfolio in his presentation later today. Turning now to capital. Challenger's position remains very strong with nearly $1.6 billion of excess regulatory capital. This increased by over $200 million for the year. An additional $96 million of net cash is also held at group. Challenger Life company's regulatory capital base of $3.5 billion declined by $461 million over the year, reflecting Challenger Life's statutory loss and dividends paid during the year, offset by an equity injection of $270 million from the institutional placement that was completed in June. Challenger also finalized a retail share purchase plan last month, and a further $30 million was injected into CLC on 31 July. Prescribed capital amount decreased significantly by $669 million over the year. This was in response to the market sell-off in March, whereby Challenger Life actively reduced its exposure to equities, infrastructure and high-yield fixed income in order to maintain a strong excess capital position during a period of heightened market volatility. The overall capital intensity fell from 13.3% at 31 December to 10.7% as a result of the asset allocation changes made. Looking at CLC's capital ratios on the next slide. Overall, the PCA ratio increased to 1.81x at 30 June following the equity injection and positive investment experience in the month of June. This is significantly above both APRA's minimum requirements and the upper end of our target 1.3 to 1.6 range. The common equity ratio also increased to 1.2x compared to 1.07x at 31 December. As noted in our equity raising announcement on 22 June, the strong capital position provides additional financial strength during this period of ongoing market uncertainty. It also allows CLC to prudently and progressively deploy up to $3 billion of cash and liquids currently held on balance sheet into higher returning opportunities, primarily into investment-grade fixed income. In terms of the other components of the capital structure, Challenger currently has 2 separate tranches of capital notes, which qualify additional Tier 1 capital of CLC. Challenger has an option to redeem or repurchase all or some of the first tranche of capital notes on any future quarterly distribution date up to 25 May 2022. At this stage, we expect to launch a new capital notes offer and replace the Challenger capital notes prior to 31 December this year. As capital is progressively deployed to primarily back investment-grade opportunities, the regulatory capital position is expected to return to around 1.6x, APRA's minimum requirement over the course of FY '21. Now looking at funds management. Net inflows for the year were $2.5 billion with a very strong final quarter. Overall, Fidante Partners contributed net inflows of $3.8 billion, offset by outflows from CIP Asset Management of $1.3 billion for the year following Challenger Life's repositioning of its portfolio. Average FUM increased by 4% over the year to $80.6 billion, and Nick will provide further insights into the net flows shortly. Net income growth was $8 million or 5%, supported by higher management fees and performance fees, partially offset by transaction fees in Fidante Partners U.K. and CIP Asset Management. Performance fees were $15 million, up from $4 million in 2019 with strong performance outcomes across a number of boutiques. Expenses were relatively flat, increasing by only $1 million. And overall funds management's pretax profit was $58 million, up $7 million or 13% for the year. In wrapping up the financial results section of the presentation, it is worth noting that Challenger has additional financial flexibility to navigate any further market volatility. The group's net asset position at year-end was $3.25 billion or $4.90 per share and includes $146 million of group cash, which is in addition to the regulatory capital surplus held by Challenger Life. The group also has $350 million of undrawn banking facilities. With the uncertain economic outlook, investment market volatility and our intention to maintain a strong capital position, the Board has decided not to pay a final dividend for 2020. The Board does, however, expect to return to paying dividends in FY '21 subject to market conditions and capital priorities. And the current policy of paying dividends in the range of 45% to 50% of normalized profit has been retained. In conclusion, the 2020 financial results largely reflect the detrimental impact of COVID-19 on global markets and the broader challenging operating environment. Despite the significant investment experience loss incurred in the year, the underlying business has remained resilient against this backdrop. Challenger Life's regulatory capital position remains very strong, sitting significantly above the top end of our target range. And funds management has continued its growth path in 2020 as demonstrated by $2.5 billion of net flows and ongoing strong investment performance, which provides further business momentum. I will now hand over to Angela for an update on Life's distribution product and marketing activity before rejoining the call for the Q&A session at the end of the presentation. Thanks. Angela?

Thank you, Andrew, and good morning, everyone. I'd like to use the time this morning to run through how Challenger Life is navigating the COVID-19 pandemic and structural change in the wealth management industry and demonstrate our progress and why we now have a business set up for long-term growth. As Richard mentioned, FY '20 total Life sales were up 13% and reflected our good progress in diversifying our distribution channels. We had a number of highlights. Sales of our refreshed institutional Index Plus product more than doubled to $2 billion. We broadened our institutional partnerships, including a new institutional annuity client investing $300 million over a range of terms. Japanese annuity sales were up 177% driven by an expansion of the reinsurance agreement with MS Primary. And direct term annuity sales increased by 1/3, mostly as a result of customers reinvesting maturing annuities. These results provided a significant offset to lower sales in the domestic retail channel, which has been significantly impacted by the major banks withdrawal from wealth management. Sales of Lifetime annuities have also been impacted by the transition to new age pension means test rules. Ultimately, the new rules should benefit longevity products, but it will take time for advisers to learn how best to use them for clients. Our focus on long-term sales, both Lifetime Annuities and 20-year MS Primary fixed-term annuities, is showing results. Long-term sales represented 37% of total annuity sales, a new business tenor with 10 years, the highest on record. It's worth giving a little more detail on how structural change in the wealth management industry is impacting domestic retail annuity sales and how we are responding to drive growth over the longer term. Historically, the financial advice arms of the major banks have been strong supporters of term annuities. These advisers could provide a superior return through a term annuity to the bank's term deposit customer base. The substantial exit of the banks from advice has removed the significant source of business for us. In FY '18, sales from major banks were almost half of total term annuity sales. In FY '20, this proportion declined to just 12%. Another structural change following the Royal Commission has been a growing number of customers that were once advised, but as a result of adviser exits and the increased cost of advice, are no longer in active advice relationships. Between June 2018 and June 2020, the number of our direct customers increased more than threefold, and direct to customers now represent about 17% of our total customers. We've had to innovate in our distribution channels in response to this structural change. We've created a service model for direct to customers, including supporting those customers with a maturing term annuity. This is involved talking directly to them via an outbound calling program. And over the year, we've increased reinvestment rates from this group. Turning to CarePlus. This is a unique product that we specifically designed for aged care customers. FY '20 sales were impacted by the new means test rules effective from 1 July 2019. Following the product refresh late in the first half of FY '20, sales momentum was rebuilding when the COVID-19 pandemic hit. With fewer retirees moving into aged care facilities and lower retail property sales, investments in CarePlus have fallen. Sales of Liquid Lifetime, our Lifetime annuity, were down 48% in FY '20. The new age pension means test rules made our previous flagship retirement product, the regular income option of our lifetime annuity less attractive for most customers. We've had to pivot towards our flexible and enhanced income options, which provide an immediate 40% asset test benefit under the new means test rules. We have focused on transitioning supporters of the regular option to the flexible and enhanced options where these provide the best outcomes for their clients. But the flexible and enhanced options are a different proposition to regular. Unlike the regular option, they do not provide defined access to capital after 15 years. It takes time to educate advisers and build sales momentum around new propositions. Pleasingly, sales of the flexible and enhanced options for Liquid Lifetime increased by 21% from FY '19 to FY '20, with IFAs contributing a significant component. We're also building a new cohort of Liquid Lifetime writers. In FY '20, 56% of advisers writing a lifetime annuity did not do so in FY '19. We have made strong progress in increasing engagement and education with consumers. Notably, in May this year, we launched an online tool to help retirees and pre-retirees better understand how their super savings might last, what age pension they may be eligible for and what impact the lifetime income stream might have on their incoming retirement. The tool was accompanied by new information hub for consumers on retirement income and the benefits of annuities, and we've seen strong take-up of the tool. Innovation has been critical to our business during the past year. Responding to adviser concerns around securing lifetime income in a low interest rate environment, in June, we added an RBA cash linked option to Challenger's Liquid Lifetime product range. This allows retirees to link future lifetime annuity payments to prevailing interest rates. We've built on our thought leadership credentials and enhanced our strong reputation with advisers. Last year, the number of advisers attending Challenger retirement planning or aged care webinars doubled, and we were again recognized by advisers as the #1 provider in this space. We've worked closely with superannuation funds around better options for retirement. Recognizing an increasing number of Australians will be moving into retirement, several super funds are exploring potential retirement solutions for their members, and we are working with funds on this. Historically, our annuity sales came almost exclusively through the domestic retail channel with a disproportionate contribution from the major bank's advice groups. In FY '20, we have greater diversity in our distribution channels. And the work we've done to navigate structural change in the domestic retail channel positions us well for future growth. We've built a strong cohort of supportive advisers and continue to grow that group. We're adapting our approach to better align with the different segments or models of advice practiced in the market. This includes integrating into leading retirement income models and making it easier for advisers to do business with us. Direct customer and consumer engagement and education remains a key focus, and our new customer work is delivering improved digital capability, providing a foundation for future scale and growth. Finally, with relevant solutions for the institutional channel, our strengthened engagement has delivered increased sales in FY '20, and we continue to work with super funds to support them in developing better retirement solutions for their members. Thank you. I'll now hand over to Chris.

Thanks, Angela. As announced to the market, over the last few months, we've derisked the investment portfolio by reducing exposures to absolute return funds, sub-investment grade credit, equities and infrastructure. This has resulted in a significant increase in our excess liquidity and investment grade increasing 10 points to 85% of the fixed income portfolio. Since we spoke to you about the capital raise, we have invested around $300 million into investment-grade credit. There have been no other material composition changes in that period, but we will continue to deploy capital into high-grade fixed income opportunities in a measured and disciplined way. Challenger is committed to providing the market with strong disclosures across all our activities. We continue to assess this disclosure to ensure it provides our shareholders with the information they need to understand our business profile. An important part of this disclosure is the asset allocation and related investment reporting. This year, we are making some changes to the key asset classes we report to better reflect expected performance of our investments. A result of the derisking in March was that equity beta exposures were materially reduced. At the same time, infrastructure, which was also already a comparatively small part of the balance sheet, was further reduced to be circa 1% of the overall asset allocation. This has left these exposures in aggregate at low levels. And given their relatively high correlation, we will now be reporting them as one asset class of equity and infrastructure. Given our repositioned portfolio, we've also taken the opportunity to separate alternatives as its own asset class. The alternatives asset class has proven itself as an important source of diversification and of liquid capital, reflecting the nature of the investments in the investment alternatives portfolio. Commencing in FY '21, we will apply a 0 normalized growth assumption to this part of the portfolio. However, the total return is expected to remain broadly unchanged. Alternatives provide higher expected cash yield versus equities, where we expect to generate capital growth through the cycle on equity and infrastructure investments. We have provided pro forma asset allocations, and there is additional disclosure in the analyst pack. Now looking more closely at the investment portfolio. We have a well-diversified and defensive fixed income portfolio. It continues to have a high weight of 85% to investment grade. The sub-investment grade portfolio is well diversified and performing comparatively well. Our commercial property portfolio is similarly defensive, with a weighted average lease expiry of 6.2 years. Over 50% of office lease receipts are from the government. It is well diversified, both geographically and by sector. We continue to work with our tenants, in particular, those more affected by the pandemic. We have made allowance for ongoing rental abatements in our guidance and are working through arrangements with our affected tenants. Our Life Risk business focuses on providing wholesale longevity and mortality protection to institutional clients, including pension funds and insurance companies. The business is an important contributor to Life's earnings and ROE whilst also providing diversification. It's a business we are well-established in and have built a strong team and capability with our first U.K. pension risk transfer transaction executed in 2013. We have maintained strong transaction and pricing discipline, with less than 10% of deals reviewed completed. It is a long-term business, and we are happy to remain selective, even if this results in extended periods without new transactions. The 3 deals we executed this financial year came in a period where the U.K. risk transfer market had experienced record volumes, giving us the opportunity to participate in several transactions on attractive terms. We have also demonstrated a strong track record of managing the portfolio for value. This year, we recognized $10 million of additional income through early termination of a transaction at a client's request. This was the second such transaction fee for us. Although it does not directly contribute to our accounting net assets or regulatory capital base, the present value of future profits now stands at over $800 million, an increase of almost 70% for the year, reflecting the significant value that has been created and which will be released to profit over the coming years. Moving to operating environment and the investment markets we operate in. We believe that the ongoing global crisis means that the macroeconomic outlook is extremely uncertain, and we expect market volatility to continue. Despite the strong rally in risk assets, we are seeing good opportunities to invest in high-grade fixed income, which is still offering ROEs above 20%, for example, through asset-backed lending, including through our CIP fixed income franchise in Australia. We remain very cautious of default risk and will, therefore, be very selective in considering some investment-grade credit opportunities. In this context, we'll maintain our defensive portfolio settings. With the additional benefit of the recent capital raise, we are very strongly capitalized. This puts us in a good position to deploy capital in a measured and disciplined way whilst benefiting from a defensive investment portfolio and high capital buffers in the near term. Thank you. I'll now hand over to Nick.

Thank you, Chris, and good morning. Funds Management enjoyed a very strong year of performance and through the crisis has exhibited real resilience. Full year net flows from third-party clients exceeded $4.3 billion, which today, we report as $2.5 billion of net flows has been -- included CLC allocation change in the half. Despite the sharp deterioration in markets through March and April, we've also grown our funds under management year-on-year to $81.4 billion. Our platform of investment capabilities has provided strong diversification across both manager and asset class. Notably, we see that the value of active management has been demonstrated, and our platform provides investors with outstanding options in that regard. A very encouraging trend is our ongoing growth of new institutional clients domestically and in our international operations. We saw a 12% increase in new institutional clients to now over 260 institutional relationships. More broadly, our performance was driven by a combination of the overall level of funds under management, which includes the market impact; our net fund flow; and then finally, the margin that is earned. Let me make a few comments on each. We've been able to grow funds under management despite the COVID sell-off driven by underlying exposure to more defensive asset classes and as well the strong performance of many of our key equity managers through the market correction. With regards to net funds flow, we've seen very strong flows domestically, both in our retail and institutional channels. We're encouraged by the breadth of the flows by both client segment and investment capability, leading to a better overall business mix. We had a particularly strong final quarter with $2.6 billion of Fidante net flows. This strong close to the year provides great business momentum, with Fidante's closing from 6% higher than this year's average. Thirdly, on margin, the strength of our Australian retail business positively contributes to margin through the cycle and will be important as we look ahead. The strong contribution from retail growth helped drive the margin expansion experienced in the second half. Let me turn to product development, a critical part of what we do. We have been focused on a key strategy of providing investors with a broad range of differentiated defensive income products, already a significant driver of our growth to date. To that end, we formed a strategic partnership with Ares, a leading global credit manager. We incorporated Ares Australia Management with key local hire and a first fund now launched and in market in the half. We just completed a rebranding of Challenger Investment Partners to CIP Asset Management to support further growth of that business with third-party clients. Our CIP fixed income team had a very strong year, winning mandates on the Australian office of financial management to support government plans to boost small business lending. In addition, the team launched a higher-return, multi-sector private lending fund, supplementing their successful credit income fund with both strategies seeing strong investor interest through the year. We anticipate ongoing strong demand from investors for actively managed income product, and we have an outstanding platform of capabilities, and we'll continue to grow that through time. Let me make a few comments about our distribution focus and success we are seeing in the Australian retail and institutional and offshore channels. The strong sales outcomes we've reported are very encouraging as it demonstrates the platform's capacity to raise significant capital and therefore, meet the market dynamics of internalization, fund mergers and as we experienced this year, large one-off outflows driven by liquidity requirements relating to the early release super program in the third quarter. On the chart here, we show the overall positive FY '20 net sales with the inflows and outflows across retail and institutional. Gross sales in FY '20 were extremely strong at $20 billion, reflecting the scale of our institutional and retail business. Pleasingly, the net margin inflows for our institutional book was in FY '20 higher than the outflow margin. So we've seen in FY '20 blended margin on the institutional fund also improved. The strength of our retail sales platform is a critical part of our strategy. Since 2010, we've grown retail sales 22% per annum to over $13.5 billion today. Today, over 60% of our retail sales are coming from the IFA channel, which, for us, covers in excess of 700 individual IFA practices across Australia. We will continue to invest in broadening and deepening our Australian distribution footprint as we continue to see significant opportunity across the market. We've made strong progress in Japan during the half, delivering our first fund into that market through a partnership with Nikko Asset Management. This is a very exciting development in what is the third largest pension market globally. For us, these large offshore markets of Japan and our operations in Europe provide our business with diversification and growth opportunity, and we continue to make good progress here. The nature of Challenger Funds Management, combining a powerful and dynamic platform for active management in Fidante and our specialist CIP Asset Management business, provides us with the confidence that we can continue to meet the changing market dynamics and the investor requirements. At its heart, we believe in the importance and value of true active management for investors. Our investment teams have likely never worked as hard as over this last 6 months to navigate the markets and to deliver positive outcomes for clients. Funds management platform has the necessary scale, providing diversification by the investment manager, both approach and style. This scale ensures we can adapt our offerings as the needs of the market continue to evolve. Just one example of that is ESG. As market expectations rapidly step up, we now have embedded an ESG capability for all our investment teams to access, ensuring we remain relevant to client needs. We've been patient rolling out our new ETFs across the ActiveX platform. Our assets over the last year have seen our fund grow to $220 million. And as importantly, our teams have developed an understanding of the end market dynamics and operated successfully through a period of extreme volatility. We will continue to selectively roll out strategies here and build scale sustainably. Finally, we will continue to bring on new investment capability. The success of the platform garners significant interest from talented investment teams domestically and abroad. We have the right model and it's proving the diversification -- and providing, sorry, the diversification you would expect in challenging investment conditions. With really strong investment performance over a long time, we are confident we can continue to attract superior flows and can continue to grow the business. Thank you, and I'll now hand back to Richard.

Thanks very much, Nick. The size of the opportunity in front of our business remains enormous. The superannuation system is forecast to double over the next decade, and the retirement phase will become even more important than it is today. And this system, while delivering in the accumulation phase, is widely recognized by both industry and policymakers to be underdeveloped in the retirement phase. Retirees lack the options they need to convert what is now significant superannuation balances into secure retirement income for life. The demographic backdrop amplifies the opportunity of addressing this need. We're in the early stages of a 20-year baby boomer retirement cycle, and we have one of the world's longest life expectancies. Policy reform is starting to respond to this challenge, encouraging uptake of secure lifetime income streams to improve living standards in retirement and by recognizing the benefit of combining guaranteed incomes with other sources of income. And the industry is increasing its focus on the retirement phase by exploring partnerships with companies like Challenger as they look to design better retirement income solutions to their members. Challenger is positioned at the center of these regulatory, demographic and industry tailwinds. We have the strongest retirement income brand, a product offering uniquely able to address the risks of the retirement phase and leading distribution capability across both retail and institutional. Against this backdrop, it's easy to see the relevance of our vision to provide our customers with financial security for retirements. It's a vision we will achieve by increasing the use of secure retirement income streams by leading the retirement incomes market and being the partner of choice, by providing our customers with excellent funds management solutions and by maintaining leading operational and people practices. This strategy has remained consistent for many years, and the disciplined implementation of it has delivered strong foundations, and positions the business well to respond to shifts in our operating environment. As I look across the activities of both of our businesses, I see their individual strengths and achievements and the benefits of their complementarity. Our leading investment capability and operating platforms are to the benefit of both businesses. Our Funds Management business has active relationships with all the leading superannuation funds, relationships which position us well for the development of partnerships in retirement income. Our Funds Management business is also leading the market in terms of penetration of the IFA channel, paving the way for our Life business, where the lead times are longer given the nature of the products involved. And Life's thought leadership in retirement benefits the positioning of the broader Funds Management product suite. Naturally, the way we're executing this strategy needs to respond to the structural changes we're seeing in the industry. And that's exactly what we're doing. Our response is us maintain our resilience and positions us to capture the significant opportunities for growth that you saw in the previous slide. We're very mindful of the acute ongoing economic uncertainty and the implications this is likely to have some market volatility going forward. Accordingly, we've taken the deliberate decision to maintain high capital levels and defensive portfolio settings. We expect that the deployment is up to $3 billion of cash and liquids into higher returning investments, will be progressively and prudently spread over the FY '21 year. Following this deployment, we aim to remain around the top end of our target excess regulatory capital range. Reflecting this gradual deployment, we expect normalized net profit before tax between $390 million and $440 million for FY '21. This also reflects an allowance for rental abatements as we continue to support a number of Life's tenants, and it reflects disciplined expense management with group-wide expenses expected to be lower than in FY '20. Our decision to prioritize high capital levels in the current environment will likely mean that we fall short of our ROE target in FY '21. However, we remain committed to maintaining this target being the Reserve Bank cash rate plus a margin of 14% over the longer term. Finally, for FY '21, our intention is to target once again a 45% to 50% normalized dividend payout ratio subject to market conditions and capital planning. Wrapping things up, the 2020 financial year has been a critical one for Challenger, in terms of the impact of the COVID-19 pandemic and in terms of our success in building on the foundations of the business, diversifying our revenue base and growing our Funds Management business. We've broadened our product offerings in Life with stronger and deeper partnerships in the retail and institutional segments of the market. And we're confident of developing further partnerships and converting these into a pipeline of institutional business. Our Funds Management business is attracting superior flows and has really strong business momentum, which has continued into the start of this new financial year. There is a locked-in growth in the superannuation system in Australia. There are regulatory and demographic tailwinds, which will see superfunds and advisers do more for retirees, the sector where Challenger is the #1 player. We've built on the foundations that allow us to operate a diversified Life business, serving retail and institutional customers with a market-leading range of products. Our Funds Management business is outperforming most of its peers and working alongside the Life business to provide solutions that help our customers achieve financial security in retirement. The pandemic and its effect on financial markets serve as a reminder that -- underlying business. It highlights the profound value we provide retirees and for the retirement system more broadly. I'm proud of our business and what it delivers every day to retirees, to our Funds Management clients, to shareholders and to the broader economy. We played our role during the current crisis, and we'll continue to do so. If nothing else, the crisis has proven that our strategy is the right one, and it's galvanized our results to help our customers achieve financial security for retirement. So thank you very much for your time, and the team and I will now take your questions.

Thanks, Richard. We'll now hand the call back to the operator to commence the Q&A process.

[Operator Instructions] The first question today comes from Simon Fitzgerald from Evans & Partners.

Just the first question relates to exploring the guidance in a little bit more detail. With the progressive deployment of the $3 billion into high-yielding assets, I was wondering if you've made any assumptions regarding credit spreads? I know that spreads, since the time of the equity raising, have contracted a little bit. And then perhaps also whether you're still confident in receiving or earning 20% plus returns on those investments at the time they're invested? And then maybe just finally on the guidance, if you could make any comments whether you assumed any performance fees for FY '21, if it's similar to last year, et cetera?

Okay. Simon, thanks very much for your questions. Richard here. I'll just make some high-level comments and then pass over to Chris to fill in some of the detail on deployments. So I guess the overarching comment to make here is that we certainly, at this time of economic uncertainty, prioritizing capital strength and balance sheet strength. But I think it's also fair to say that, that economic uncertainty means that we continue to see and expect to continue to see accretive investment opportunities as we go forward. And I would say that the comments we made at the time of the capital raising around expectations of accretion and the ability to generate ROEs north of 20% remain true today, notwithstanding the rally that we've seen in credit spreads since then. But I might pass to Chris just to provide a little more detail.

Yes. Thanks, Richard. Yes, I think that's exactly right. We remain very confident about our ability to achieve those sort of 20% ROEs that we talked about when we did the capital raise. We are being very selective. But there are good opportunities out there across the investment universe we look at. But in particular, in high-grade fixed income, especially given our sort of quite negative outlook for default for high-yield credit, where we're being pretty selective, but in investment-grade credits, for example, we quite recently cornerstoned a transaction working with one of our domestic nonbank lending partners for the CRP fixed income business, and that sort of comfortably met that target. So we're doing transactions at the moment and so confident about achieving those targets going forward as well.

Second question just relates -- sorry, go on...

Yes. So I was just picking up your second question there, Simon, which I think was about Funds Management performance fees.

Yes, that's correct.

Yes, we have made modest expectations of performance fees ongoing there. But maybe, Andrew, if you wanted to add anything further to that?

Yes, sure, Richard. That is the case, Simon. I think you know our history. If I go back to FY '18, our performance fees were something like $19 million. Last year, they were only about $4 million and this year landing close to $15 million. So it would be a very modest sort of expectation. Very difficult to forecast performance fees at the start of the year, of course.

Understood. Second question then relates to expenses. On that Page 10, there were some one-off trends that were highlighted; the DPM initiatives, $13 million; the corporate expenses, up $8 million. Just wondering, in terms of the quantum of the expenses being down from last year, are they 2 numbers we should just consider nonrecurring and therefore, that's the sort of extended reductions? Or are you expecting a little bit more than that?

If I might pick that call -- that question up as well. So we've called out expenses for next year down compared to this year. There are some one-off expenses in there definitely. I called out capitalized IT software, for example, and some restructuring costs. But we do continue to plan for increased spend or modest spend in DPM. It's very important that we maintain the spend in that particular area. It probably won't be as high as what we spent this year. So not the straight deduction, if you like, from the expense base going into next year, but for more modest spend in the DPM area.

Okay. That's helpful. And just one final question on maturities. For FY '20, it didn't actually end up being that much different than what you've guided to in FY '19 at 26%. I think you guided to 25%. So it does obviously include that early withdrawal. But for FY '21, I think you're looking for 27%. And I'm just interested to know whether you think there might be any sort of further early withdrawals? And then maybe make a little comment about rollovers, what you're seeing there for FY '20? And what you're expecting for next year?

I'll take that in the first instance and just make a couple of high level observations, and then maybe Andrew might like to add some further color. So I think you're right to call out the $150 million early withdrawal, which has impacted the maturity rate of 26% this period. That's a very unusual thing. And it's not our expectation that we see anything more along those lines. To pick up your second question around renewals or reinvestment rates, further to Angela's comments about the bank channel being substantially contracted -- acutely contracted over the last couple of years, that certainly has impacted our reinvestment rates. But pleasingly, among the IFA channel and on the back of some of the direct engagement initiatives that Angela has been talking about, we've been able to generate reinvestment rates in that part of the market in the -- well into the high 60s percent. So I think those efforts are bearing fruit. But Andrew, I'm not sure whether there's anything further you want to comment on in terms of reinvestment, maybe -- excuse me, in terms of maturity rates?

I think that covers it, Richard. We've called out in the analyst pack expectations for next year, and that's 27% at this point in time.

The next question comes from Andrei Stadnik from Morgan Stanley.

I wanted to ask 2 questions, please. Firstly, in terms of how far you're willing to push the cash and liquids allocation down from $3 billion? Would you be willing to move that to circa $400 million, $500 million levels over a year, 1.5 years ago or circa $1 billion level? Would that be more appropriate? And kind of as a start point, did you call out that you've already shifted about $300 million of that cash into high-yielding investments post 30th June?

Thanks for the question. I'll grab that one in the first instance. There are limits to how much we will deploy of that, like cash and liquids, and that really reflects our risk management framework and our liquidity management policies. You can imagine that one of the important things that we were able to deliver during the crisis was to be able to meet all of our liquidity calls, including those in relation to redemptions from our Index Plus product. So that does place some limit there. You are right to call out the fact that we have started that deployment and you can see that in some of the progress that we've made there. But as I say, the -- so whilst we'll be deploying most of that, there's kind of a limit to how much we will ultimately deploy. Chris, I'm not sure whether you want to add anything to that?

Yes, I think that's right. And if you look at what the levels have been over the last couple of years, that might give you some guidance as to where it's likely to end up.

And my second question, just in terms of product development, in terms of combining the capabilities within Life and within Funds Management, particularly given an increase in -- or impended increase competition, one thought definitely comes to mind if something happened in the U.S. from BlackRock with a combined multi-asset traditional managed funds with annuity option towards retirement, Challenger has all the ingredients. But we haven't really seen a lot of kind of innovative products. So is this an area that Challenger can explore quite aggressively going forward?

Thanks for the question. It's a really interesting space, I'd say, product development more broadly. And I think your reference to the BlackRock announcement in recent months, I think, is a telling one as it indicates how different systems are thinking about, combining account-based product with guaranteed lifetime income streams. And in many ways, I think the evolution of public policy in this country and certainly the conversations that we're having with superfunds reflect a similar direction, that combining managed funds with annuities makes a lot of sense. And we do have a long history of innovation on the product side. Liquid Lifetime itself, when it was first launched, really changed the landscape of all retirement incomes, and we've been sort of building on that since. In this recent period, we launched a floating rate version of our Lifetime annuities, which give policyholders who are really concerned about the low interest rate environment and possibly higher rates, the ability to participate in those higher rates through a linkage to the RBA cash rate. And I think you're right to point out the strength that we have in the Funds Management business as being part of that solution overall. As a general statement, we're working in partnership with both advice businesses and then with superfunds to bring the lineup of products there to the floor. And in many cases, either the funds or advice business as an asset consultant kind of build the combinations. But I do see us as well placed absolutely on both sides of that equation.

The next question comes from Andrew Buncombe from Macquarie.

Just the first one is on the Japanese arrangement given how successful that has been. Can you just remind us of the scope to expand that reinsurance arrangement again to a baseline higher than the $50 billion? Or is that essentially just locked in with no renegotiation for the next couple of years?

So we're obviously very pleased with one of the significant accomplishments during the year, which was an expansion of our partnership with MSP to include reinsurance of U.S. dollar annuities, and that really does sit behind the 177% increase in sales through that channel. We did outperform the minimum target of JPY 50 billion. And this year, sales are off to a strong start. The relationship remains very strong. It's a very interactive relationship with Kobayashi-san, a representative from MSP on Challenger's Board. And we talk with our partner about product developments and other ways that we can work together. So I'm optimistic as to the future of that partnership.

Excellent. Just the second question is focused on the maturity rates. Obviously, flagged the higher rates in FY '21. But maybe longer term, do you think that's representative of the longer-term expectation? Or do you think that's the inflection point?

I think one of the things you've seen in this result is that for the first time ever, we've produced a new business tenor of 10 years. And we've got an increasing proportion of new sales being of long tenor. And actually, for the first time, more than half of our in-force book is long-term and lifetime annuities. Now I think that actually mathematically will result in lower maturity rates in the book as time goes by. It's also -- the success in prior periods around fixed-term annuities can impact that in the shorter term. But I think over the longer term, it's reasonable to expect those maturity rates to come down.

That makes sense. And then just a final one from me, please. Again, on the cost base. How should we be thinking about the group cost-to-income ratio in FY '21? Is the old 30% to 34% range still appropriate for this next year?

I'm going to get Andrew to pick that one up, Andrew?

Yes, Andrew, thanks for the question. Well, we have gone to sort of an absolute guidance metric at this point in time in terms of the lower expenses going into FY '21. The 30% to 34% was our previous guidance going back into '18. And also from the start of this financial year, we effectively called out the additional expenditure for DPM, which meant we went above that range. So I think next year is quite a disruptive year. If you think about the income side of that equation that determines the cost-to-income ratio, even thinking just about the rental abatement was calling out $22 million, that really swings net income and therefore swings the cost-to-income ratio outcome. I think my personal view is, let's get through FY '21, let's look at where we're up to and sort of we'll readvise the market as to sort of more medium-term cost-to-income ratio guidance from there.

The next question comes from Matt Dunger from Bank of America.

I appreciate the additional information on the annuity sales channels. How will the channel shift impacts the composition of Life sales? And also, if I could ask on the Australian fixed-term momentum improving in the fourth quarter versus the third quarter. Will this continue? And those reinvestment rates you talked to, Richard, in the high 60s, where does that come from?

Actually -- so I might actually pass to Angela to give us a little more color on some of that. Thanks, Angela.

Thank you. So the reinvestments across -- we've gotten quite different experience across different client groups. So our IFA group has been pretty unchanged over the last couple of quarters. We do have quarter 4 usually a stronger quarter for maturities. And I think we expect -- is that the right -- sorry, can you repeat the question?

Yes. Thanks, Angela. Yes. I was just wondering about the shift -- the channel shift and what we should expect going forward given the shift towards IFA and away from the bank channels in terms of the products?

Yes, sorry. I will -- so yes.

In terms of the composition of annuity sales by product, by lifetime versus term?

Yes. Okay, great. So we are seeing -- always have historically seen slightly lower contributions from IFAs on term annuities. So -- and we are seeing that continue as we move forward. However, we are seeing stronger reinvestment rates from them. So where we have business there, that's holding up more strongly than what we've been seeing from the bank channels. We also have -- in the IFA channel, we tend to get groups of specialists. So for example, we have a couple of care specialists, and so we get quite strong contributions from those specialist practices. So we -- I think we see stronger support. Obviously, Care has been more strongly hit by COVID, but we definitely get kind of pockets of stronger support there. So as we've seen the new business coming in, I would say, overall, we're seeing, compared to what we've seen historically, a stronger representation of the Lifetime and Care compared to term.

And those reinvestment rates, will they continue to be a tailwind for the Australian fixed-term growth?

Yes, great question. So not from the bank channel because, obviously, that is where we're finding -- we've got customers who previously were advised and were not. But certainly, as we're picking them up through our direct servicing model and reinvestment program, the answer is yes. We're finding that, that's settling into a good level. So absolutely, if we have those maturities coming through when we get to a more solid position, that's a big contributor to our sales as well.

Okay. Great. And if I could ask a final question on the tax rate. Andrew, you noted the capital notes replacement expected. What are the expectations for the tax rate? You also mentioned another factor had been the offshore tax rates as well. What should we be expecting going forward post the capitalized replacement?

Matt, thanks for the question. So again, we've guided approximately 30% is the way to think about the tax rate going forward, noting that the capital notes interest is not tax deductible if those distributions are franked. So that's the outcome there. In this current period, I called out specifically that we had foreign tax credits that we couldn't use because we had a statutory loss this year. And so you just use -- lose those credits effectively this year. So that's why the rate was higher this year. The best way to think about it going forward is 30%.

The next question comes from Nigel Pittaway from Citi.

First of all, just if I -- just question on sort of default risk. I mean as you were going through sort of saying what you were going to invest, the liquid funds, and you said you're very cautious about default risk, I noted in the existing portfolio the credit default experience rose from, I think, $26 million in first half to $40 million in second half. I mean how are you feeling about the credit default risk in the existing fixed interest portfolio?

Nigel, thanks for the question. I'll start on that, and then I'll ask Chris to color it in a little bit. So at a high level, one thing to bear in mind, of course, is that we're in a fair value regime for both our assets and liabilities, and accounting and for capital. So to the extent that there is any stress in the portfolio, as reflected in credit spreads, that's all flowing into the valuation on the book. And the other thing I would call out is the move to sort of overwhelmingly investment grade now within the fixed income portfolio being at 85%. But as it relates to sort of where we're seeing the potential stresses and so I might just get Chris to add a couple of extra comments.

Yes. Thanks, Richard. And, yes, it is actually worth just pointing out that a good portion of those losses that we've -- that you've referred to there relate to some of those positions that we've exited. So the high-yield positions that we exited as part of our derisking in March, we're a pretty significant contributor to that 50 basis points. Beyond that, if you look at the portfolio, and we provide a lot of disclosure around this, is very diversified. The losses are in the sectors that you might expect that have been more directly affected by the crisis areas, like consumer and aviation-related lending, for example. But it's pretty contained and pretty diversified portfolio. So we're comfortable. And as Richard said, that's all reflected in the valuations of the portfolio.

Okay. So you're not really expecting that to spike up in next year or anything like that?

We are cautious on the default cycle as to where we're standing and we certainly expect a lot of economic uncertainty, and that's going to lead to business weakness and defaults, how that plays out for us. We're confident in the guidance we've provided and how we can generate returns from the portfolio. If there is a -- if that does translate into a significant default cycle, we're not going to be immune from that, but we're confident about how the portfolio is positioned with that high 85% investment-grade weighting as well.

Okay. Moving on then maybe just on to the property side of the portfolio. I mean are you confident there that you've taken enough marks on the property portfolio? I mean, obviously, valuations do seem to be playing catch up a bit. There are other players that have taken a bit more than you've got. It depends on your starting point. Can you just make some comments on where you think you are with that, please?

Good questions, Nigel. So I'll get Andrew to just talk a little bit about the process from the governance point of view, and then Chris can make some comments on the particular state of the portfolio and -- at a more granular level? So...

Nigel, really from a process perspective and governance, we effectively have every single one of our directly hold properties independently valued at 30th June. So very confident in the valuation, noting though that the valuers have called out uncertainty in relation to valuation and income in relation to the COVID-19 situation. And that really drives us to think about rental abatements. And there are some uncertainties around valuation going forward, of course. I might get Chris to talk about the defensive nature of our property portfolio, particularly around the retail property portfolio.

Thanks, Andrew. Another sort of high-level observation worth making here. You're going to be very careful comparing those high-level results. You've really got to look at a little bit below that and dig into the detail. For example, location is important. Obviously, Victoria, at the moment, very impacted. We have some office in Victoria, but with long lease last to high-quality tenants. What type of assets you own? Our retail shopping portfolio, for example, very much dominated by supermarket-anchored nondiscretionary centers. So a lot less affected than some of the regionals, for example, have been affected by the ongoing crisis. Another sort of good way to look at this and think about this is to look at some of the statistics. So if you look back to April, when we're really at the peak of the shutdown nationally, our foot traffic was down sort of 50% year-on-year. If you look at it now, that's recovered to be about 12% across the portfolio. So the recovery has very much played through in our portfolio. Likewise, if you look at the number of stores, we had, I think, around 60% of our stores open in April. It's almost 100% now. I think it's about 97%. So you've really got to look through those high-level statistics. We've got a defensive portfolio. And as Andrew said, all of our properties have been externally valued.

Okay. Maybe if I could just change tax, next question. Just on the DPM spend, I mean you spent $13 million of the $15 million initially. You say you might spend more. When you first announced the $15 million, you were saying the hope was to make annuities mainstream in retirement. I mean how do you think you're going with that? And how are you assessing your sort of return on the spend you're making on DPM currently?

Yes. Great question, Nigel. At a high level, a couple of observations. I think it's fair to say we're still on that journey of mainstreaming annuities. I talked a little bit in my presentation about some of the demographic tailwinds, the public policy tailwinds and kind of the secular growth in the system. I think it is fair to say in reiterating that the retirement phase remains underdeveloped. And I think both the structural change we've seen in the industry and then more recently COVID has slowed things down a little bit on that front. But the opportunity is very much there, and that is very much the name of the game for us. When I look at what we've accomplished at a high level with that $15 million -- with the $13 million spend, as we've disclosed today, there are a number of things there. And I'm actually pretty pleased with it. And in an ongoing sense, throughout BAU, we'll obviously continue to invest as appropriate into initiatives that makes sense of that business. But I might get Angela just to comment a little more on, I guess, where the money has been spent and why we have to do that?

Yes. Thanks, Richard. And one of the things is a lot of the efforts that we're doing, they don't -- they're not all short-term focused. So a number of them are long-term focused. If I think through where we're -- what we're focused on over the last year is probably 3 or 4 buckets. In particular, we've done a lot of work direct with customers, which I think has been really valuable. We've got lead nurturing now where customers find out about annuities and retiring income directly from us, which is completely new. We had our first customer webinar, 93% of customers attending that were interested in attending another one. Over the course of the year, we've actually increased website traffic, average monthly visits to the website by over 50%. So some really strong outcomes there and understanding where retirees are at and what they're thinking about in relation to their retirement. We also created a pilot for an adviser referral program. So we have a number of customers calling us and wanting information that sometimes extends beyond the bounds of where we are prepared to go. And we're now looking at being able to direct them to a kind of pre-visit adviser. And so we instituted that. And a lot of the work that we're doing with superfunds is quite long term in nature, understanding how our proposition can become part of a broader retirement offer and understanding the operational requirements and different options in relation to that.

The next question comes from Siddharth Parameswaran from JPMorgan.

A couple of questions, if I can. Firstly, just on the guidance range that you've provided. It's obviously quite a wide range, $390 million to $440 million. Could you give us some idea of what assumptions go into the lower end of the range? Does that involve more asset dislocation? And how does that compare with the high end of the range? Could you just give us the key stress points between those 2 levels, please?

Yes. Thanks for your question, Sid. So obviously, there's a fair few moving parts. And one of the -- maybe one of the anchorings is that's the same with guidance range that we used last time. During the presentation, you heard Chris talk about the fact that we reorganized the asset classes to make things just a little easier for you guys and in particular around alternatives. We're grouping assets together, which are more cash generative, lower correlation and for which growth is not the main driver. So normalized growth is 0 there. A component of that and a significant one is absolute return funds. And so there's obviously variability in the cash that we generate from those assets as there are on some of the insurance-linked investment activity that we do. At the same time, the economic uncertainty creates uncertainty, obviously, around future rental abatements, and we've built in prudent allowances to that into our budget, but there's obviously risk factors either way on that. And moreover, as some of the earlier questions have highlighted, we've built in the possibility of some default activity in certain parts of the portfolio. And so all of that can create noise on the normalized outcome. So I feel like that range is a prudent one.

So just to be clear on that, the default activity, so -- I mean doesn't that affect the experience, not the underlying?

Certainly to the extent that we were principal, that's an investment experience. But if we're not collecting coupons as well as something goes into the restructuring and so forth, that can also flow into the normalized cash numbers.

Okay. Great. Okay. Thank you for that guidance. Maybe just a couple of other questions which are forward-looking. So firstly, on your capital intensity, I mean that's been dropping for a while. It's now about 10.7%, obviously, reflective of your asset allocation. Once you've deployed the liquids, should we think that, that level is what you'd be targeting through the cycle for your capital intensity?

Yes, I might pick that one up, Sid. It's a good question. And I think we've said that by the time we're done deploying over the course of this next financial year, the capital intensity will raise to high 11s. I think 11.7% is we what we're calling out there. And capital intensity -- maybe taking a step back from it, capital intensity is a function of the structure of the balance sheet as well. So to the extent that we've got, in absolute terms, a lower -- a smaller capital base relative to the size of the balance sheet, albeit that it's a more conservative positioning because we've got higher capital and PCA ratios. If you would expect there's an outworking of that, that capital intensity would be lower, all things equal, the smaller the capital base relative to the size of the overall balance sheet would mean that you would have lower capital intensity ratio. But it's also true that the more defensive settings, notably the higher allocation to fixed income and then higher investment-grade within that, is also a driver of those capital intensity numbers.

Yes. So I was asking just for the medium term. How should we be thinking about that?

Yes. So we don't really guide the -- provide guidance out to the composition of that, beyond saying that we expect to deploy that and that will increase capital intensity. We will continue to be relative value investors. So where opportunities emerge in lower capital intensity -- sorry, in higher capital intensity assets that can move things around. I would say that -- I'd call out that our PCA ratio sits at 1.8x. We're saying that's going to return towards the top end of about 1.3x to 1.6x range, and that's consistent with this increase in capital intensity from 10.7% to 11.7%. But I wouldn't want to be specific beyond that into -- and into future years.

Okay. And sorry, just one final question for me. Just the lessons from the last 6 months -- I mean at least going into it, you were at the top end of your range. It seems like you're saying that the top end of your range is actually where you're going to -- what you're going to target on a go-forward basis. Is that basically a lesson of the last 6 months? And is there anything else you should take away or that you've taken away about what might be a change in how you manage the business on a go-forward basis?

The slow deployment and the fact that we're at 1.8x PCA now is a reflection of what we see as being a key economic uncertainty at the moment. So it is just -- it's prioritizing conservatism at this current time over ROE for the next period. It's not a statement about what -- a change to that range. Our target range in PCA terms continues to be 1.3x to 1.6x. More broadly, as I reflect on the 6 months that we've had, no doubt, it's been a very impactful one in terms of market moves. One of the things I'm really pleased with is that we have executed on our risk management framework in exactly the way it was intended to work. Essentially, during times of extreme market moves of the type that we've seen, priority becomes protecting the long-term franchise value of the business and protecting the strength of the balance sheet. And that's been all executed exactly that would be in. So I'm comfortable with that, and we'll continue to -- we will continue to commit to that risk management framework as we go forward.

Just to be clear on it, though. You say there in your outlook that you want to remain at the top end of your target range in the medium term? That's your through the cycle target. So surely that would mean that should be the middle of -- the top end of your previously stated range should be the middle of your new range?

Yes. So we're saying we'll -- by the time we're deployed, we will end up at around the top end of that 1.3x to 1.6x range. But our target range lies 1.3x to 1.6x.

The next question comes from Brett Le Mesurier from Shaw and Partners.

A couple of questions. Table 2 on Page 35 and [ narrative does not ] -- asset-backed securities, you've got the total what appear to be the RMBS numbers against the ABS numbers, looking like a total. And then the same line is down there next to CMBS. So is the right way to look at that, all those numbers should be shuffled down one and the ones against the CMBS should be removed?

Brett, Stuart Kingham here. I'll take that one. You can clearly see that this is a duplicate row. The duplicate row, at the top is a duplication -- sorry, everything should shuffle down by removing that duplication at the bottom.

Okay. Good. Now a year ago, you had your front book economics slide and did note you had the fixed income return or the margin being 300 basis points over BBSW. Is that the margin that you've achieved during the second half '20?

We don't -- so we haven't broken down investment return by asset class. But broadly speaking, Brett, spreads in the portfolio have been in line with that. Obviously, as we go forward, reflecting the shift between high yielding and investment grade, that obviously has an impact on what weighted average spreads are going to be in the portfolio. But at the same time, given the economic uncertainty we've got at the moment and the opportunities in the market, that's also -- that assists spread going in the other direction.

And that doesn't include cash to the fixed income piece?

Cash and fixed, I'm trying to cast my memory back to the front book economics slide...

Yes, it didn't refer to cash. It just referred to fixed income.

Right. Yes. So obviously, with the shift in the composition of the book at the moment and -- different economic climate spreads are moving around. But I think the important thing to focus on is we continue to target over the medium term our ROE target of 14% above the RBA cash rate.

Which is consistent with getting a 3% spread on your fixed income?

Well, it depends on the -- within fixed income, it depends on the mix between investment grade and sub-investment grade within that. So when it's got -- one of the things that has been interesting to observe through this crisis has been the relative moves of high yield and investment grade against the capital that are allocated to those asset classes. And in fact, proportionately but move really in lockstep in many ways. In other words, the drawdown in high yield per unit of capital has been very similar to the drawdown investment grade per unit of capital there. And so in a forward-looking sense, the weighted average spread across the fixed income portfolio will also be a function of the mix between investment grade and high yield.

So why do you not provide the investment yield on fixed income given it's such a large proportion of your book that would help us understand what the future looks like?

Certainly when we put out the front book economics slide, we were providing that additional transparency at that time so you can understand how the whole model work across each asset class. I mean it's also what we do -- what we have suggested is particular indices that can be used to track investment experience in different asset classes. And so you can look at prevailing spreads in high-yield markets in those relevant indices and in investment grade as well as giving an indication of the sorts of spreads that can be available more broadly. And similarly, we'll provide the -- we provide risk premium charts which tell a similar story. And then in addition to that, we can earn illiquidity premiums and also, I guess, what I'd describe as capability premiums within some of that learning franchises, which add spread to that as well.

Okay. Just lastly, on property. The balance sheet value of the property in the 6 months fell by $45 million and your loss was $155 million. So I gather you invested $110 million in property during the half. Would that be a correct interpretation?

Brett, it's Andrew here. I might grab that one. That's broadly correct. So the [indiscernible] also includes the CapEx, et cetera, that goes into maintaining some of those properties.

Can you say broadly where that money was spent? Which categories?

It's a number of properties.

But nothing in particular?

Yes. Nothing in particular.

Uptick you would say?

That's correct. So there's been an ongoing refurbishment program across a number of properties for many years. So there's always CapEx that goes into maintenance of those particular properties.

The next question comes from Ashley Dalziell from Goldman Sachs.

I just had a follow-up question on the maturity rate guidance for '21. Sorry to keep dwelling on this. Just wondering if you could shed a little color as to, I guess, how the sales mix shift through the year to the in-store product is playing into that maturity rate guidance for next year? And maybe you could help us with some color around, I guess, the average maturity of tenor of that step-up in in-store sales that came on to the book through the last 12 months.

Ashley, I might grab that one -- Andrew?

Sorry, Richard. Sorry, Richard, to cut across you like that. But really, just to highlight the maturity rate that we quote excludes the institutional portfolio and so it really pertains to the annuity portfolio only.

Okay. That's very clear. Are you still able to shed some light on the maturities?

So maybe just to -- yes, I was just going to -- Ashley, just to add a short voice [ to that ]. So then the key determinant of maturity rates is really then sales mix, as you're pointing out, within annuities. So a significant growth in MSP adds to maturity, the decline in bank channel term annuities, then also adds as to a lengthening of tenor and, therefore, over time, a reduction in maturity rates. To some extent, we've got institutional fixed-term annuities which are part of the sales mix now. And pleasingly, we're able to double those from $300 million to $600 million over the course of the year. And so that -- there's a confluence of product costs which would contribute to the maturity rate there. But I'd say, generally speaking, the greater share of longer term, whether that's Lifetime or MSP in particular, or what's driving the longer tenure and over time, as we said before, that will push down maturity rates.

Okay. And the -- if you could make some comments on the maturity or the tenor of the step-up in the GIR sales then, in terms of how that will play into the outlook for pretty long?

So without getting too specific on our guaranteed index return products or what we now refer to as our Index Plus suite, has a range of maturity dates. We've been successful in placing different types of that business this time around including a tranche of Index Plus, which are collateralized by annuities themselves. And then there are a variety of different maturities there. I wouldn't call out a particular change in maturity rate being driven by the changes in the maturity profile of Index Plus that continues to be similar to where it's been in the past.

Okay. Great. Just a final question just on the property rental abatements. Would, at this stage, your best estimate, that the bulk of that '22 -- bounces back in FY '22?

Yes. So we are seeing the impact of COVID in terms of abatement as being a one-off effect. Obviously, how it turns out will be a function of where we get to in Victoria, among other things. But at this stage, we've built in a prudent allowance for it. But then we're expecting -- we're effectively expecting things to get back to normal thereafter.

At this time, we're showing no further questions, I'll hand the conference back to Stuart Kingham for closing remarks.

Great. Thank you very much for your interest in our results today and the company. Mark Chen and myself are available on e-mail or phone if you have any further questions. Thank you very much. Have a good day.

Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect your lines.