Challenger Limited (CGF) Earnings Call Transcript & Summary

Good morning. I'm Mark Chen, Challenger's General Manager of Investor Relations. Welcome to Challenger's 2023 Half Year Results Briefing. We're coming to you today from our Martin Place head office in Sydney, and today's briefing will be conducted online. Today's presentation will be followed by a question-and-answer session. You can ask a question via the online portal or via the telephone. Today's presentation will be provided by our Chief Executive Officer, Nick Hamilton; and Chief Financial Officer, Alex Bell. I'll now pass on to Nick to get us underway.

Thank you, Mark, and good morning. Let me begin by acknowledging the Gadigal people of the Eora Nation on whose traditional land we meet today, and pay my respects to their elders, past, present and emerging. I'm particularly pleased to be joined by our newly appointed Chief Financial Officer, Alex Bell to deliver Challenger's first half results. Alex was formerly Challenger's Group Deputy CFO and has a deep intrinsic understanding of our business. And personally, I'm delighted to welcome Alex back to Challenger. Alex will take you through our financial results in more detail shortly. Alex's appointment now completes the renewal of our leadership team and Alex joins our talented and experienced group of executives who will take Challenger forward. Challenger starts 2023 in great shape with a clear purpose of providing our customers with financial security for a better retirement. Today's result highlights the diversified nature of our business. And Challenger is performing strongly, benefiting from demographic trends, today's economic environment, and the efforts of our talented team. We're making very encouraging progress executing our strategy. We have delivered strong growth in our core retirement products, we have embedded a new customer growth model, centering a great business around the purpose we bring to life for our customers through our market-leading products. Today's presentation will cover the key drivers of our first half results, including record annuity sales; how we are generating significant long-term value from increased demand for income in retirement; how we're driving better outcomes for our customers to support future growth; and our priorities and outlook for the remainder of FY '23. The advantages of Challenger's diversified business model are reflected in our performance across the half. Group normalized net profit before tax, which reflects the underlying performance of our business, increased 5% to $250 million. Statutory profit was lower due to investment markets, which in the half resulted in largely unrealized investment experience. Life earnings increased by 13% over the period coming from an expansion in margins supported by higher sales and book growth. Higher demand for guaranteed retirement income delivered an 11% increase in Life sales to $5.5 billion. Significantly, we're seeing strong demand in the retail channel, with retail annuity sales up nearly 90%. In Funds Management, earnings have been impacted by lower FUM compared to last year. We've performed well in a difficult market environment, with group FUM otherwise stable in the first half '23. Group ROE is up 20 basis points, driven by higher ROE from our Life Company. Our capital position remains strong with significant financial flexibility. Challenger Life held $1.6 billion of excess regulatory capital, or 1.59x the minimum required amount. Reflecting our confidence in the business, the Board has determined a fully franked interim dividend of $0.12 per share, in line with our target payout ratio of 45% to 50%. This is a very pleasing interim result that demonstrates the strength of our business, the opportunity we have long term, and sets us up extremely well for the full year. There are a number of key dynamics that are influencing the standout performance in Life in terms of customer demand and sales. The chart on the right-hand side of this slide shows a material shift in the Life sales mix towards the retail channel as our teams focus on capturing the growing demand for secure income from our retail customers. The macro environment has created some tailwinds for our business, higher interest rates and the premium yield we can offer our customers has increased the attractiveness of our products. This is playing out alongside the broader trends of higher demand for income, particularly as people head to retirement. Challenger's annuity rates are back at levels not seen in a decade. Higher rates and our team's focus is also driving longer tenor sales and higher reinvestments, with 71% of new retail annuity sales if the terms greater than 2 years and on significantly higher volume as compared to 61% a year ago. The higher volume is being driven by our retail channel across both our term and lifetime products. Pleasingly, lifetime sales themselves were up 70% on the prior period. Alex will provide more details on these trends later in the presentation. At its heart, Challenger is a purpose-led business, focused on our customers to provide them with financial security for a better retirement. Our 4 strategic priorities describe how value is created at Challenger. As we described at our Investor Day, we do this by leveraging the combined capabilities of the group, whether that's our people, our balance sheet, our investment capabilities or our partnerships. These capabilities enable us to expand the range of products and services we create and offer to our customers, which provides long-term growth and strengthens the resilience and sustainability of the business. Our capabilities are our true strategic advantages. The strong relationships and trust we have nurtured among advisers over many years gives us an exceptional distribution footprint. We remain the most recognizable brand in retirement income, a role we will continue to invest in and nurture. Our asset origination platform across fixed income, real estate and alternatives provides Challenger an engine that can support growth and is an area we will continue to invest into, as is evidenced by our strategy. New for many has been understanding our investment administration capability, which has supported growth in AUM to almost $100 billion, and under the name Artega, provides a platform for future growth. And our dynamic collaborative culture makes Challenger an exciting place to work, ensuring we're able to attract and retain the great talent that ultimately deliver the better outcomes for our customers and shareholders. Our purpose, our strategy and our capabilities define our future success. The rapid normalization of interest rates help, however our long-term performance will come from the unique core capabilities we have in our business. I would like to highlight the initiatives we are focused on to help us achieve our purpose. A key priority has been to align the business around our customers and improve the way we deliver our products. Being focused on our customers and being a long-term partner is a priority, which includes supporting super funds as they design retirement solutions for their members or the retail advice sector as they support millions of Australians achieve financial security. I've highlighted some of the key initiatives we're focused on this half to improve our customer experience. To make it easier for our customers to transact with us, we launched a new registry system in our Funds Management business. This has also established a platform that supports the expansion of our suite of active ETF products, accessing a broader market opportunity in a format that customers are increasingly seeking. In our Life business, we have commenced work that will significantly improve customer access to our guaranteed annuity products. By the end of this year, our customers will be able to buy a range of our term annuities simply and quickly online. And we're supporting our customers who want more income at the start of retirement with the addition of a new accelerated payments option for our innovative market-linked annuity. You will recall the announcement we made at our Investor Day last year to establish a joint venture with global technology partner SimCorp, which we've now named Artega Investment Administration, a combination of our names. It takes our existing capability and deep expertise in investment operations to build a new tech-led, end-to-end investment administration service at scale. We've invested in the setup of Artega during the half, and this is reflected in our expense base, which Alex will talk to. Artega is operational, servicing its existing Fidante and Challenger clients, and has recently won its first external client. Core to Challenger's success has been our asset origination capability in our Challenger Investment Management platform. Working with Apollo, we have established the framework for our new nonbank lending joint venture. In the period, a highly experienced chair and CEO have been appointed. And the business has been in market and has developed a strong pipeline of opportunities. Distribution is a core strength of Challenger. And with Apollo, we've collaborated on a range of product opportunities, including exciting plans to bring Apollo's aligned alternatives capability to Australian customers. Challenger has a strong track record developing successful strategic partnerships, which we've demonstrated over many years through our relationships with MS&AD Group in Japan and our affiliates in Fidante. This includes: For MS&AD, a long-term annuity reinsurance relationship, which delivered us over $400 million of longer duration sales this period; and as well a new property mandate awarded in FY '22. Our decision to sell the bank allows us to focus on our core Life and Funds Management businesses. We announced the sale to Heartland in October, which remains subject to regulatory approvals. Excess capital of around $100 million will be returned prior to completion, providing additional financial flexibility. The initiatives I have outlined have a strong strategic focus. The execution of our strategy is progressing well, and we will continue to take advantage of the broader macroeconomic conditions driving demand for our products. I will now pass to Alex, who will provide the details of the first half results.

Thank you, Nick, and good morning, everyone. I am delighted to be back at Challenger in the role of CFO, working with such a talented team towards our shared meaningful purpose. As you've heard from Nick, today's results reflect the progress we're making to simplify our core franchise, diversify revenue streams and build a more customer-centric business. This is a terrific foundation for my first Challenger results briefing. Turning to the numbers in more detail. We have achieved a normalized net profit before tax of $250 million for the half, an increase of 5% on last year. This was driven by strong Life book growth and margin expansion, partially offset by lower Funds Management earnings and the investment in a number of growth initiatives. We remain on track to achieve our full year normalized net profit before tax guidance. This half, earnings represent 49% of the midpoint of our full year guidance range. Statutory net profit before tax was $123 million, down 56% on last year due to fair value movements in the investment portfolio that are largely unrealized. Challenger's total income increased by 6%, reflecting growth in Life normalized cash operating earnings offset by lower Funds Management fee income. Expenses increased by 7% or $11 million, of which $5 million or approximately half of the increase relates to the bank. Excluding the bank, expenses increased by 4%. Normalized net profit after tax was $167 million, an increase of 1%. This is less than the increase in the pretax earnings due to a higher tax rate. The tax rate increased to 33% with a one-off prior period adjustment, increasing the tax expense by $5 million, which is equivalent to a 2% impact on the tax rate. Pretax return on equity was 12.3%, which was 20 basis points up on last year. Group funds under management closed the half at $99 billion, down 14% on prior comparable period but stable on the half. Now looking at the income and expense drivers. Income was $411 million, an increase of $24 million or 6%, driven by an increase in Life cash operating earnings. And this is partially offset by lower Funds Management FUM-based fee income. Life income or normalized cash operating earnings increased by 10%. This benefited from both higher average investment assets and a 20 basis point expansion in the COE margin. In Funds Management, net income decreased by 11% or $10 million, with average FUM down 14% on last year. Expenses were $158 million for the half, an increase of 7%. This was largely due to a higher number of bank employees, investment in a range of growth initiatives and some inflationary pressure. Excluding the bank, expenses increased by 4%. The group cost-to-income ratio was 38.5%. And excluding the bank, the cost-to-income ratio was 36.7%, a decrease of 40 basis points. We remain absolutely disciplined on expenses and confident of hitting our full year expense growth of 5% to 6%. More recently, investors have been focused on the impact of rising inflation and interest rates on our business. This chart highlights the positive impact of higher interest rates on Life's ROE. During the half, the RBA cash rate increased by over 200 basis points and Life's ROE increased by slightly less, 170 basis points, to 14.8%. It takes time for the interest rate impacts to be fully reflected in Life's ROE, particularly in relation to our property portfolio, as not all our portfolio is directly leveraged to interest rates. In Funds Management, ROE decreased due to lower FM-based earnings. For the group in aggregate then, pretax ROE increased 60 basis points in the half to 12.3%. This compares to the group's target for the half of 14.3%. In accordance with our outlook statement set at the start of the year, we do not expect to hit the target in FY '23 due to the impact from the bank and the lower Funds Management average FUM. Looking at the Life business performance in more detail. Challenger has been building more resilient sales by diversifying across a range of retail and institutional products and clients. Total Life sales were strong and increased by 11% to $5.5 billion. We achieved record half year annuity sales underpinned by strong retail sales. Retail annuity sales nearly doubled to $2.1 billion for the half. These retail annuity sales volumes are benefiting from the higher interest rate environment and strong reinvestment rates. The higher interest rates are improving the customer proposition and attracting new advisers and customers. Reinvestment rates are strong, with 68% of fixed term annuities reinvested into another Challenger term product. This compares with a reinvestment rate of 62% a year ago. As a result of disciplined pricing on institutional sales, this channel was 14% lower at $2.9 billion, and this was dominated by reinvestments. Overall, the strong sales result translates into Life book growth of 5.5% for the half year. Average investment assets increased by 2% on the prior comparative period, and the COE margin expanded by 20 basis points. Expenses decreased by approximately $1 million, with higher personnel costs from wage inflation offset by timing of marketing and technology costs. With the higher income and lower expenses, Life EBIT was $263 million, 13% above the first half of 2022. Now looking at the drivers of the expansion in Life's COE margin. This slide highlights the key movements in the half, with higher interest rates visibly benefiting the return on shareholder capital. The COE margin for the half was 2.76%, up 20 basis points on last year and up 13 basis points on the second half of last year. The product cash margin increased by 2 basis points. The fixed income portfolio benefited from higher interest rates, which has been largely passed on to customers through higher annuity rates. It is important to note that interest expense also includes the cost of Challenger capital notes and subordinated debt. In September, you'll remember, we raised $400 million of new subordinated debt and subsequently repaid an equivalent amount in November. The impact of carrying additional subordinated debt for 2 months and of raising the new instrument at a higher margin increased the interest cost by approximately 4 basis points. Normalized capital growth was 6 basis points lower, reflecting the allocation from equities to alternatives, which has a zero normalized capital growth assumption. I'm committed to providing the market with greater insight and transparency. And so today, here is additional detail on the composition of our sales and the tenor of those sales. As previously mentioned, the Life business experienced strong sales in the half and particular retail sales, which tend to be at a higher margin and a higher ROE. As Nick mentioned, 71% of new retail annuity sales were of durations of 2 years or greater compared to 61% in the first half of last year. Maturities reinvested also lengthened, with more than half of those reinvested for a duration of 2 years or greater. Lifetime annuity sales were $375 million, up 70% on last year. The strong annuity sales growth was supported by approximately 68% of all retail term maturities being reinvested and 87% of all institutional term annuities being reinvested in the half. The benefit of longer duration sales is starting to emerge in the maturity rate. We continue to expect a full year maturity rate of 34%, with it moderating from 18% in the first half to 16% in the second. Pleasingly, the higher interest rate environment is providing us with the opportunity to remix our sales and pivot towards retail business. This chart shows net flows or book growth of approximately $1 billion for the half across all channels. The benefit of our strategy to diversify sales is clear. After years of record low interest rates, sales were dominated by shorter duration, institutional term annuities. The higher interest rate environment and a supportive yield curve is accelerating sales and providing us the opportunity to remix the book towards retail business. For the half, retail annuities accounted for the large majority of total net flows. We continue to maintain a high-quality investment portfolio to meet our liability obligations. There has been no change in our risk management approach, and we fully match the asset and liability portfolio. Fixed income represents 76% of Life's investment portfolio, up 1% in the half. Within the fixed income portfolio, investment grade continues to represent 78%, which is above our target of 75%. In the half, we exited our low beta equity portfolio, reducing our exposure to equities by 3 percentage points to 1%. We increased our allocation to alternatives by 3 percentage points, now representing 9% of the investment portfolio at the end of December. Alternatives are less correlated to credit and liquid equity markets and provide a source of liquid capital that improves our financial flexibility. Investment experience represents the fair value movements in assets and liability valuations as well as net new business strain. Overall, we reported a pretax investment experience loss of $61 million for the half. $45 million of the loss was a result of our net new business strain, and the remaining $16 million loss was from asset and liability valuation movements. The asset valuation investment experience was driven by gains in the fixed income portfolio, offset by property, equities and alternative valuation movements. Within fixed income, corporate credit spreads tightened driving positive valuation gains partly offset by the widening of securitized markets' credit spreads. Consistent with our policy, we have provided $36 million or 21 basis points for credit defaults across 2 names. It's Life's policy to provide for any security downgraded below B-, and both securities continue to pay their coupons in full. For property, the $37 million investment experience loss largely reflects valuation movements, lower than our normalized growth assumption, which is a long-term view of investment return. Equity and Infrastructure recorded investment experience losses of $21 million from lower investment markets. And the alternatives portfolio, which consists of predominantly absolute return funds, posted a loss of $56 million, which after adjusting for distributions, was in line with relevant indices. Now turning to Funds Management. Funds Management EBIT was down 32% to $31 million for the half. The decrease in EBIT is due to lower average FUM, which was down 14% compared to the first half last year. The reduction in average FUM includes both the de-recognition of Whitehelm Capital, which was about $5 billion, and weaker investment markets in the second half. Pleasingly, FUM was stable across the half with both closing and average FUM finishing at $93 billion. Funds Management expenses increased by $4 million due to investment in the platform, particularly our fixed income capability, deployment of new technology and higher trading volumes. The total net income margin increased by 0.7 basis points to 18.7 basis points, with the margin expansion attributed to a mix -- a change in product mix, following the sale of Whitehelm Capital and redemptions on a number of low-margin, fixed income mandates. Looking more closely at net flows. Funds Management net flows were driven -- net outflows, were driven from fixed income managers and a number of institutional outflows in a domestic equity manager. Net flows and client distributions were fully offset by $3 billion of positive market movements, with the ASX 200 increasing by 7% in the half. Investment performance remains strong, with 97% of FUM outperforming benchmarks over 3 years, underpinning future inflows. With 17 affiliate managers and a diversified model focused on generating alpha, we are well positioned. The chart on the right-hand side shows that we have outperformed our peers 9 out of the last 10 quarters in terms of net flows. We continue to be strongly capitalized and maintain significant financial flexibility across the group. Life's PCA ratio the half at 1.59x, which was stable on last year and well above both APRA's minimum requirement and our own internal capital targets. There is approximately $100 million in excess capital in the bank, which will be returned to Challenger prior to sale completion. As Nick outlined, the sale of the bank is subject to regulatory approval. Challenger's financial strength was recently reaffirmed by Standard & Poor's, who confirmed Challenger Life's A rating with a stable outlook. Reflecting the strength of the business, the Board determined a fully franked interim dividend of $0.12 per share, which was in accordance with our payout ratio and 4% up on last year. In conclusion, we have delivered a result that shows the benefit of diversification. In Life, we're positioned to benefit from a more favorable economic environment, accelerating sales and margin expansion. In Funds Management, earnings reflect average FUM movements, particularly impacted by movements in the second half of last year rather than this half. We continue to invest for the future and believe our diversified model will outperform. I'll now hand back to Nick and look forward to rejoining you for Q&A.

Thank you, Alex. Turning now to the outlook. Today, we have reaffirmed our FY '23 guidance. We continue to see full year normalized net profit before tax within the guidance range we set at the start of the year of between $485 million and $535 million. Today's result reflecting 49% of the midpoint of this range gives us a strong platform for the full year. Our Life business continues to benefit from the broader macro environment, with rising interest rates supporting sales and margin expansion. As noted, ROE is expected to be below the through-the-cycle ROE target this year due to the impact from the bank and lower contribution from Funds Management. The speed at which the RBA has increased interest rates means it will also take time for the benefit to be fully reflected in our earnings. We have reaffirmed our expense guidance. And as our result demonstrates, we remain very strongly capitalized within our 1.3 to 1.7 range. I'd like to conclude today's presentation by sharing our media priorities for the second half. We will maintain the momentum that we have achieved in the first half by capturing the strong customer demand for our guaranteed income products, with our team focusing on driving longer-term and lifetime sales; managing our balance sheet to take advantage of market opportunities; and maintaining our customer focus in Funds Management to meet demand when end markets improve. We will continue to improve customer experience by digitizing the annuity sales and reinvestment processes. This will allow customers to buy simply -- sorry, simple term annuity products quickly and easily and also create efficiencies for our business. We look forward to providing you with an update on this as we progress. We will leverage our expertise, capability, scale and reach of our broad range of strategic partners to deliver more value to our customers and our business. We will remain disciplined on expenses, directing resources for growth initiatives and ensuring we support returns for our shareholders. Finally, we will complete the sale of the bank and returned $100 million in capital to our balance sheet. I'm extremely pleased with the strong performance of the business in the half. We're delivering for our customers, leveraging our competitive advantages to meet more of their needs by providing financial security for a better retirement. We achieved this through our talented and committed team, and I would like to thank them for their energy and their dedication. Alex and I will now take your questions, and I'll hand back to Mark. Thank you.

Thanks, Nick. We'll now turn to the question-and-answer session. [Operator Instructions]. Operator, are there any questions via the telephone, please?

[Operator Instructions] Your first question comes from Simon Fitzgerald from Jefferies.

Just given the current interest rate environment and the nondeductibility of the capital notes, just interested to know in terms of your optimal funding mix and what you're thinking about in the future?

Thank you for the question. What I might do is I'll ask Alex to make maybe a comment on some of the elements of the funding mix. But I think as a broad statement, Simon, we maintain a diverse source of funding on the balance sheet and accessing debt capital markets periodically is an important part of that program. So clearly, what you've seen in this period is there is some higher interest expense costs to some of the tiered paper that we have. But Alex, you might like to add a comment to that.

Yes, sure. Thank you, Nick. So thanks for the question, Simon. As you know, we operate within the Prudential Standards. So we have a access to our diversified capital base of issued share capital as well as the capital notes and the subordinated debt, and that's a mix that we're comfortable with. As noted, we did refinance $400 million of our subordinated debt last year, so we raised the new issue in September and [indiscernible] issue in November. That was at a slightly higher margin. But the nondeductibility of that interest is not a new feature. And so we're comfortable of the mix at this stage.

Yes. Okay. Two more quick questions here. The 2 clients that were downgraded to CCC, can you confirm whether that was an external party that rated that? Or is that downgrade related to your own internal rating systems?

Do you want to speak about the policy?

Yes, sure. So maybe just a reminder for everybody on the call. So the Challenger Life policy, from a valuation perspective, is to anything that is rated below B- we provide for on a default basis. The 2 that we've provided for today, dipped below that at 31 December, and so we have provided for them in full. But neither of them are in default, and they do continue to pay their coupons in full.

But was that based -- the downgrade CCC that based on your own internal rating systems or is that an external party that rated those?

Yes, they were externally rated.

Okay. Understood. Last question then, Nick, just I'm interested to know just on the longer-term sort of outlook and the relationship with MS&AD. I mean the relationship expanded in 2019 with the U.S. dollar-based annuity. And then there's a real estate investment management partnership, I believe, that was announced after that. But I'm not quite sure how much FUM that has in it, but maybe you can give us an update on that, because for a strategic relationship, not really that much has happened since the U.S. dollar-denominated annuity. And looking at the agreement between the 2 parties are still for JPY 50 million (sic) [ billion ]. So just wanting to get a bit more information on that.

Yes. Thanks, Simon. So I mean, as a comment, the relationship is very, very strong. So the agreement with MSP on reinsurance for JPY 50 billion. What you've seen in this half is [ 414 ], which is near to 80% of that on a Aussie dollar translated basis. So that is the -- a key feature of it. The expansion of that relationship last year to incorporate a real estate outsource management program using our Japan real estate team, I think, is a strong signal as to the value -- we seek to add value to each other's businesses where we can. So there is a very strong, very healthy relationship with MS&AD and MSP and we'll continue to explore ways to further that relationship.

If I could just sneak in one more, just a bit more context around the $56 million in other gains on policy liabilities. Said it was related to inflation-linked instruments. So just if you can just provide a bit more color there or detail, please?

Can you just repeat the start of that question, Simon?

Yes. I just wanted a bit more detail, if we could, please, on the $56 million in other gains on policy liabilities. Said it was related to the inflation-linked instruments. But just wondering if we get a bit more detail around that in terms of the valuation.

Yes, sure. No problem. So the investment experience in aggregate represents all the assets and liabilities being mark-to-market. So what we've shown today is by asset class, the impact of those valuation movements. And within liabilities, you have both the impact of our net new business strain as well as the impact from the hedges.

Your next question comes from Kieren Chidgey from Jarden.

A couple of questions. Maybe just starting on the Life business. The spread margin there sort of flagged, improved nicely over the half on PCP, 20 basis points. But as you pointed out in your chart sort of that still come in the shareholder investment return bucket. The product margin has been fairly flat. So just wondering if you can sort of indicate why that's been the case? Is it a mix issue? Are there other factors, sort of, we should think about on a go-forward basis around the product spread.

Yes, sure. Thanks very much for the question, Kieren. So as you said, really pleased with the aggregate COE Life margin up to 2.76% for the half. Most of that uplift is coming from the shareholder funds where we're really seeing the more immediate benefit from the increase in interest rates. In the product margin itself, that's up 2 basis points in the half. We have seen investment yield go up for interest rates and other abilities to drive greater yield. But most of that is passed on to our customers, which is part of the valuation proposition from an annuity perspective. The other thing I would point out, though, is that in that interest expense as well as the cost of funds to annuities, we also include our subordinated debt. And so that double up of the 2 months of subordinated debt that we had in the half does create a 3 basis point headwind to the margin in the half. And then we've also got a 1 basis point headwind from the fact that the new instrument is at that higher rate. Obviously, the double up doesn't persist into the second half, but that higher rate will do.

Okay. And from a mix perspective, if we continue to see sort of more terming out greater growth in lifetime product from a sales point of view, should we expect a sort of less mix pressure or even potentially positive mix pressure going forward? How do you actually think about the margin differential from a mix perspective?

I might, Kieren, just to sort of start off. I think the comment is right. I mean, in the last 3 or 4 years, where we've written very substantial amounts of shorter-dated business, that clearly -- it meets our ROE hurdle when we write the business, but it creates less COE earnings signature for want of a better word. What we're seeing coming through in terms of the greater volume of longer-dated sales is definitely supportive. And I think something we are happy to say today is that the business, in aggregate, that we're writing today, is accretive to our COE margin based on our pricing and the asset yields that we're able to achieve in market.

Okay. And just on the retail annuity sales I think you touched on in your commentary the direct-to-consumer sort of strategy. Can you unpack a little bit more where you are sort of in terms of putting the IT platform in place for that? When you'd expect to potentially go live? And then similarly on the institutional side or product development and sort of traction you've seen over the past 6 months.

Thanks, Kieren. I might -- I'll start on that one. So what we did through the second -- the first half back in September last year, was we ran some campaigning in market to test our capacity to -- or ability to attract customers that wouldn't have come down through the traditional advised source. And we're pleased with what we saw there. Our business has traditionally been a B2B through platform business on the Life side. What we are working on now is the way -- is a means to take our term annuity product to simplify some of the features and to effectively digitize the customer onboarding experience. And then similarly, one thing that we're also completely working on right now is reinvestments. We've seen in the retail side, our reinvestment rate has ticked up, which is really great. And the number of clients that we have is clearly growing. Finding ways to improve the reinvestment experience for customers is really supportive of reinvestment rate in our view. And so we're trying to open up the front end and also improve the reinvestment process as well on retail. So in terms of timing, what I said is -- we are looking to middle of this calendar year to the back end of this financial year to have some of the first releases of that available. Now in terms of institutional product development, our business with institutional clients, it takes a number of streams today. So we've got our institutional annuity products, our institutional GIR or guaranteed index products, and we've seen some growth in the GIR. We've seen a little bit about in the institutional term products. And the team are very focused on discussions with institutions around ways we can improve on those products, if you like, product development around them, and that might lead to some longer tenors. So the team are focused on that. More broadly with the super funds, we're engaged in a lot of discussions as we see this momentum building -- genuine momentum building around designing and developing retirement solutions for their members. And so there's sort of multiple, multiple streams. One of the reasons why last year we put together and we increased the scale of the team that is focused on supporting that institutional channel in the institutional solutions team.

Your next question comes from Lafitani Sotiriou from MST.

Good morning, everyone. A few questions from me, if I may. The first is in relation to the exit rate on the COE spread. Can you give us an idea as to where it roughly was sitting in December?

I might just start off on that. So what we've called out is a NCOE margin here at 2.76%. The way that I've made the comment before, and that has increased half-on-half, but the business that we are writing today is accretive to that margin. But we don't provide really explicit guidance. I know you asked about December. So the comments there would be we've traveled to 2.76%, but we're writing business today that is accretive to that in the book. And as you know, all the things being equal, well, probably what I would say other things being equal, we see a pathway for that margin to go higher over the medium term.

I mean clearly, it's going to go high because of the impact on the shareholder or the regulatory capital supporting it. But are you saying that the new business you're writing is accretive excluding that impact?

That's correct.

It's accretive exploding that impact, okay. Can I just clarify a follow-up on one of the questions I think Kieren asked around some of the asset allocation. And maybe just if you could remind me because historically, when Challenger was writing longer dated annuities, you would tend to move away from fixed income as an asset class. So in the last few quarters, your book has been extending, but you've actually increased your exposure to fixed income. So can you just talk a little bit what we should see in that asset class allocation? And then also, more specifically, what you're seeing nearer term in the respective asset class pricing that may change how you're allocating in the short term.

Yes. I might just provide a little bit of context, and I'll ask Alex to provide some more. So over the last 3 or 4 years, the balance sheet has changed the asset allocation composition. And so today, we have a materially higher weight towards fixed income, of which 76%, 75% of that being IG and sub-IG being balanced, and that's a very diversified portfolio. So we have seen a growth. The new business we're writing, pleasingly, we're seeing that tenor extend. But it is still -- there's still a lot of term business in the book that we're writing. And the fixed income assets we originated are really good assets for those liabilities.

Yes, I think that's absolutely right. So we match our assets and our liabilities, which is that very first principle. And then the investment decisions that we take are all made on a relative value basis. So you have, over the course of time, seen a slightly higher weighting to fixed income. So that's a 76% now of the total portfolio. But it's very, very diversified. It's across 1,700 different securities. And then we use a number of other asset classes to ensure that we have that mix of duration as well as maintaining flexibility and liquidity, which is what we've done in this half in terms of increasing our exposure to alternatives.

Can I be a bit more clear then? So if the tenant continues to increase in the new business that you're writing, should we see fixed income stay at a steady level? Would you expect that to fall over the medium term?

I think what we're saying today is that we're not seeing -- we're not expecting any material changes in the asset allocation mix that we have today. We've called out the increase to alternatives, which is being funded from reducing the low beta equity position. But other than that, we're not calling any material changes today.

That's great, thanks for clarifying. And just one last question. In Funds Management, you flagged higher investment. I'm sorry if I missed this, but can you just give us a little bit more detail as to what the money or increased investment in Funds Management is going towards? And is it one-off in nature? Is it project-based? Or is this a resetting of the cost base?

Yes, sure, Laf, I'll take that question on expenses. So you have seen this half, a weighting of our expenses more to the FM side of the business than the Life side, and that's a matter of timing. So the first -- in the first half -- we launched our new registry system boardroom for the FM business, so that's the most material investment that was made into that business. There are also higher transaction volumes, so that affects the costs that we are allocated from our investment operations, which will be Artega from 1st of January because those are volume related. Some of the data feed costs that FM uses are denominated in U.S. dollars and the exchange rate has gone against us a little in this half too. So there's a mixed bag, but a lot of them are one-off in nature to the first half, which is why we're really comfortable in reaffirming the 5% to 6% growth for the full year today.

Your next question comes from Nigel Pittaway from Citi.

Just first of all, I was hoping to return to the product cash margin and the comments you made about needing to pass on interest rate rises to customers. I was just wondering, trying to get your feel of the sort of nature of that competitive pressure and whether or not you feel that competitive pressure will intensify as people expect deposit pricing to get more competitive?

Nigel, I might start on that one, so thanks for the question. I think the Challenger's product range on the Life side operates across quite a broad spread. So where we've got that short dated, or shorter tenor term business, say 1 year, you're definitely seeing rising competitive pressures around that. And that's coming from the big 4 banks and [ neos ], et cetera. So I guess our response to that would be we still look competitive on a relative rate perspective, but we're going to maintain our pricing discipline. And that probably speaks a little bit to the term annuity within the institutional channel, where we'll write business at certain levels, not at other levels. But what pleasingly we're seeing is the stronger growth out the tenor, where that competitive pressure eases materially, plus also the features of the product start to really kick in. And so that the term annuity products has features that advisors use at a different term deposit product. And then also, clearly, with the lifetime product and the care products, that's a different proposition again. So I think the comment there on the competitive pressure, our response has been to really try to push the efforts across the term. But you are seeing good strong reinvestment rates at the shorter end as well. And we've been prioritizing the retail shorter end business where we can practice to be more price disciplined for want of a better word, relative to the institutional. But Alex, you might just...

Yes, no, that's good.