Challenger Limited (CGF) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to those in person and online to Challenger's 2023 Results Briefing. I'm Mark Chen, Challenger's General Manager of Investor Relations. We're coming to you here today from our Martin Place head office in Sydney. Before we begin, I'd just like to acknowledge the Gadigal People of the Eora Nation, traditional custodians of the land on which we are hosting this event today and pay my respects to elders past, present and emerging. Today's presentation will be followed -- sorry, today's presentation will be provided by our Chief Executive Officer, Nick Hamilton; and Chief Financial Officer, Alex Bell. It will be followed by a Q&A session, whether -- and you can ask a question in person, via the online portal or via the telephone. I'll now pass over to Nick to get us underway.

Thank you, Mark, and good morning to everyone. To those who have joined us in the room and also welcome to everyone online. So this morning, as Mark noted, I'm joined by CFO, Alex Bell, to deliver Challenger's 2023 full year financial results. Challenger closes FY '23 in great shape, with significant growth momentum as we enter the new financial year. Our performance reflects a near 30-year journey that has seen us build a leadership position and guaranteed income for retirement. As we look ahead, Challenger is now ideally placed to meet the growing demand for guaranteed income and retirement solutions. This year, we've made considerable progress in executing our strategy. Annuity sales are at a record high. Growth in new channels has delivered early wins, including partnerships with Aware Super and TelstraSuper. Funds Management has executed its diversification strategy, with new global alternative and real asset investment capability coming online. Our relationship with MS&AD will now move to the next stage, and we have progressed our strategic relationship with Apollo. We have achieved all of this in the service of our purpose: to provide customers with financial security for better retirement. Today, Alex and I will cover the key drivers of our FY '23 results, how we are broadening our customer reach and our outlook. In 2023, the team applied an absolute focus in executing our growth strategy. Pleasingly, we're seeing the results of this in our financial performance. Group normalized net profit before tax increased to $521 million in the top half of our guidance range, and statutory net profit increased by 13%. Group assets under management reached $105 billion, reflecting growth across our business. Life delivered a standout performance, with record annuity sales contributing to overall sales of $9.7 billion. Notably, we've seen significant growth in retail annuities, which reflects the attractiveness of our offering and the demand for guaranteed income. Our capital position continues to remain strong, with Challenger Life holding 1.59x the minimum regulatory requirement. Group return on equity was up 80 basis points to 12.7%. Reflecting confidence in the business, the Board determined a fully franked full year dividend of $0.24 per share, an increase of 4% on last year. This result underpins the strength of our business and provides an excellent platform as we look to capture the significant opportunity in Australia's burgeoning retirement income market. In 2023, we achieved more than just a strong financial performance. Providing Australians with financial security in retirement has never been more important, particularly given economic, policy and demographic shifts. This year, we made billions in payments to our customers, providing them with guaranteed income and the confidence to spend their savings. We have a proven track record developing long-term relationships with superfunds. Australia's top 25 funds are clients of Challenger. We will build on this strong foundation as we seek to support funds, meet their members' needs in retirement. Underpinning our business is a talented and a diverse team who are proud to work for Challenger. This year, we progressed our community engagement and formed a partnership with ATSE to support indigenous leadership in STEM. I'm particularly passionate about this initiative, which reflects a wider commitment to investing into knowledge and innovation. We remain passionate advocates for better outcomes for all Australians in retirement, and it is encouraging to see the progress currently underway. As an industry, it's critical that we build a resilient retirement income system on par with our first-class accumulation system. At Challenger, we support customers to build their wealth and to spend their retirement savings with confidence. We are the country's leading guaranteed retirement income business, and we will continue to deliver for our customers and invest in our brand to maintain our position. Over the last 30 years, we've continually adapted to the needs of our customers, developing a unique and leading suite of guaranteed income solutions. We are one of Australia's largest active managers with a platform of contemporary affiliates and our leading domestic credit platform Challenger Investment Management. The business has built a reputation for its investment capabilities with market-leading positions across equities and fixed income. The strength of our business, supported by demographic tailwinds and regulatory shifts, presents a significant growth opportunity. Our superannuation system is forecast to triple in size over the next 2 decades. And whilst Australians are retiring in record numbers today, it remains the case that financial uncertainty of retirement is only worsening. The proposed objective of super, quality of advice review and retirement income covenant, have the potential to transform retirement outcomes for Australia's aging population. And Challenger has the potential to play a key role in meeting this important societal need. We closed the financial year in a position of real strength, with momentum across our key customer segments. In FY '23, our sales team conducted over 10,000 adviser meetings, and quotation numbers are up over 50%. And with the normalization of interest rates, our customers are receiving the most attractive rates in a decade. The demand for guaranteed income drove record annuity sales, particularly in longer-duration term and Lifetime sales. As we begin FY '24, our momentum across a broader range of channels, longer-tenor business and a declining maturity rate will help drive further growth. Record annuity sales were driven by strong performance across our distribution channels. Growth in the retail channel has been exceptional, with sales up 53% and weighted towards longer-duration business. Japanese annuity sales also delivered, up 20% and significantly exceeding the agreed annual target. I'm delighted to announce the broadening of the relationship with Mitsui Sumitomo Primary that allows us to now look to FY '24 and beyond with confidence. As previously flagged, institutional term tapered off as we maintained our disciplined approach to pricing. It's worth noting that Index Plus sales reached $4.2 billion in the year, reflecting the value of that proposition to our institutional clients. For our core adviser-led market, we will soon go live with annuities in platform. Netwealth will be the first to launch in platform term annuities, which opens up a larger market of superannuation and pension stage monies with a far enhanced adviser experience. Through retail direct, customers can now access our term annuity range online, and further enhancements are planned over this coming year. What is important is that we continue to make it easy to do business with Challenger, and FY '23 has been an exciting year to better position our business towards our customers, and the results are extremely pleasing. As outlined at Investor Day, we have been very active this year with our institutional clients. In FY '23, we have successfully executed on new institutional partnerships that include a defined benefit pension derisking and retirement income solution. TelstraSuper is the first fund to launch a comprehensive retirement income solution in partnership with Challenger. We will integrate the lifetime income component into their retirement offering, which allows TelstraSuper to issue a lifetime product. Members will benefit from this complete retirement approach via TelstraSuper's retirement advice capability. The relationship will generate regular lifetime annuity sales for Challenger and is expected to commence later this half. This partnership is a great example of how Challenger will work with superfunds to meet their members' needs in retirement. As was highlighted at Investor Day, the defined benefit market represents a significant growth opportunity for our business. Last month, we announced a major partnership with Aware Super, the largest defined benefit buy-in in Australian history. Under the agreement, we provide group lifetime annuity policy to the value of $619 million, noting this will contribute to our FY '24 Q1 lifetime sales. This partnership reflects our unique capability to deliver simple solutions to very complex problems. The agreement builds on our long-standing relationship with Aware Super, who we have provided balance sheet solutions to for a number of years. Looking ahead, we expect more funds and sponsors will derisk their defined benefit plan liabilities in the coming years. Leveraging our retirement and investment expertise, we are ideally positioned for this opportunity. A key focus for Challenger is making it easier for financial advisers, institutions and customers to do business with us. Customers, including retirees, are showing an increasing preference to engage digitally and invest directly. Income-seeking customers can now purchase our fixed-term direct annuity from our website in a matter of minutes. This simple and straightforward process allows us to target growth from a new direct digital channel. As we build out this channel, we expect our offering to compete with the term deposit market with our focus on longer-duration business. We are now in a test and learn environment using technology to build a more customer-centric business and deliver a seamless experience. Funds Management is a leading investment and multi-affiliate platform that provides our clients with access to a broad catalog of highly regarded investment products. In what has been a more challenging market, we've continued to invest for growth. We've expanded our offering, adding new alternative investment strategies to meet growing client demand. This year, in Fidante, we broadened our relationships with alternative asset manager Proterra in Singapore and Resonance in London as well as launching local affiliate cultivates, new food and agriculture fund. We also focus on offering investors a wider range of structures, with the team launching new active ETFs, UCITS and access fund structures. Challenger Investment Management has secured 2 new domestic private lending mandates, 1 with our new strategy -- sorry, 1 with our strategic partner, MS&AD and the other with a global insurance company. While 2023 was a difficult year for the funds management industry, our team's efforts to expand our capability and to stay close to our customers sees us well positioned for 2024 and beyond. Challenger has a proven track record of building strategic partnerships that support the delivery of our strategy. The Challenger Investment Management mandate I referenced is a great example of the strong relationship we have developed with MS&AD over many years. Our long-term annuity reinsurance agreement with MS Primary has been highly successful to date. And we have worked collaboratively -- which we've worked collaborative on over many years. As I mentioned earlier, we are expanding our partnership and will commence reinsuring Japanese yen-denominated annuities later this year, which will further diversify the product range that we reinsure. Our partnership with Mitsui Sumitomo Primary will now look beyond the original July 2024 agreement date to an evergreen relationship. I would like to thank our partners at MS&AD. We are privileged to continue supporting them, providing their customers with financial security for retirement. With Apollo, we have started to identify ways both businesses can create shared value. For our balance sheet, this includes investment opportunities across private equity alternatives and credit, supporting our future growth and margins. We've also agreed to form a new distribution partnership under which Fidante will bring the Apollo Aligned Alternatives, AAA, capability into Australia. This responds to client demand and will be launched in the coming month. Artega Investment Administration, our joint venture with SimCorp, is off to a positive start. Artega has won several new clients that will transition to its platform in the first half. Through platform improvements, Artega continues to enhance its offering to both existing and new clients. Through our recently announced partnership with Elanor Investors Group, our life company will have a broader and deeper asset management and transactions partner in real estate. In addition, Fidante will bring Elanor's compelling real estate proposition to retail and institutional customers. It's been a year of significant achievements right across our business. We have successfully executed our strategy, expanding our customer reach and delivering a very strong financial performance. I will now pass to Alex, who will provide the detail of our FY '23 result.

Thank you, Nick, and a very good morning, everybody. Challenger has delivered a strong result, which really demonstrates the progress that we are making in executing our strategy. Our efforts to build a more customer-centric business is translating into strong financial results and provides a platform for accelerating growth. This has been a tremendous foundation for my first year as Challenger's CFO. I'll now take you through our financial performance for the year. Starting with the group view, we delivered normalized net profit before tax of $521 million for the year, an increase of 10% on last year. Pleasingly, the result was in the top half of our earnings guidance range and was driven by strong growth in Life earnings, partially offset by lower earnings from Funds Management, and I'll cover the drivers shortly. Normalized net profit after tax was $364 million, an increase of 13%, which is higher than the increase in pretax earnings due to a lower effective tax rate. Statutory net profit after tax was $288 million, also up 13% and includes an investment experience loss of $68 million and one-off items of $9 million. Pretax return on equity was 12.7%, which was 80 basis points up on last year. And I'll provide some more detail on both investment experience and ROE in a moment. I'd like to turn now to the earnings drivers. Income was $842 million, an increase of $65 million or 8%, driven by very strong growth in Life earnings, partially offset by lower Funds Management fund-based fee income. Life income or normalized cash operating earnings increased by 12%. The key drivers here were a 22-basis-point expansion in the COE margin and a 3% increase in average investment assets. In Funds Management, net income decreased by 7%, driven by lower average funds under management. Expenses were $318 million, representing an increase of 5.7%, which was within our expense guidance range of 5% to 6%. Excluding the bank, expenses increased by only 4%. The increase in expenses was largely due to a higher number of FTE in our investment operations business, Artega, and some inflationary pressures. The group cost-to-income ratio was 37.7%, an improvement of 100 basis points on last year, with revenue growth significantly outpacing expense growth and reflecting our cost discipline. Pleasingly, we expect to continue to capture scale benefits, with the cost-to-income ratio improving further to between 35% and 37%. And accordingly, we're communicating this as a medium-term target going forward in FY '24. Turning to ROE. This chart shows the contribution to ROE from Life and Funds Management. For the group in aggregate, ROE increased 80 basis points in the year to 12.7%. Life's ROE increased by 200 basis points to 15.1% and was driven by stronger Life earnings. With Life's portfolio predominantly in fixed income, its ROE is correlated to the RBA cash rate over the long term. The investment portfolio is 76% weighted to fixed income, and this year's increase is directionally consistent with the 290-basis-point increase in the average daily RBA cash rate. Accordingly, it will take time for changes in the RBA cash rate to be fully reflected in earnings and ROE. In Funds Management, the ROE decreased by 10 percentage points to 21.7%, driven by decrease in fund-based fee income and some higher expenses. But as we look to FY '24, we expect the group ROE to be below the through-the-cycle target. The gap will close over time though, and the Life ROE is expected to continue to increase. Looking at the Life business performance in more detail. I'd like to take you through the key components of the results in the following few slides. At the start of the year, we outlined our strategy to improve the quality of the book by focusing on longer-duration annuity sales. We have executed on this strategy, achieving record annuity sales of $5.5 billion, underpinned by very strong retail sales. Retail annuity sales increased by more than 50% to $3.6 billion. And the largest contribution to the increase was from domestic retail new business sales with a tenor greater than 2 years, which almost doubled. We will look at sales in more detail shortly, but it's clear our annuity market messages are resonating with retirees and advisers. There is rising demand for both guaranteed income and true longevity protection, which safeguards against the very real risk of our customers running out of money in retirement. This strong sales result translated into Life book growth of 5.2% for the year. This was moderated by the higher maturity rate this year of 33%. Average investment assets increased by 3% to $23 billion, and pleasingly, the COE margin expanded by 22 basis points to 2.82%. The second half margin was even higher at 2.88%. The higher cash operating earnings and disciplined expense management delivered a 14% increase in the Life EBIT to $541 million. Turning now to the drivers and the expansion of the COE margin. Return on shareholder funds was the biggest contributor, up 25 basis points, reflecting higher yields in fixed income and alternatives. The product cash margin expanded by 7 basis points, reflecting our disciplined pricing approach and the benefit of higher yields on investments, particularly fixed income. Normalized capital growth was 10 basis points lower as a result of our reallocation from equities and property into alternatives, with alternatives attracting a 0 normalized capital growth assumption. This slide provides some additional detail on the sales composition and tenor. Total Life sales was $9.7 billion and stable on last year. However, composition has tilted towards higher-value retail and longer-duration business. The Life business is experiencing exceptionally strong sales, and the growth in longer tenor retail sales is expanding our investment universe, enabling us to deliver a higher margin. We are seeing increasingly strong demand for retail sales, with adviser quotations up 59% on last year, a testament to the benefit of our strategy to diversify sales and our efforts to broaden access for retail customers. 74% of new retail annuity sales were for durations of 2 years or greater compared to just 50% last year. And in dollar terms, this represents a notable 82% increase on last year. The increasing tenor of new business sales means that the average tenor of new business is now 5.8 years compared to 4.9 years in FY '22. In the institutional channel, reflecting asset allocation decisions as rates have normalized, new business term annuity sales were lower, and the investment rate was also low at approximately 50%. But importantly, as Nick mentioned earlier, we are deepening the relationships with institutional customers, particularly superannuation funds. We're providing innovative, guaranteed income solutions, and we see significant opportunities to accelerate these activities and generate additional sales and revenue. Looking now at maturities. Our focus on generating longer-duration sales will benefit the maturity rate in future. Total annuity maturities this year were $5.1 billion or 33% of the undiscounted opening annuity liabilities. This was higher than the 28% maturity rate in FY '22. In the years of ultra-low interest rates, we generated significant shorter-duration sales, and that drove our maturity rate higher. But now, the benefit of increased longer duration sales is starting to emerge in the maturity rate, which will start declining from next year. In FY '24, annuity maturities will be down $0.8 billion, representing 26% of opening annuity liabilities. This will help support stronger book growth. Continuing with a bit more color on Life net flows and book growth. This chart shows Life net sales of approximately $0.9 billion for the year across all channels. This delivered total book growth of 5.2% and retail annuity book growth of 8.6%. Considering the $1 billion of institutional term annuity outflows we experienced in the year, this is a very strong result. At $1.4 billion, retail and MSP sales accounted for the majority of total Life net flows this year. Let's now look closer at the Life investment portfolio. There has been no change to our risk appetite, and we continue to seek to match our assets and liabilities. Fixed income represents 76% of Life's investment portfolio, up 1% from last year. And within the fixed income portfolio, investment grade represents 77%, which is above our target of 75%. The weighted average credit rating of the portfolio is A. In the first half of the year, we exited our low-beta equity portfolio, reducing our exposure to equities by 3 percentage points to just 1% of the total. We also sold one direct property at carrying value. The funds received from the sale of the low-beta equity portfolio and the sold property were reinvested into alternatives, increasing its allocation by 4 percentage points. So that equities now represents 10% of the investment portfolio, comprising primarily of a diversified group of absolute return funds and some general insurance exposures. Alternatives are less correlated to both equity and credit markets and provide a source of liquid capital that improves our financial flexibility. Moving on to investment experience, which represents the fair value movements in asset and liability valuations as well as new business strain. Overall, we reported a pretax investment experience loss of $99 million for the year, of which $39 million was in the first half -- was in the second half. Of the $99 million, $87 million was net new business strain, and the remaining $12 million was from combined asset and liability valuation movements. The asset valuation investment experience was driven by gains in the investment -- in the fixed income portfolio, offset by property, equity and alternative valuation movements. Within the fixed income portfolio, corporate credit spreads tightened, particularly in the second half, driving positive valuation gains of $209 million, partially offset by some credit default allowances. Consistent with our policy and in line with what we disclosed in the first half, we provided $38 million or 22 basis points for credit defaults across 2 names, and almost all of this occurred in the first half. As a reminder, it's Life's policy to provide for any security that is downgraded below B-. For property, the $223 million of investment experience loss largely reflects valuation movements. Given the rising inflation and interest rate environment, all of our properties were independently valued at the 30th of June 2023. Most of the revaluation loss was in the domestic office portfolio, which was revalued down by 7%, driven by cap rate softening. The retail portfolio revaluation loss was only 3% and was almost entirely offset by valuation gains in the industrial portfolio, driven by higher market rents. Pleasingly, the portfolio has an occupancy rate of 93% at the 30th of June. The alternatives portfolio posted a loss of $105 million, which, after adjusting for distributions, was in line with relevant indices. And finally, the equity and infrastructure which now represents only 1% of Life's investment portfolio, recorded investment experience losses of $36 million. Turning now to Funds Management. Funds Management EBIT was down 26% to $62 million for the year. The decrease in EBIT was due to lower average FUM, which was down 9%, as well as higher expenses. Closing FUM for FY '23 was $98.4 billion, with the second half seeing $1.4 billion of net flows and a particularly strong close to the year in the fourth quarter. Funds Management expenses did increase by $8 million or 8%, with higher data and investment management costs as a result of higher trading and transaction volumes. We also implemented a new registry system and had some inflationary pressures. Funds Management total net income margin increased though by 0.4 basis points to 18.8 basis points. This was primarily driven by fund-based margin expansion following the sale of Whitehelm Capital last year and redemptions from lower-margin fixed income affiliates. Looking more closely at Funds Management net flows now. Outflows for the year were $0.5 billion, primarily concentrated within fixed income and derecognition in alternatives. Net outflows and client distributions were fully offset by over $7 billion of positive market movements. We closed the year really strongly with $2.3 billion of net flows in the fourth quarter. With a platform of differentiated fund managers and a diversified model focused on generating alpha, we are structurally very well positioned. We have a range of investment strategies that appeal to clients through most economic cycles. And you can see this in the chart on the left-hand side, which highlights we've outperformed our peers in 10 out of the last 12 quarters in terms of net flows. Our net flows are also underpinned by strong investment performance, with 75% of FUM outperforming over 3 years and 99% outperforming over 5 years. We continue to be well capitalized. Life's PCA ratio closed the year at 1.59x and was stable over the half despite property revaluations. The PCA ratio is well above both APRA's minimum requirement and our own internal capital targets. Throughout FY '23, Challenger Life continued diversifying the investment portfolio by increasing its allocation to alternatives. This provides additional financial flexibility, which, in combination with the higher proportion of CET1 in the capital mix, will enable the Life business to operate at a lower PCA ratio. The CET1 ratio is up 5 basis points to 1.16x, which highlights the capital mix component of this dynamic. Reflecting the strength of our business and our commitment to shareholders, the Board determined a fully franked final dividend of $0.12 per share, bringing the full year dividend to $0.24 per share. The dividend payout ratio was 45% for the year, which was within our payout ratio target and reflects a 1% increase for the full year dividend from FY '22. In conclusion, we have delivered a strong result that shows the momentum built over the last year. In Life, we are uniquely positioned to benefit from favorable economic, structural and regulatory forces, helping us accelerate sales, extend duration and expand margin. We are delivering on our growth ambitions. And with that, I'll hand back to Nick, and I look forward to joining you for Q&A. Thank you.

Thank you, Alex. Now turning to the outlook. In '24, we are targeting normalized net profit before tax of between $555 million and $605 million, with the midpoint of the range representing an 11% increase on FY '23. In setting the guidance range, we have excluded Challenger bank, with the sale now expected to complete in the first half of FY '24. In FY '24, ROE is expected to come in below our through-the-cycle target. Whilst we expect to benefit from continued expansion in Life's ROE, Funds Management's relative contribution is expected to take more time to recover. We continue to remain disciplined on costs. From FY '24, we will return to our cost-to-income target. For FY '24, we are targeting a cost-to-income ratio of 35% to 37%, an improvement on this year. We are confident in our growth outlook, and to ensure we have capital flexibility, we are extending the dividend payout range. Starting in FY '24, we will target a dividend payout range of between 30% and 50%. In periods of high growth and favorable investment conditions, this will provide additional capital flexibility, which will allow us to deploy retained earnings in an ROE-accretive way. We remain well capitalized. And we will operate within a 1.3 to 1.7 PCA range. I'm extremely pleased with the performance in FY '23 and the momentum that we are taking into FY '24. We are a very focused business and have executed on a range of strategic initiatives that position us for growth, which is reflected in the momentum that we are seeing across the business today. As a team, we are aligned and energized to deliver our strategy, which will see us leverage our expertise to meet the needs for guaranteed income and active investment management. We have in our strategic partners, MS&AD, Apollo and SimCorp, the potential to enhance long-term growth. This will support future returns for shareholders. And now this couldn't be achieved without the commitment and energy of the Challenger team, who I would like to thank for their dedication this past year. And with that, Alex and I will now be pleased to take your questions.

Okay. As a matter of process, we'll first take questions firstly in the room. We'll then move to the telephone, and if there's any online questions, we'll also go to those after the telephone questions. [Operator Instructions] Let's start with the room. Sid's got the mic.

Siddharth Parameswaran from JPMorgan. If I could just ask the first question just around the ROE and just the lag versus the cash rate. Alex, you did mention that you expect the Life ROE to improve again into next year. Just wondering if you could give us a profile of when you think -- leaving the other divisions aside, when will the Life division itself get to its target ROE as a premium to cash?

Thanks for the question, Sid. So yes, you're right. We delivered today an ROE target of 12.7%, which is up 80 basis points, and we did provide an indication of Life's contribution to that. So 15.1% for the Life business, up 200 basis points, which if you think about the composition of the fixed income component of the balance sheet is reasonably well correlated to the 290 basis points you saw as an increase in the cash rate. That cash rate increase was incredibly fast, though. And so it is going to take a little bit of time to fully flow through the whole balance sheet within the Life company, but we're really confident in saying that, that Life company ROE will continue to increase as we look forward to FY '24.

Okay. Okay. Well, maybe I'll just have a question around guidance then. Just maybe if you could just help us understand the components of the increase in the guidance, about $60 million to the midpoint of the range. Just composition in terms of -- just what you're expecting in terms of book growth and also just cash operating earnings for the Life business.

Sure. I'm going to just start that off, and then I'll let Alex add some details. So in setting the guidance range of $555 million to $605 million, with -- we -- the midpoint of that, as I noted, is 11% up on what was a strong year in FY '23. So there's a whole lot of components to go into how we consider that range at any point in time. It reflects the strong momentum we have coming through the Life business. And the operating earnings, cash operating earnings will take off that, but not all components of Life's results are guaranteed, hence the range. And so that gives us some flexibility around that. It also allows for the fact that in the course of the year, we will do a lot of investment activity on the balance sheet and fixed income that can provide impacts up as well as down for the credit program. And obviously, on the fund side, there's variability of outcome depending on where markets are or where flows are. So from where we sit today, that feels like a strong guidance to bring to market. In terms of book growth, we don't provide that specific detail other than to say what we are seeing because of the lengthening maturity rate right now in FY '23 is a natural step-up in book growth. So $800 million less of maturities like-for-like is equivalent about 6% book growth for the year ahead given the length and the tenor of the sales book that we've had. So we feel good about book growth as we come into FY '24, but there are sort of thought processes that go into that guidance. And Alex, I'll see if you'd like to add some [indiscernible].

Yes, the only thing I'd say is -- so the midpoint of the guidance range gives us 11% profit growth year-on-year, which we see as a really positive and reflection of the momentum that we got in the business this year. We have called out in the analyst pack 2 items, which are sort of new to the year, if you like. So one is a $5 million investment into our investment administration platform, Artega. So that's a technology investment to bring the dimension system into the cloud and to ensure we can onboard new clients. So that's new. And the other $5 million that we've called out is investments into cybersecurity and risk-related projects. The compliance requirements are only increasing for everybody across the industry, and so there was a step-up in that regard.

Can we go to Simon in the front?

Simon Fitzgerald from Jefferies. I guess my first question is a bit of an extension from Sid's question then on the ROE and that lag. I'm just interested to know conceptually whether it's the right thing to have a variable base target within a through-the-cycle ROE target. I mean in a rising interest rate environment, you'll always be chasing it. And in a declining environment, it might certainly serve you well. I'm just interested to know conceptually how you're thinking about that.

Simon, your comments are well-made. And clearly, as Alex noted, the steepening of rates in such a short period of time and the lag effect on the balance sheet plays through. But you also think about how the ROE target is used within the business. We are very clear that all the business that we write FY '23, FY '24 and beyond, that business must meet our ROE target. So whether it be new business on the Life company or whether it be strategic initiatives that we may be looking at, it anchors the business. It anchors the business in terms of an expected return. So we are going to see a lag this cycle, and that is the nature of it. But we're not proposing any changes to the floating rate target.

That's clear. Second question just relates to the digital direct sales. Just if you had any comments about how they've been going maybe month by month or at least any early engagement anecdotes from customers on that?

Sure. Of course, I can make a start on that. So we went live a couple of months ago. Whilst we were doing the build-out, the first iteration of that is for individuals or couples. So it doesn't capture people who want to invest via superfunds or trust. So it does narrow the range. We talk about it being a test alone because the team with the technology that they have, we're able to follow and map the customer behavior on it. So it is early days. We have seen regular flows going on to that platform. But as we do more product development of that direct and more campaigning, we would expect to see more flows. But bringing this back up one level, this is all part of a broader range of our focus right now and making sure whether it be the announcement around Netwealth and getting annuities in platform or providing online access and other activities that we're doing in the adviser channel to make it easier to do business with us, full stop. So we're really confident around the long-term opportunity for that direct channel. It is really early days, and we'll give it 6 to 9 months, and we'll give you a lot more color as we go through this initial launch period. But the early signs are very promising.

And then just on the Aware Super mandate, just finally, given it's a DB mandate, I understand that it's in a liquid lifetime annuity. Is there anything different in terms of the capital that we should think about that needs to back that mandate? And also maybe if you could give us some further guidance in terms of what the new business strain would be like against that? I imagine that's going to be pretty significant.

Do you want to...

Yes. I'd like to take that one. So thank you, Simon. So the way to think about the Aware Super business is just like all of our Lifetime business today. So it's no different in terms of the capital requirements. It will depend what assets we use to back that money, but it will tend to be longer duration because the lifetime -- but it is, by its nature, longer duration but no different to the retail and lifetime in how to think about it. There will be a new business strain, which we will record in the month of July. So the product went live on the 31st of July. So you'll see that come through in our results that we'll report at the first quarter. It is lumpy because it's a big one in one go, but there are a number of other moving parts in the investment experience line. As you know, that can easily compensate for that from one period to the next.

Kieren, [indiscernible].

Kieren Chidgey, Jarden. A couple of questions. Maybe just starting on the annuity sales and sort of from a Japanese point of view, you talked about extending the relationship into yen, what does that do to the JPY 50 billion guarantee? Does it alter that? Or is it just sort of the mix will evolve?

Yes. Thank you, Kieren. And if you've got more questions, I'll answer that one first, and you come with the second one. So this is great news for Challenger. We've had this partnership. We put a quota share in place in 2019. That has a natural run to '24. That did have a fixed rate. We've always exceeded that rate. I mean this year was 20% up on the target quota. So we feel very confident. I think one really positive reflection on doing yen-denominated annuities is it diversifies the sales mix for our exposure in Japan. So we no longer are exposed to the shifts in currency, and that, we think, will be very positive. And so we're not -- we don't have a guidance as to what sales look like. We'll provide some more color next year, but it should be seeing very positively to support long-term Japanese lifetime sales.

Okay. But just to be clear, does the guarantee exist anymore into this relationship?

The guarantee will roll off in FY '24 and become an evergreen relationship. But what we're not calling out is lower levels of reinsurance flow there.

Okay. And the economics around the relationship, the margin you make on those products, I presume, is unchanged.

Correct, absolutely.

Okay. And then also on the sales side of things, the retailer sales, you have very good growth year-on-year in terms of domestic retail annuities but lower in second half than first half. So I'm just wondering if you can talk to the dynamics around that seasonality and how you're thinking about that on a go-forward basis?

Sure. Okay. So coming out of -- coming out 18 months ago from a very low rate environment, we initially started writing quite a lot of shorter-dated annuity business in retail. We've worked as a team very hard to push the tenor of that retail business out, and also, the volumes have gone up materially. So what we are seeing as we leave FY '24 is continuation of these positive trends, more flow going into the longer-term business and strong sales within the lifetime and care family of business, and that has continued through July. So what we are trying to do shift that -- continue to shift the mix. There is undoubtedly competition about 1-year-term annuity. Now that's an annuity in name, really. Where we're trying to build our business is in that 2-year plus annuity. So we've seen very strong 3-year sales, 5-year sales. And our mantra internally very much is $1 in 3 years is worth a lot more to us than $3 in 1 year, and that just builds out longer. So that's how we've got the sales team lined up. They're really excited about the opportunities. And I think the way that we've asked the team to focus this year is to broaden the number of financial advisers writing annuities. So you've seen a real increase in the number of advisers writing annuity for the first time with us, so it's the first time in the last 24 months. And that is allowing -- sorry, 12 months, and that gives us a really good platform to work with those advisers to write more business and become multi-writers, and that momentum, we take into this year. So we don't -- we feel very good about retail annuity sales for FY '24.

And just on the institutional side, great to see the Aware contract coming through. And I know the sort of that bulk business on the DB side is going to be very lumpy, but you seem fairly confident on the opportunities ahead of you. How do you approach that from a guidance point of view? Do you assume you're going to have any success through the course of '24? Or is that upside or risk to the midpoint?

It's definitely upside. So it is episodic. We work very hard to build the relationships, and this will be across not just funds but also the sponsors, the corporate sponsors of these plans in many cases, and building those relationships takes a period of time. What the Aware Super -- and this was a very contested process. This was not Challenger as a party of one in those discussions. We were able to demonstrate a clear leadership position relative to other parties in that transaction. And that is a real calling card for us, with other large schemes that are in market right now. The environment is good because none of them are really well funded and on the basis that they'd rather not have this risk because it doesn't match their business model, but it works for us than the opportunities we see as really prospective. So there is a pipeline, and you can rest assured we're working as a team, very, very hard to land more of these.

Andrei Stadnik from Morgan Stanley. Can I ask my first question around the dividend? You're reducing the dividend payout range. At the same time, you flagged that you actually have more diversity within your capital base, you have more flexibility within your capital base. And you're also trying to tilt the business mix towards more stable earnings. So then why the cut in the dividend range?

Okay. Thank you. Yes. Thanks, Andrei, for the question. So our dividend range of 45% to 50% was a tight range. And what we've done here is extend the range. What we haven't said is an expectation of where we are in that range. It is set to our guidance, and we are in a strong growth period. And the momentum we take from FY '23 to FY '24 in terms of remix sales, longer-dated business, we are a balance sheet business, and we do require capital to drive profitability. But to be really clear, the decision around the use of capital will be taken through the ROE lens and the shareholder lens. And to the extent we can deliver and drive returns in excess of our ROE, then that is -- that could be efficient use of capital. To the extent we can't, we will return it. And that -- this just gives us optionality to grow the dividend to decelerate the growth or, at times, to take some of that retained earnings for capital growth in the balance sheet.

My second question, I wanted to ask around the Apollo joint venture. Can you tell us a little bit more about like some of the products coming to market and how long will it take for those more capital-light products to actually -- and making meaningful impact on lightening the capital mix of the business?

Yes. Thanks, Andrei. I'll just break up the sort of initiatives with Apollo into a couple of buckets here. One is that there's a lending joint venture partnership where the team are looking at different nonbank lending platforms. We are a really large originator ourselves of lending to support the balance sheet in Challenger Investment Management. That is -- that would be an extension to what we have today. There is no new news around that, but the teams are looking at different opportunities. We'll continue to do so. Then I think about the other, Apollo is a leading investor in credit globally, and their capability to produce very attractive risk-adjusted returns is something that for our investment team is an area of interest. And so the team -- we've had a team in New York recently, and there's a lot of discussions around different investment opportunities that will support the Challenger Life balance sheet, okay? So that can -- I made the comment about that could be private equity, it could be alternatives, it could be credit. And we've already started on private equity, and the team are working on those other opportunities. With the Apollo AAA, which is the product, if you like, the Apollo AAA is their flagship global alternatives capability. It is a USD 20-plus billion pool of diversified alternatives that we will have exclusivity to in the domestic market here. And this is where we're seeing enormous growth across whether it be the high end of the retail or high-net wealth market or in family offices through to institutions and demand for these uncorrelated private market assets. And so that will come -- that's going to be in market over the next month. And the teams have already been out premarketing. We've had teams down from Apollo in the field with our distribution teams. And there's a really strong sense of excitement in the business around bringing that into market and the opportunities to open up new doors. So there's a number of parts to that relationship. And I think what's really pleasing is that we're finding ways to work together that are really meaningful for the Challenger business and for our shareholders.

We'll go to Scott -- or Scott first then go to Anthony. Did you have a -- so Anthony.

Anthony Hoo at CLSA. Can I follow up on an earlier question around annuity sales? As you go towards end of the year, Q4 annuity sales slowed across most categories, except for lifetime. I'm just wondering, is that no more reflection of market dynamics, increasing competition around term deposits and short-term, and hence, you kind of push towards the longer end? Or is it really a conscious decision on your part to -- as you talk about shifting the shape of your book -- the tenor of your book?

Yes. We definitely have a priority on raising lifetime monies. That is a key focus of our distribution team. In the 2-plus though, what you can't see is the 3 to 5 and some of the strong growth that we've been getting in that part in the adviser channel. So whilst the number it's -- I mean they move around, and there's been always a little bit of movement depending on activity in market and the busyness of advisers, et cetera. But I wouldn't read too much into those volumes. At the short end, we definitely -- we're definitely not trying to focus the sales team at 1-year -- that 1-year business. We're trying to get all the attention and focus around the 2-plus. Now clearly, at different points, you have the rate. The curve has been moving around. And if you look at our pricing over the last 3 to 6 months, you can see that effect. And so you've got reasonably flat pricing out at 2 to 5 years. So the team adjust how they position that sales story to market. But it's -- if there is very strong momentum, a lot of focus on that lifetime sales. We're talking about bringing annuities in platform with Netwealth, opens up a huge amount of advisers, client monies, which today we couldn't access. So that conversation also moves as well for us. So there's -- I don't want you to hear from us that there is some great deceleration in sales happening on the retail book. That's not what's coming through.

And just a question just on your dividend payout ratio. I recognize your comments earlier around flexibility and your desire to invest capital from an ROE lens. I'm just wondering, can you talk a bit more about how do we interpret your -- the change in your dividend payout ratio? It doesn't mean really in the short term, in the next couple of years we should be expecting towards the lower end of that new range, 30% to 50%. Is that how we take it?

No. I mean that's not what is being signaled today. So we've come in at the bottom end of the range, 45% to 50%. And we are expecting strong growth in earnings over this next 12 months and is a range that will clearly go with those earnings. It is about providing us capital flexibility. And when we talk about the need for capital, it is only where there is very strong growth that we -- where the capital position we have today and the investment opportunities line up to use that capital. So we're very clear that to the extent that it decelerates or it doesn't increase, that is because there are opportunities that are directly ROE-accretive to the Challenger business, and it's an effective use of shareholder capital. But that is the lens through which the Board will ultimately make the decision around the dividend.

I think just to add to that, we're just trying to make sure that we've got as many capital options as possible. As Nick talked about before, the Life company is a capital-intensive business. We've got $40 million sitting in the bank, which we hope to get back when that closes. The widening of the dividend payout ratio gives us optionality to potentially use that if we think that there are things that will be ROE-accretive for shareholders. And we've got the asset allocation on the balance sheet, too. So just making sure that we're giving ourselves the maximum optionality with regards to capital.

We might take some questions from the telephone now. Operator, can we go to the first call? Thanks.

[Operator Instructions] Your first question comes from Matt Dunger with Bank of America.

If I could just ask first on the guidance. Can you talk about to what extent you're factoring in some of these partnerships you called out, Telstra, Netwealth and others, into guidance for net book growth? And what's the margin and ROE on these should we consider these similar to the back book?

Thank you. So the guidance is built up clearly for our expectations of sales, and our expectation sales will be adjusted based on the partnerships. I mean they'll be, to be clear, entering a partnership with the superannuation funds about building flow over time. That will take time to come on, but it will become a steady contribution to lifetime sales. Netwealth, we believe there is strong interest and good excitement around that initiative on the platform there. So that will feed into term sales through the year. So we take a view on retail sales and institutional sales clearly more broadly when we're thinking about guidance. All of the business is priced to meet our ROE. So that is absolutely a definitive part of how we think about setting up guidance for this year. So those partnerships are subsidiary factored in through our sales, what we think our sales plan looks like. Do you want...

No, that's good.

If I could just ask a follow-up on costs. And noting a step-up in FTEs in the half, are you able to talk about where those FTEs have gone? Does that include these 2 factors you've called out around the step-up in costs? Or is there more FTE increases to come?

Thanks for the question, Matt. So the cost-to-income ratio in FY '23 was 37.7%. What we're moving to is guidance around the cost to income target going forward, with the range being lower than that, so 35% to 37% for next year. And this is a transition year. So I hope to be able to lower that range in future. I did talk today about needing some extra FTE in the investment administration business, Artega. So those have come online in FY '23. And so we have built into our guidance and that cost-to-income ratio -- the full year impact of those FTE. But other than the investment in the technology uplift for Artega, we're not calling out a big increase in FTE anywhere else.

Your next question comes from Nigel Pittaway with Citi.

Just first of all, just thinking about COE for next year. I mean aside from the increase in interest rates on the shareholder capital and, obviously, the flow through the impact of the change in asset mix on normalized capital growth, is there anything else we should be thinking of as key drivers in terms of that COE margin into '24?

Thanks for the question, Nigel. So just as a reminder for everyone, we have seen the COE margin tick up. So finishing the year at 2.82%. The second half is even higher at 2.88%. You're right, that seasoning of the interest rate is something that we will continue to see come through. There also continues to be a drag in the interest expense line from the higher sub debt costs. So that's worth about 4 basis points in FY '23, and that persists into FY '24. So those are probably 2 other things to call out.

But otherwise, you'd be expecting margin expansion because you're writing longer-dated sales, isn't it? [indiscernible]

That's right, Nigel. The business that we're writing today is very much accretive to our COE margin.

Okay. Second question then is on asset risk. Obviously, you've had to take the mark on the property in this period. Presumably, you're expecting to have to take more next year. And then also on fixed income [ and ] charges, I was just wondering whether those 2 entities are still paying that [indiscernible] and if there's any amount of fixed income growth moving forward.

Okay. Well, I might make a start on that Nigel, and then Alex can build on it. So what we have done -- what we did at Investor Day was provide a bit of sensitivity around capital to any revaluation of the property book, and we used a 5% assumption. As it was, that's what came in, but it's very much barbelled. And I think that the -- underlying that revaluation, there's a very strong story, the defensive nature of that property portfolio. So half of that book is office, and half of that is multi-tenanted office, which is where you've seen the double-digit -- cap widening of the double-digit reduction in value in those assets and most of the cap widening. What we -- in the single tenanted office, which for us is government-tenanted, they've had a very different experience. And then the retail book, where we probably took the marks through COVID, that was just down slightly. Industrial was up, and Japan was there or there about was flat. So in the whole piece, we've seen significant revaluation in the office portfolio, a multi-tenanted, but the rest of the book is proving very resilient. And as Alex noted in her comments, leasing rates were 93%. And we're pretty pleased with some of the early activity that we're seeing around the Elanor relationship and opportunities around those assets that we have. And I remember saying at the half that one of the ways to meet the cap rate expansions is to make sure we're running our assets as efficiently and effectively as possible and maximizing the rental income across there and those very pleasing early signs there. So we did revalue the whole book at this half, and as to what happens in the future, well, time will tell, but we definitely took significant marks on that on the multi-tenanted office portfolio. And on fixed income in the first half, we did call out 2 names that we had provided for but, in the second half, saw quite a different experience across the book. So blended for the year, it was 22 basis points. We had a 35-basis-point allowance in the normalized framework for credit losses. And those 2 are not paying their coupons. But similarly, we have a strong experience in recoveries as well. So the team will work now to seek recoveries around those names. Do you want to add anything to that?

I was just going to say that what we have tried to do with the property portfolio at this half is give the market some comfort around those valuations. So ordinarily, we would have only externally revalued 50% of the book. That's our policy, but we revalued the whole portfolio to have independent valuations. So we're really comfortable with how that's performed and the diversification, as Nick said, particularly with having so many of our buildings tenanted by very sticky government tenants and means that our portfolio is performing well. And Nick's right, so the coupons are no longer being collected on those 2 fixed-income instruments that are in default. But we have a very strong track record of recoveries. And in total, we're talking about 22 basis points for the year, which is below our 35 allowance.

And then maybe just finally, I mean, just in terms of the sort of online sales. I mean obviously, the risk of doing that is always that you sort of end up with channel conflict issues. So can you just sort of make a few comments to that, how you intend to manage that moving forward?

Yes, thanks. Nigel, what we're working on across the whole business is simplifying and making it easier to do business. So we get better adviser experiences as much as we make available an opportunity in a new channel. It is worth noting that 85% of Australians don't receive financial advice today. And we have an extremely close relationship with the financial advice community, and we invest significantly to support making it easier to do business with us. So we don't foresee channel conflict. And in many ways, it's not dissimilar to the personal investment decision around the term deposit that people might make from time to time. So there's a large part of the population which isn't being served with advice, and that's the part of the market where the marketing that we're doing will resonate.

Your next question comes from Lafitani Sotiriou with MST Financial.

Can I follow up with the ROE guidance? And in particular, is it possible to try and isolate the timing, the benefit of the cash rate change? So out of the 4% increase in the cash flow that we've seen, how much fall in financial year '23 as a percentage? How much is falling in financial year '24? And how much do you have still good impact in the -- following this guidance period, isolating out your [ organic ] earning?

Thanks for the question, Laf. I think the best way to look at the ROE impact from interest rates is really to look at the Life ROE. And so in seeing the 200-basis-point improvement in the Life ROE, that gives you a sense of how quickly the cash rate has been able to be reflected. But the ROE does represent the return on the entire book as a whole. And so our fixed income portfolio has about just under a 3-year duration. So that's an indicator of thinking about how long it will take for the entire book to turnover on the fixed income book. So I would say we have seen a material amount of that interest rate come through, but there's definitely some more to come.

And I think, Laf, to add to that, we've also just been talking about the property book and the rent roll-down. That's clearly an important part of the income that we receive on the Life company balance sheet. And we're really focused on making sure that we're maximizing that. About 72, I think, it is percent, of the leases we have do have some sort of annual escalator in them, but it's really only a point of redoing the whole lease that you're going to get the complete benefit of the inflation impact that you're seeing in rents across the market corresponding to higher interest rates. So when we talk about it taking time, that's the practical impact from running the balance sheet.

So just kind of the -- because some of the numbers aren't quite adding up, but I think there's been a lot of questions around this. And so if we just take and peel it back, just one layout, before interest rates started to move, your pretax profit was $472 million. Now if you based on your ROE guidance, interest rates moving to 4% should add $160 million pretax profit. And if you add that on, you get the $632 million pretax profit just from the interest rate impact based on your guidance, right? And so again, if you roll that forward by another year, that kind of implies 8% growth just from interest rate impact. It kind of -- something's missing because you've got maturities, improving -- you've got organic growth, you have the Life company. And the Funds Management business is also set to improve this financial year. It just doesn't quite seem that outside of the interest rate impact pace that you're getting organic growth, or the numbers just aren't adding up to what you put on the table and put out into the market. I am just having trouble trying to understand why the guide for financial this year is so weak based on the ROE and the anticipated timing of the interest rate impact.

Thanks, Laf. It might be that we take some of this off-line with you just to show you the mechanics of the various parts. Part of the issue in comparing year-on-year from a group perspective is we have had different composition to the earnings over time. For the last couple of years, we've had a drag from the bank from a group perspective, which won't persist hopefully much into FY '24. And that relative contribution from the FM business has changed over that time, too. But we're really confident in the Life ROE expanding as we expect, particularly on the fixed interest -- fixed income side of things. And as Nick said, some of the other components take a little bit longer, but we're very happy to work through that matter with you off-line.

Look, I understand that, but if you look at the bank is not going to be in FY '24 earnings, right? So something is still not adding up in how you're setting your guidance. So it's almost like you're taking a free kick on the interest rate movement and investing in -- or say, conservative clients. So what are we seeing otherwise because you're very getting that benefit from interest rates and what you've currently set in the market, what you achieved last year and what you said to achieve next year?

I think one of the things to think about is that, that interest rate impact, we pass on most of that to our customers through the interest expense. So you need to look at both the yield side as well as the interest expense and thinking about the expansion of that product cash margin.

Sorry. So your own ROE guidance. You've just reiterated today, which is 12%, right?

12.7%.

12.7%.

Yes, you're still confident in achieving that. So we should expect to continue to see it come through. And of course, it's showing up already in the net COE spread. So what's not adding up? Like, if -- you should be doing a better impact based on your own guidance. You run the numbers yourself. Even if you roll it out to a third year, you're still not going to get there just from the interest rate impact. So what are you missing? Like I understand there's some timing benefit, but in the past, you said 2/3 of it tends to come in the first year and 1/3 comes a year after. And now we're kind of hearing that it takes 3 years to roll through. I mean which is like we're trying to understand your own ROE guidance that you put in the market and, in particular, the cash rate impact and the timing of that. And I'm still confused as I was previously, and you don't tend be able to clarify the timing and what the key driving factors are.

Yes. So I think -- I mean just to start off and then Alex can pick up. I mean you've seen the benefit of the cash rate expanding through the shareholder funds, but clearly, not the whole portfolio is floating rate. And I've just spoken about the other elements in the time frame will come through, which is not 1 year after -- which is not in the following years. So that will just take time to come through. But I must [indiscernible] on -- without looking at the maths that you're doing, I need to take this off-line.

We will track it [ today ].

Okay. All right. But the [ clean ] numbers are [ $60 million ] plus [ insurance ] guidance.

Yes. I mean to make sure, I mean, we want this business to meet its ROE target, and we are working extremely hard to drive a better mix of sales in the business coming out of an ultra-low rate environment where spreads were tight, doing reinvestment activity, repositioning the portfolio. So we are very focused on getting this business to its ROE. Alex has noted the drags that we've seen from the bank that will fall out, the lower relative contribution from Funds Management. The Life company is a business that does well at scale, and the book growth that we're getting, whilst it might not be the double-digit that we had last year, is of the right shape. The 5% book growth plus that we've seen in FY '23 is longer-duration business. And if you look at just the -- and I'm sort of deviating off topic, if it does all come into how we position the business to be invested. So the investment program is not concentrated around shorter-dated liabilities where the opportunity to earn strong returns is more limited. It's moving out the duration where we can -- it's more natural, we can -- for us, and we can invest where we can capture the liquidity premium. So we are cycling out of this very low-rate environment and remixing the book of business, which will change the investment program to support that over time, but it will take time. And the benefit of higher rates we're seeing through shareholders' funds. But the overall benefit to -- from the asset yield side, as I've noted and Alex noted, will just take more time to come through the book, which is bit -- so I was questioned about the lag effect that you get given the floating rate ROE target and how quickly we can achieve it.

The next question comes from Julian Braganza with Goldman Sachs.

Just an initial question with the property portfolio. So just in terms of that -- the revaluation, do you still expect to revalue them [ before May ] or on a half yearly basis, 50% each half year? And also secondly, are you still expecting to reduce your property exposure for FY '24?

Yes. Well, let me make a start now, and Julian, so the property allocation we have over the last 3 years has been a net seller of properties. And so we're not making any -- we're unlikely to be an acquirer at this stage. So you will, as the book continues to grow, see the weight, which today is down to 13%. It's down a couple of points over the last few years. So that is reducing in the -- as a percentage of the overall portfolio. We took the decision, which was very prudent to revalue 100% of the properties externally. Typically, where we only do 50% each half, we then take the external data points and apply that using an internal methodology. So we would have got to the same outcome, but we wanted that to be full transparency on the pricing of those assets. So we'll wait and see how transactions move through the course of this year, and we'll make a decision near 31 December about whether or not we revalue the whole portfolio or we go back to policy.

Yes. No, that's right. So we're certainly not changing our internal policy about revaluing them every 6 months. The intention was to give some confidence this time by providing external valuations, so there is a cost to that. So I think it will be more prudent to continue to do it every 6 months, unless we see a lot of movements in the market. So if you have a lot of, actually, transactions, then that gives the external valuers more data points in their valuations. And so we would reconsider that. And if we do choose to do it again, we'll absolutely let you know.

Okay. And then in terms of just the ROE by division, I believe you made a comment on the business [ price ] to meet ROE targets. I guess put another way, if you look at all the new channels that you're looking develop and growth points, you particularly defined benefits and you needing super and [indiscernible] maybe. Put another way, and if you had incremental [ individual ] capital, what's the order of priority you would to grow into first from a capital perspective?

Thank you. Well, I'll make a comment, and then I'll ask Alex to add to it. We're very deliberate right now in focusing on the remix of the Life sales. So there's -- a number of things you'll see in this result is that where in the past, we've been solely reliant or very heavily reliant on retail for lifetime sales. We're now building out lifetime sales from institutional from both the significant bulk transactions, the DB buy-ins, plus also the flow partnerships. That is longer-dated business, and it is more capital-intensive, if you want to take that approach from an investment program perspective. And it's where -- if we -- where we can earn higher ROEs on that incremental dollar. So that's the focus of our capital right now. We continue to invest into Funds Management's capital-light business. We have in this period -- and Alex has noted. It had some high costs through this period coming through and relating to volumes and the cost of delivering transactions through that part of the business. But we're absolutely confident that we will be able to return that business to -- back to the sort of ROEs that we were earning in the last couple of years in the high 20s over these coming -- just over the medium term. And so the approach to investing there, we have been investing into the core investment operations platform, which Alex has called out, which is about automating some processes, which right now are manual and regulatory-related processes without going to complication. And that is a focus. We're putting a bit of cost in to take out cost and operating costs on that side of the business. The incremental capital that we've deployed into some of the new partnerships, a lot of it just builds on our own cost base, things like AAA. But then with Proterra, we've made a direct investment into that business of a lot of size to take a stake. So right now, we need a very strong growth in the Life company, and that's a priority for us to support that long-term -- that longer-dated down book growth that we're achieving. Would you like to add anything, Alex?

I was just going to say, it's not a sort of a binary decision in terms of that capital allocation. We run a balance sheet that is diversified and has a mixture of durations, and we match those assets and liabilities to each other. At the moment, what we've talked about is wanting to extend the duration of our liabilities, which is something we will look to continue to do. And that enables us to open up the investment universe in terms of the assets that we can invest those in. But that comes at a capital intensity cost. And so there needs to be an ongoing balance.

Okay. Great. And then just last question in terms of just the guidance range. I know it's touched on a little bit before, but just the upper end of your guidance range, what will it take for you to get there? And is it largely an outworking of book growth expectations that could eventuate over the next 12 months?

Book growth, well, in terms of setting the guidance range, we've maintained our $50 million range to give us some flexibility. And as we continue to grow our profits, that range becomes a smaller percentage of our overall earnings as one observation. The midpoint gets us 11%, and that's on what we know in front of us. And as we've said many times, we'll keep the market updated through the year if we think we're going to outperform that, which is what you're asking. But clearly, driving higher cash operating earnings, you have a Life company, a better environment for the Funds Management business, their direct inputs into what would take us above that -- to the upper end of that range.

There are no further questions at this time. I'll now hand back to Mark Chen.

We've received one question online, and I think just conscious of time, I'll just ask it, and then we'll finish it up there. So the question is just in regards to the product cash margin, whether we can do anything particularly around pricing to improve that.

So thanks for the question. So mathematically, absolutely, if we're tighter on our interest expense, that will drive a higher cash margin. But I think what's really important is that we do need to balance the customer proposition. And we pass on the benefit of interest rates, if you like, to our customers, and that's a really important part of what we're offering to customers. So we will seek at the longer duration sales to be able to get a little bit more benefit on the interest expense, but it's -- driving those asset yields is just as important.

Excellent. There's no further questions. That closes today's briefing. Both Irene and I are on the phones today should you have any questions. Thanks for your interest in Challenger and talk soon.