Challenger Limited (CGF) Earnings Call Transcript & Summary

Good morning. Thank you for joining us today for our 2023 Annual General Meeting. On behalf of the Board, I would 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. My name is Duncan West, and I am the Chair of your company, Challenger Limited and the Chair of today's meeting. It is now 9:30 a.m., and I'm advised by the Company's Secretary that there is a quorum present, and I would like to declare this morning's meeting open. The minutes of the previous meeting of the shareholders of Challenger Limited, which was the Annual General Meeting held on the 27th of October 2022, were approved by the Board and signed by me as Chair of your company and are tabled today for the information of shareholders. Today's meeting will be recorded, and the recording will be available to view shortly after the AGM. For those of you present in person as a courtesy to your fellow attendees, please ensure that your mobile phone is turned to silent. Before we commence the formal aspect of today's meeting, I would like to introduce the members of your Board, starting with my immediate right. Managing Director and Chief Executive Officer, Nick Hamilton. Our nonexecutive directors, Melanie Willis, Masahiko Kobayashi, John Green, JoAnne Stephenson, Heather Smith and Steven Gregg. We also have with us Graeme McKenzie, who is partner of Ernst & Young, the company's auditor. In the front row are members of Challenger's executive team. They include Alex Bell, Challenger's Chief Financial Officer; Anton Kapel, Chief Executive, Life and Solutions. Mandy Mannix, Chief Executive, Customer; Stuart Kingham, Chief Commercial Officer; Tony Bofinger, Chief Risk Officer; Louise Roche, Chief Human Resources Officer; Chris Plater, the Challenger and Apollo Joint Venture Chief Executive Officer; and Kate Ingwersen, Chief Executive, Technology. We are also joined by Challenger's Company Secretary, Linda Matthews; General Counsel, Aron Rattew; and General Manager of Investor Relations, Mark Chen. There are 3 major components of this meeting. Firstly, I would like to provide an update on your company and our performance over the past year. Then I will hand over to Nick, who will provide an overview of Challenger's progress in its strategy and future plans. We will then move to the formal items of business for this meeting. You will have an opportunity to hear from Melanie Willis and myself as we seek reelection today. We will be opening the floor to questions on our business and the resolutions to be considered later in today's meeting. Voting on each resolution will be conducted for those of you in attendance, in person by poll via your smartphones or the voting card you received when you entered the meeting. For those attending online, voting will take place via the online meeting portal. I will now explain the procedures for asking questions and voting in today's meeting. For those of you attending in person, to ask a question, please approach the microphone in the room when instructed later in the meeting. And at the appropriate time, you will be invited to ask your question. For those of you attending online, you can submit questions at any time, and you do not need to wait until the relevant item of business. We encourage you to submit your questions as soon as possible. For online participants, to ask a question, shareholders and appointed proxies can submit questions either in writing or verbally. To submit a question in writing, shareholders and proxies should firstly select the Q&A icon on your screen, then select the topic your question relates to, then type your question into the chat box at the bottom of the screen and press send. To ask a verbal question, please follow the instructions on the online meeting platform. Please keep your questions relevant to the business of the meeting and the resolutions being considered today. Questions sent via the online meeting platform will be moderated to avoid repetition, and if questions are lengthy, we may need to summarize them in the interests of time. For those attending the meeting in person, if you are eligible to vote, you can scan the QR code on your blue attendance card with your mobile device at any time. This will take you to our terms and conditions page and want to accept the terms and conditions to an online voting page. For those participating online, if you are entitled to vote, you can select the vote icon, and the voting options will display on the screen. For those using the QR code and those online, to cast your vote, simply select one of the options for each item of business. There is no need to hit a submit or enter button as your vote is automatically recorded. You will receive a vote confirmation notification on your screen. For any person voting using their mobile device or voting online, if you change your mind, simply select a new option by tapping it on the screen. Your original vote will be canceled and your new selection will be counted. For those attending in person who do not have a mobile device, you may complete the voting items on the reverse side of the blue attendance card and the Computershare team will collect these prior to the close of voting at the end of the meeting. I understand that all shareholders may not be able to stay for the entire meeting, so I will declare the poll open now. This means you can vote on all items of business at any time until I declare the poll closed at the end of the meeting. I will give you a warning before I close the voting, and results of all items of business will be notified to the Australian Securities Exchange as soon as practicable after today's meeting. The Board recommends that shareholders vote in favor of all items of business. Further details of the items are set out in the Notice of Meeting. For those joining us online, if you experience any technical difficulties, the help line number is displayed at the bottom of the page where you enter your log-in details. At the conclusion of the meeting, we would like to invite those attending in person to join the directors and the executive team for refreshments in the foyer. Now turning to my address. Challenger has exceptional opportunity to live our purpose and improve the financial outcomes of Australian retirees. It is an enormous privilege to have commenced as chair at such an important time for our organization. Your Board and management are committed to ensuring that Challenger delivers on this opportunity and its growth potential and importantly, drives value for you, our shareholders. 2023 was a pivotal year for our industry as Australia's demographic, economic and policy shifts converged to highlight the real need and opportunity to create a retirement income system on a par with our savings system. Australians are retiring in record numbers, and this is projected to increase to over 7 million by 2050. A strong policy focus on the accumulation phase has helped our superannuation system grow into the world's largest pool of pension assets relative to the size of our economy. This positions us well for the growing retirement phase. At the same time, the normalization of interest rates over the last 18 months has been welcome news for retirees savings. Retirees are, however, rightly concerned about the impact of rising inflation. They have already lived through periods of high inflation and are very aware of the negative consequences that inflation has on savings and living standards, which is a key risk through their retirement. As a country, we are only just beginning to focus on the importance of providing income in retirement, but recent policy reform is encouraging. The Retirement Income Covenant is a positive first step, requiring superannuation funds to develop a retirement income strategy for their members. It is encouraging to see APRA taking an active role in ensuring its effective implementation. The Quality of the Advice Review released earlier this year highlighted the challenges in accessing affordable, quality advice. And plans to legislate the Objective of Super will increase focus on the delivery of retirement income throughout retirement. These reforms are each meaningful, but what's even more valuable is their collective effect, with each a critical ingredient in further developing Australia's retirement income system. Collaboration across government, regulators and the industry will be key to the success of these reforms. At Challenger, we look forward to playing our part in helping to develop a system that provides retirees with financial security and peace of mind. Turning now to our financial results. Challenger made significant progress in executing our strategy reflected in our strong performance in 2023. Normalized net profit before tax was $521 million, an increase of 10% on the previous year and in the top half of our guidance range. Statutory net profit after tax increased by 13% to $288 million driven by a normalized earnings growth. Growth across Life sales was particularly pleasing. The business delivered record annuity sales with exceptional growth across retail sales as Challenger met retirees growing demand for guaranteed income. Our business is very well capitalized and reflecting Challenger's strong financial performance. The Board determined a full year dividend of $0.24 per share, an increase of 4% on last year. The result will give shareholders further confidence in Challenger and the significant growth opportunity for our business in Australia's growing retirement income market. The Board is acutely aware of the dynamic and rapidly changing environment that our business operates in and the risks and opportunities that come with it. The financial services industry has undergone significant regulatory reform in recent years. Effective regulation is critical to protect customers and promote safety in the system, and must be balanced with the importance of driving productivity and fostering innovation. Cybersecurity is a risk that's front of mind for businesses, customers and society more broadly. Protecting the information of our customers, people and organization is our priority. And this year, Challenger continued to strengthen its cybersecurity capabilities. To maintain strong corporate governance, it's critical that we have the right people and practices in place. Our capable and diverse directors bring a compelling mix of skills to oversee our business, including governance, risk, strategy and customer. Today, the directors standing for reelection are Melanie Willis and myself. Melanie is a valued and dedicated director, who brings a wealth of expertise and knowledge, and she has the full support of the Board in seeking reelection. You will have the opportunity to hear directly from Melanie a little later in the meeting. As outlined in the Notice of Meeting, Steven Gregg will retire at today's AGM. On behalf of the Board and the team at Challenger, I would like to thank Steven for his significant contribution to our business over more than a decade. Throughout his tenure, his insights and experience have been highly valued, and we wish him all the best in his future endeavors. We expect to provide an update on Board renewal shortly, as we continue to balance stability and new perspectives with a strong mix of experience and industry knowledge across our Board. Sustainability is a key focus for Challenger and our Board. It's important for the long-term success of our business and reflects the responsibility we have to shareholders, customers, employees and the community more broadly. In 2023, we continue to embed environmental, social and governance considerations into our strategy, decision-making and risk management approach. Our staged approach is driven by the rapidly evolving expectations and critically, the availability of quality data to deliver tangible and meaningful insights. Our ESG review during the year informed our immediate work program and identified areas where we will focus our efforts over the next 12 to 24 months, particularly climate-related risks and opportunities. Moving to our people. Both the Board and management are passionate about building a high-performing, diverse and inclusive workforce. In 2023, we achieved or exceeded our targets for women at Board level, on the leadership team and across all roles. We continued to be a Workplace Gender Equality Agency Employer of Choice citation holder. This recognizes our work to improve gender equality across leadership, gender pay and driving change beyond the workforce. Challenger is fundamentally a people business, employing highly skilled people with culture key to our long-term success. From 2024, culture will be included as the key nonfinancial measure in our long-term incentive plan. This reflects our commitment to building an innovative, collaborative and growth-focused culture and will help ensure we continue to recruit, retain and inspire a talented workforce. Reflecting on my first year as Chair, I am pleased with what we have achieved. We have delivered a strong performance with significant progress in executing our multiyear strategy that positions our business to meet a broader range of customer needs. The strength of our business, combined with supportive tailwinds, ensures that Challenger is well positioned for the future, and I am confident in our ability to deliver sustainable growth for our shareholders. In closing, thank you to everyone who has contributed to Challenger's success this year, to our customers for trusting us to provide them with financial security. To Nick, the leadership team and everyone at Challenger, thank you for your dedication, skill and hard work. To my fellow directors, for your commitment in guiding our business. And to our shareholders, for your ongoing confidence and support. I will now ask our CEO and Managing Director, Nick Hamilton, to address the meeting.

Good morning, everyone. It's a pleasure to update you on Challenger's performance, progress in executing our growth strategy and the significant opportunities ahead. Our business is extremely well positioned to benefit from a number of structural tailwinds and our purpose to provide customers with financial security for a better retirement feels as relevant as ever. Australians are retiring in greater numbers and living longer, yet financial uncertainty at retirement is only worsening. Recent research by Challenger and the National Seniors found that the majority of older Australians are increasingly concerned about the cost of living. For most, this means cutting back on their spending, or effectively under retiring and living more frugally than they need to. Providing retirees with the confidence to draw down their savings can materially improve their quality of life as well as benefiting broader society. And looking at the experience of those here and overseas who predominantly live off their savings, there is a strong link between having part of your savings and guaranteed income, and the confidence this provides to spend in retirement. This is where we see a significant opportunity for Challenger to play a very meaningful role, supported by the economic, regulatory and demographic shifts that Duncan and I have outlined. Earlier this year, we provided an update on our corporate strategy. Our plan is built around our customers and focuses on driving growth, broadening our reach and leveraging our leading position in retirement income. I'm pleased to report that we have executed a range of initiatives that will help us take a broader stance in retirement and play a more meaningful role in our customers' lives. We have expanded into new and emerging channels to broaden our customer base. Our suite of products has evolved to meet a wider range of customer needs. And we've progressed strategic partnerships to enhance our long-term growth. There is great momentum across our business, and we're focused on delivering long-term sustainable shareholder value. At Challenger, our 2 complementary businesses, Life and Funds Management, turn our purpose into meaningful outcomes. Over the last 30 years, our Life business has built a leadership position in guaranteed retirement income. In that time, we've continued to adapt and expand our offering. Today, we offer customers a range of payment options that can be fixed, indexed to inflation or the cash rate or linked to the returns of investment markets. Last year, we made around $6 billion in guaranteed payments to customers, providing them with the security to spend their savings as they choose. Funds Management is one of Australia's largest active fund managers. As a leading investment and multi-affiliate platform, we provide clients with access to a broad catalog of highly regarded investment products. Together, Life and Funds Management form a unique and complementary business that is a leader in savings and retirement income. Underpinning our business is a very talented and motivated team, driven by a culture of innovation, growth and collaboration. I'm pleased to report the Challenger delivered strong financial outcomes this year as we focused on driving growth. We achieved record annuity sales, reflecting the certainty that guaranteed income provides. Our customer proposition is the most attractive in a decade, supported by great products and solutions and a normalization of interest rates. Today, a customer can receive a return of over 5% guaranteed per annum on an annuity. As I mentioned, we are the country's #1 retirement income brand, and we will continue to invest to maintain and leverage our leadership position. Earlier this month, we announced a brand partnership with PGA Australia, WPGA, and Golf Australia. With over 9 million golf fans in Australia and a sport of choice for the over 45s, this partnership provides an exciting opportunity to engage with our target market and build more awareness of Challenger. We've also taken significant steps to make it easier for customers, financial advisers and institutions to do business with us. For advisers, our fixed term annuities are now available in platform. This allows advised clients to invest both their superannuation savings and non-pension monies as well as improving the adviser experience. We see significant opportunity to partner with superannuation funds using our expertise to develop retirement income solutions to help meet their members' needs. This year, we secured 2 major retirement partnerships and have an exciting pipeline of opportunities ahead. In Funds Management, we continue to innovate and expand our offering, adding new investment strategies, particularly in alternative assets to meet growing client demand. Challenger has a proven track record of building successful strategic partnerships, leveraging their scale and expertise as we focus on our competitive advantages. Pleasingly, we've expanded our long-standing relationship with MS&AD, one of Japan's largest insurers. The product range that we support through reinsurance will now include Japanese yen-denominated annuities. It is a privilege to continue supporting MS&AD to help provide financial security to their customers. We're working closely with our significant shareholder and strategic partner, Apollo, a global alternative asset manager. Challenger and Apollo have also entered into a new distribution partnership under which Fidante now brings the Apollo Aligned Alternatives capability to Australia. As I outlined at last year's AGM, we made the strategic decision to sell the bank to Heartland to focus on our core strengths across Life and Funds Management. And the sale is currently going through regulatory approvals. This year, we have expanded our community engagement program, and the team and I are proud to support organizations that make such a positive impact on local communities. Our partnership with the Australian Academy of Technological Sciences and Engineering, ATSE, supports indigenous leadership in STEM and reflects our wider commitment to investing in knowledge and innovation. Members of the team and I are looking forward to celebrating innovators from across the country at ATSE's national award ceremony this evening. Our relationship with Women Up North began as a fundraising initiative following the devastating floods in Northern New South Wales. This has developed into a deeper long-term partnership, and we are pleased to support an organization that provides such vital community services. We are delighted to partner with FoodLab Sydney, a social enterprise that works with food entrepreneurs from high barrier backgrounds to build their businesses. Challenger is in great shape with momentum across our business as we meet the growing demand for our offering. The team has executed a range of strategic initiatives, broadening our distribution channels, expanding our product range and capturing the demand for guaranteed income products. Looking ahead, we will focus on growing our core retirement and investment businesses. And by leveraging our strategic advantages, we will take a broader stance in retirement. This will deliver strong outcomes for both our customers and shareholders. Thank you to our team who are proud to work for Challenger and go above and beyond for our customers. I would also like to thank Duncan for his strategic counsel and advice as Chair, and I look forward to continuing to work with him to deliver on Challenger's significant growth agenda. I will now hand back to Duncan.

Thank you, Nick. We will now detail each item of business to be considered at today's meeting. We will call for questions from shareholders for each item as it is read. If you are attending in person and would like to ask a question, we invite you to approach the microphone in the center of the room when I read the item of business relevant to your question. The Notice of Meeting and accompanied explanatory notes has been circulated to shareholders, and I propose to take them as read. As I get to each item of business, it will be shown on the screen together with the proxy results for that item. Where undirected proxies have been given in favor of the Chair for a resolution, I will vote these proxies in favor of each resolution as was indicated in the notice convening this meeting. The first item of business relates to Challenger's financial reports, and there is no resolution for this item. As I mentioned earlier, we have Graeme McKenzie from our external auditor, Ernst & Young, present at today's meeting. He will be able to answer any questions relating to the conduct of the audit, preparation and content of the auditors' report and accounting policies adopted by the company in preparation of the financial statements. Ernst & Young did not receive any written questions from shareholders prior to the meeting. Okay. I will ask for questions from the room for this item. Elizabeth, please come to the microphone, so everyone can hear.

Thank you, Mr. Chairman. Today, I represent the Australian Shareholders' Association. And I am holding 119 proxies, approximately $1 million shares. I wanted to ask you with regard to future plans and broadening the reach of Challenger. Who do you propose to broaden to at which areas?

Thank you, Elizabeth, and it's always good to see you here and to engage with you before the meeting. In terms of expansion, maybe the best way to answer that question is look at where we have already expanded in the course of this year. So two things I would call out as an example there, TelstraSuper, where we have a new arrangement for retirement income with TelstraSuper is a good example of new institutional customers and the Aware defined benefit de-risking transaction, which again was another example of ways that we have expanded both product and customer reach. We intend to continue to expand customer reach both in the direct space, the adviser space and through institutions. Thank you. Any other questions? Yes. Thank you.

Good morning, everyone, and there's always thank you for your time throughout the year and today. A couple of questions. If you can just -- you mentioned Aware Super and TelstraSuper. If you can just provide a bit more detail on that from the employees perspective, i.e., the Telstra employee or the member, how do they see a difference now in their retirement savings or products given your involvement?

Yes. I might -- I'll deal with the Aware Super and I might ask Nick to deal with the detail on Telstra. On Aware Super, they will see no difference because what Aware Super effectively done is buy a guaranteed income or annuity from Challenger that backs up the [indiscernible] payment that will go to the defined benefit members of Aware Super. So it's a transaction between Challenger and Aware Super. The individual retiree or a person at the end of that will see no difference. They'll just get their payment in the usual course. In terms of Telstra, maybe, Nick, do you want to answer that one?

Yes, I can say a few words. So TelstraSuper is one of the first super funds to develop a complete retirement strategy for its members. And so over the last 12, 18 months, it has spent time understanding its members' requirements, and it has built a number of retirement strategies for its members. A number of those retirement strategies include a Challenger annuity, which TelstraSuper themselves will issue that we will reinsure effectively or provide the annuity to them. So if you're a TelstraSuper member, you will receive financial advice, and your needs will be assessed, and a number of those retirees will receive advice to include a lifetime income stream issued by Telstra, which Challenger will be backing.

Okay. And one other question, if I could. You've mentioned your involvement in the Japanese business. So if you can just give a little bit more depth in terms of what that involves and the lessons learned or cross-cultural product awareness that we can either bring to their products or they can bring to our products.

Yes, very happy to deal with that. So we have 2 main products and about to launch a third product, which are where we reinsured Japanese annuities, either in Aussie dollars, U.S. dollars and soon to be in Japanese yen. And MSP reinsures those through, so they issue them and then reinsure them through to -- or a proportion of them through to Challenger. We've had -- and Kobayashi-san is on the Board here, we have a fantastic 2-way relationship with MSP and MS&AD, where we are learning all the time in terms of the way that different products are designed in different markets and different opportunities for us here and vice versa. So it's -- but the primary leadership in Japan is taken obviously by MSP as the primary issuer of the policies. Other questions? If there are no more questions in the room, Mark, are there any questions online?

There are no questions online.

And are there any verbal questions for those -- from those attending online?

There are no verbal questions.

Okay. Thank you. As the next item of business involves my reelection, I'm going to pass to JoAnne Stephenson to take this item of business.

Thanks, Duncan, and good morning, everybody. So the second item as Duncan has said, relates to the reelection of Duncan West and Melanie Willis, as nonexecutive directors of Challenger. You're going to hear from both Duncan and Melanie this morning, who will speak briefly on their proposed reelection. So can I first hand to Duncan.

Thanks, JoAnne. I'm afraid you got me back again, but anyway. So it's now my pleasure to speak with a slightly different focus to you today regarding my nomination for reelection to the Board. I was appointed to Challenger's Board in September 2018 and became Chair of the Board in October 2022 after last year's AGM and Peter Polson's retirement. I currently also serve as nonexecutive director on the Board of Suncorp Group Limited and Helia Group Limited. During my executive career, I was the Chief Executive Officer of Vero Insurance and CGU Insurance and an Executive General Manager of Insurance at MLC. In particular, I bring significant global experience in the financial services industry to the Challenger Board. Since I joined the Board and particularly in the last 12 months as Chair, I have looked to apply this knowledge and expertise combined with a long-term strategic focus and an inclusive and consultative style to assist, support and challenge management to drive -- in the drive to enhance shareholder value. I strongly believe in the purpose of Challenger to provide our customers with financial security for a better retirement. As I outlined earlier, this is now being seen as very relevant as the Australian superannuation system focuses on the growing need for retirement income, a need I believe that Challenger is uniquely positioned to meet. It is important to me that we realize the many opportunities for growth that this transition presents by providing solutions to our many customers whether retail or institutional. At the same time, we face a complex and volatile economic environment, and I hope to apply my experience and skill as we look to navigate this environment to the benefit of all stakeholders, especially you, our shareholders. I am optimistic about Challenger's future, and with your support, we'll continue to be committed to play my part to the benefit of all stakeholders. Thank you.

Thanks, Duncan. So can I go firstly if there any questions in the room? Can I get you to move to the microphone? Looks like no questions in the room. Mark, do we have written or verbal questions online?

Not in relation to this resolution. There are no questions online.

Thanks very much, Mark. So if I can ask you, our shareholders, to please cast your vote now if you haven't yet voted on this one. [Voting]

Thank you. So then the next item is really in relation to Melanie Willis' reelection. And so you'll hear from Melanie now.

Thank you, JoAnne. It's been an honor and privilege to serve you on the Board of Challenger since December 2017. I'm fully committed to continuing to work with the Board and the great leadership team in service of our purpose of providing customers with financial security for better retirement. As Chair of the Risk Committee and nonexecutive director, I have focused on ensuring that Challenger navigates key risks effectively notably financial, capital, strategic customer technology and cultural risk and more recently, reputation, cyber and ESG risks. I firmly believe that a comprehensive and well-managed risk strategy has been and will continue to be critical to Challenger's success. This will ensure that the business takes risks where it can drive superior risk-adjusted returns as well as mitigating noncore risks. As a member of the Board, I share Challenger's commitment to a comprehensive and holistic approach to resilience and risk management. Over the past 6 years, I have brought a range of skills to the Challenger Board, a deep understanding of strategy and innovation, particularly digital ecosystems and platform players where technology is helping to transform their customer experience, expertise in sharing and serving on risk committees including insurer QBE AusPac, PayPal Australia and PEXA. I have a strong understanding of the opportunities and challenges of risk, and the need for companies to deeply consider their strategic operational, financial and cultural risks, ensuring strong risk accountability and delivering risk-adjusted returns. Expertise in financial regulatory environment and investor and owner mindset from my time as Chief Investment Officer and CEO -- Chief Investment Officer at NRMA and CEO of Financial Services start-up and a long career in corporate finance. As a value-based leader, I recognize the commercial imperative for diversity and inclusion and how considering, respective of all shareholders can drive sustainable decision-making. I'm naturally curious and I'm passionate about continuing to strengthen my knowledge of changing consumer behavior and how technology can better -- to deliver better outcomes as well as the potential for risk to be a strategic competitive advantage. I look forward to continuing to work with the Challenger team to deliver on our purpose and support our customers with a range of innovative solutions across a broader range of channels as we make it easier to do business with us. I'm also energized by the opportunity to continue to evolve Challenger's risk management practices in an ever-changing environment, the demands, adaptability and resilience. Thank you for considering my reelection to the Challenger Board. Thanks, JoAnne.

Thanks, Melanie. So once again, can we go to questions in the room first? Yes, Elizabeth.

Thank you for question, Melanie. What is the risk that keeps you awake at night most?

Great question, Elizabeth.

It's a wonderful question. I think that there's a number of risks for Challenger that keep me awake at night. I think for all organizations in the last 12 months, cyber has been burning bright, and we've spent a lot of time uplifting our cyber skills and expertise and quality there. So cyber is definitely one. But I think at the heart of Challenger's investment and financial risk, and it's ensuring that as we sell more annuities, we're very clear on where we're investing that money, and we're getting diversified returns on that in terms of our investment portfolio and strategy, and we're off-laying risk like interest rate risk and ForEx risk are things that we don't want to take. So -- and ensuring that we have the right capital base that meets our regulatory requirements, but supports the assets that we're choosing to invest the diversified investment portfolio we're choosing to invest in.

And do you have a policy on nonrenewable assets?

In terms of...