Challenger Limited (CGF) Earnings Call Transcript & Summary

[Audio Gap] Chen, Challenger's General Manager of Investor Relations. We're coming to you today from 5 Martin Place in Sydney. Before we begin, 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 I pay my respect to the Elders past, present, and emerging. Today's presentation will be followed by a question-and-answer session. You can ask a question either in person via the room, via the online portal or the telephone. Today's presentation will be provided by our CEO, Nick Hamilton; and Chief Financial Officer, Alex Bell. I'll now pass over to Nick to get us underway.

Good morning, and thank you, Mark. So, today, as Mark noted, I'm joined by our CFO, Alex Bell, to deliver the 2024 full year result. So, Challenger recorded a very strong financial performance in the year, and I believe the result demonstrates that our strategy is delivering on the significant opportunity that we have as a business. Our focus on longer duration, higher quality Life sales is delivering a stronger financial performance. We're working with superannuation funds and wealth groups to develop retirement income partnerships. Funds Management has continued to expand its offering. The sale of the bank is now complete. The important investments in our technology platform that we announced in February will enable our growth plans, and our capital strength ensures the business' resilience and supports future growth. And we've delivered all of this in service of our purpose of providing customers with financial security for a better retirement. Today, Alex and I will cover the key drivers of our full year result, our outlook and our strategy to drive long-term sustainable growth. Our purpose sets us apart in the Australian market, and is at the core of our strategy. Over the past 12 months and consistent with selling the bank and focusing on our 2 core businesses, we have simplified our strategic pillars. Retirement leader, reflects our focus on building a strong and trusted brand, expanding what we deliver and who we partner with. We're able to deliver flexible solutions to meet the retirement needs across multiple customer channels, ensuring we play a role with more Australians saving for entering and through retirement. Investment excellence, across our balance sheet investment program, we leverage decades of liability-driven investment expertise, balance sheet management, and asset origination capability. And in our multi-affiliate platform, we are home to some of Australia's most trusted investment brands across public and private markets. All of this will be underpinned by our talented and committed team who have the skills and capability to meet the significant opportunity that we see ahead. In FY '24, we made significant progress against these pillars as we position Challenger as Australia's retirement income leader. We've developed partnerships with superannuation funds and some of Australia's leading wealth platforms. Our longstanding successful reinsurance relationship with Mitsui Sumitomo Primary has extended for a further 5 years, a measure of their confidence in our expertise and capability. Financial advice is core to how good retirement will be delivered. And this past year, we conducted over 230 road shows, workshops, and webinars that support advisers in delivering their clients' needs in retirement. This is in addition to the ongoing thought leadership and advocacy programs. We were very pleased to launch a new brand and marketing strategy that will enhance our brand and allow us to engage with more Australians preparing for and in retirement. Investment excellence is the engine of our business. We've continued to expand Funds Management, adding new investment strategies to meet growing client demand. We've also invested into our asset origination capability, building whole loan servicing and new asset origination flow partnerships, including our recent origination partnership with Apollo, which provides access to their global investment management capability to further support balance sheet returns and growth. The foundation of Challenger is our people and we've continued to invest in their growth and potential to deliver an environment that ensures great career opportunities and is an employer of choice for talent. Our technology partnership with Accenture is making good progress. The teams are focused on service delivery and the design and build of our new registry and customer technology for our retirement business. Our future [ state ] technology will enable us to integrate our retirement products and solutions across our key customer channels and deliver a more scalable and innovative platform which will bring operational benefits. FY '24 was undoubtedly a year of delivery for Challenger, demonstrated by the milestones we have achieved. Challenger is a unique business with a compelling growth strategy. A few words on how we're executing the refreshed strategy we laid out 2.5 years ago. We have invested to maintain our position as Australia's leading retirement income brand, including our brand sponsorship strategy, our engagement with financial advisers, and delivering simple solutions for complex problems with superannuation funds. In executing our strategy, we have further enhanced our sales and product mix, which is delivering more diversified revenue streams. Our focus on longer tenor, more valuable annuity sales are delivering lower maturity rates and longer duration book growth. This also allows us to invest in longer duration assets that can generate an illiquidity premium, which is supporting both a higher COE margin and a sustainable return on equity. At the same time, we are deepening our investment capability. In Challenger Investment Management, we've continued to invest and grow our leading private credit asset origination capability to deliver yield for the Life company and more broadly meet the growing demand for high-yielding income strategies. We have a balance sheet that has been significantly diversified and supports [Technical difficulty] sustainable through the cycle ROE. The strength of our capital position also ensures that we retain balance sheet resilience and capital for growth. As we look forward, we are delivering a platform that enables us to manage liabilities at scale, at the same time, as achieving greater efficiencies. I'm extremely pleased with our financial performance in FY '24. Group normalized net profit before tax increased to $608 million and was above the top end of our guidance range. Assets under management reached $127 billion as our leading active management capabilities delivered institutional net flows. Our Life business was the powerhouse of this result, with longer tenor term and Lifetime annuity sales contributing to high-quality Life sales of $9.1 billion. 88% of new business annuity sales were for terms of 2 years or more, compared to 50% 2 years ago when we started the sales remix strategy and new business tenor reached 8.5 years. Challenger Life holds 1.67x the minimum regulatory capital requirement. Our regulatory capital position reflects the benefits of diversifying strategies. The higher capital position will significantly strengthen balance sheet resilience. We have continued to improve group ROE, which increased 290 basis points to 15.6%. In FY '25, we are on track to achieve our ROE target. Reflecting confidence in our business, the Board determined a fully franked full year dividend of $0.265 per share, an increase of 10% and in the upper half of our payout range. Challenger's strong performance in 2024 demonstrates the success of our strategy and the unique position we have across retirement and investment management. I will now pass to Alex, who will provide the detail on the full year results.

Thank you, Nick, and a very good morning, everyone. Today, I'm really pleased to be delivering a set of results that is showing the benefits of the execution of our refreshed strategy. There are 3 things that I'd like you to take away from today's presentation: Firstly, you will see the benefits of our sales remix strategy supporting margin expansion; secondly, the sales momentum coupled with a relentless focus on expenses, [ which ] you will see a clear pathway to our ROE target for the year ahead; and thirdly, you will see a positive step change in our PCA capital ratio, which provides a resilient balance sheet outlook. I'll now take you through our financial performance for the year in detail and provide insight on how we are positioned for the year ahead. Looking firstly at the group results. Strong financial performance this year is attributed to growth in Life earnings and cost optimization, partially offset by lower earnings in Funds Management. Normalized net profit before tax increased 17% to $608 million and pleasingly we finished above our guidance range. Normalized net profit after tax was $417 million, an increase of 14%, slightly lower than the increase in pretax earnings due to a higher effective tax rate. Statutory net profit after tax decreased 24% to $130 million. It does reflect the noncash impacts from revaluing our property portfolio and the accounting mismatch impacts from applying actuarial assumption changes under AASB 17. A highlight for this period is that, we have made significant progress towards achieving our normalized ROE target. For FY '24, pretax ROE increased 290 basis points to 15.6% with a very strong contribution from the Life business. Group assets under management increased 21% to $127 billion with growth across both Life and Funds Management. I'd like to spend a few minutes looking at our normalized return on equity progress. This slide will be familiar to many of you as I presented a similar slide at the half. The difference is that, we now have a clear pathway to achieving our normalized group ROE target in FY '25. In FY '24, normalized group ROE increased to 290 basis points to 15.6%, benefiting from Life earnings and expense discipline. The execution of our strategy is driving this improvement. And our exit ROE for the second half of the year is just 20 basis points short of hitting the target. As we move into the new financial year, I have confidence we can continue to improve ROE with the midpoint of our FY '25 earnings guidance range achieving that normalized ROE target. I expect the ROE expansion to be supported by continued momentum in Life earnings from executing our strategy, increasing the contribution from Funds Management, and capturing scale and efficiencies, including our technology partnership with Accenture. Looking now at expenses in more detail and the operating leverage in our business. I'm really pleased with the expense performance this year in the face of a challenging inflationary environment. We have been disciplined on costs and ensure that we have invested back into the business in targeted areas. We have focused on building a business that is scalable with high operating leverage. In FY '24, group expenses decreased 1% to $314 million. Year-on-year, expense reductions from the sale of the bank and our Australian real estate business were offset by investments in brand initiatives, higher staff costs, and investment administration inflation. With the operating leverage in our platform, the cost-to-income ratio improved 390 basis points to 33.8%, below our target range of 35% to 37%. Reflecting our confidence in continuing to capture scale benefits and efficiencies, from FY '25, we are lowering the target range for our cost-to-income ratio to 32% to 34%. Over the last couple of years, we have had a strategy to diversify our balance sheet and improve the resilience of the business so that it can more easily navigate through different market cycles. This period, we have a positive step change in our PCA ratio, mainly as a result of a reduction in the amount of capital [Technical Difficulty] under APRA standards. The combined stress ratio is the component of APRA's capital adequacy standard, which is used to calculate the adjustment to the PCA when capital charges are aggregated. It is the magnitude of the combined stress scenario adjustment which has fallen because our investment diversification strategies have reduced downside risk on an aggregate basis. With a PCA ratio of 1.67x, we are near the top of our PCA ratio range of 1.3 to 1.7x. This higher PCA ratio provides significant capital flexibility through different market cycles and will also support future growth. Looking now at the Life business performance in more detail. The Life business performance this year has been exceptional with earnings before interest and tax increasing 17% to $634 million. Normalized cash operating earnings grew 15% with both book growth and margin expansion. Expenses were well managed, up only 3%. This result demonstrates the benefits of our strategy to prioritize longer-dated Life sales, which are supportive of achieving higher quality and more valuable returns. In the next few slides, I will now cover off in more detail the drivers of this outstanding financial performance. Firstly, sales and our remix strategy. You would be familiar with this slide, which shows our progress this year, shifting sales to longer durations. Total Life sales were $9.1 billion, and whilst down 6%, we deliberately prioritized longer-dated sales over typically lower margin, short [Technical Difficulty] business. Annuity sales of $5.2 billion were supported by Lifetime annuity sales of $1.5 billion, up 110%. Retail lifetime annuity sales increased 27% to $901 million, and this included CarePlus sales of $496 million, the highest [Technical Difficulty] achieved since launching in 2015. Lifetime sales are benefiting from rising demand for guaranteed income with a growing number of Australians in and entering retirement and aged care. Fixed term annuity sales were $3 billion. This was $1.1 billion lower than last year as we maintained our disciplined approach to pricing. The tenor of the fixed term business that we did write has increased to 3.5 years from 2.5 years a year ago. Japanese annuity sales of $709 million exceeded the annual minimum target by approximately 36%. There was a material contribution from Japanese yen-denominated annuities, which we commenced reinsuring in November. Challenger Index Plus sales were $3.9 billion and included a new $500 million 5-year investment from an insurance client and this demonstrates our ability to also shift Index Plus to longer durations. These charts help show the benefit of remixing our sales and the impact that it's having on stronger shareholder outcomes. In the first chart, you can see that 3 years ago, 43% of sales were for durations of 3 years or longer, and this is now 60%. The tenor of new business sales is now 8.5 years. This improves the sustainability of the Life book and supports the business to deliver both margin and ROE improvements. In the middle chart, you can see the impact this is having on the maturity rate and book growth. After peaking at 33% last year, the maturity rate next year is expected to be just 24%. The benefit of this is that, we don't have to run so hard to grow the overall book from 1 year to the next. And the chart on the right shows how longer duration sales allow us to invest in longer duration assets that can generate an illiquidity premium that supports improved margins and returns. Looking at the margin drivers in more detail. We have now experienced 5 consecutive halves of margin expansion, and finished the year up 30 basis points to 3.12%. On the investment side, we achieved higher yields across all asset classes, and although we pass on higher interest rates to customers, we still expanded the product margin by 18 basis points. The return on shareholder funds also increased 18 basis points, reflecting higher interest rates. This is a very strong margin outcome. Turning now to the Life investment portfolio. As already noted, we have been diversifying our balance sheet and increasing its resilience. This reduces downside risk and provides financial flexibility so we can navigate through different market cycles. Today, we have a well diversified high-quality investment portfolio. Fixed income represents 74% of the investment portfolio. The credit experience of the portfolio continues to be very strong with 19 basis points of default experience for the year, well inside our 35 basis point normalized growth assumption. Alternatives represent 13% of the investment portfolio and comprise a group of diversified absolute return funds and insurance exposures. These investments are less correlated to both credit and equity markets and are more defensive during periods of market stress. Critically, they also provide a source of liquid capital. Property now represents just 11% of the portfolio, down 2 percentage points, reflecting higher investment assets and lower valuations, which I will cover in a moment. Looking forward to FY '25, we do not expect any material change to our asset allocation. Turning now to our FY '24 asset experience. Commencing this year and in an effort to improve disclosure, we have split investment experience into asset experience and liability experience as they have very different drivers. Asset experience represents the fair value movements in asset valuations during the year and was a pretax loss of $119 million. We have independently revalued our entire property portfolio this year with valuations impacted by wider credit cap rates, especially in our office portfolio. As shown on the chart on the right, since 2022, when interest rates started to rise and cap rates started to widen, we have written down our Australian office portfolio by 21% with 15% this year. Over the same 2-year period, the office cap rate has softened by 34%. Pleasingly, occupancy remains high at 91% and we are seeing positive re-leasing activity. The impact of lower property valuations was partially offset by gains in the fixed income portfolio from tighter credit spreads and strong credit performance. Turning now to liability experience. Liability experience includes policy liability valuation movements, including accounting mismatches from AASB 17 and noncash new business strain, which unwinds over time. In FY '24, total liability experience was a pretax loss of $276 million. The net new business strain component of $105 million reflects book growth and includes the large Aware Super defined benefit derisking transaction. We have also experienced a noncash loss of $150 million as a result of how the new accounting standard, AASB 17, affects the valuation of our Life Risk business. The valuation of the Life Risk business is sensitive to changes in U.K. interest rates, FX, and assumptions around U.K. mortality. AASB 17 introduces volatility to the valuation of the Life Risk business due to a mismatch between the discount rate used to value the contractual service margin and the discount rate used to determine the present value of future cash flows. In the year, there was a reduction in U.K. mortality improvements, which is an economically positive thing for Challenger. The present value of the Life Risk portfolio, which is not captured in our net assets goes up. This is supportive of higher future normalized cash operating earnings as the present value unwinds. The FY '24 loss arises because the increase in the contractual service margin from this mortality change is higher than the increase in the present value of future cash flows as a result of the discount rate mismatch. Importantly, these policy liability movements have no impact on CLC's capital position other than through second order tax benefits. Turning now to the Funds Management business. Funds Management EBIT was down 11% to $55 million due to ongoing changes in business mix. Over the last 2 years, Fidante has experienced large retail outflows, which have a meaningful impact on both the margin and headline revenue of the business. This year, large inflows received from lower margin institutional mandates have not been sufficient to offset this impact, and this will be a key focus for management in FY '25. Closing FUM grew by more than 19% to $117 billion, reflecting positive market movements and strong institutional net inflows in Fidante across equity and fixed income affiliate managers. Reflecting ongoing changes in business mix, the net income margin fell by 240 basis points to 16.4%. Expenses were impacted by the cost of data and rising investment administration costs. In FY '25, we expect the Funds Management performance to improve, largely driven by revenue opportunities from both equity and alternative investment strategies and the expansion of our asset origination capabilities, including whole loans. Now, looking more closely at Funds Management net flows. We closed the year strongly with $10 billion of net flows and $10 billion of positive market movements. We continue to see solid flows into our affiliate managers that are underpinned by strong investment performance, with 93% of FUM outperforming over 5 years. Institutional inflows, excluding the Elanor derecognition, were $14.5 billion across both equity and fixed income strategies, whilst retail net outflows were $1.2 billion. I will now provide an update on our FY '25 guidance and the outlook for the year ahead. We enter FY '25 in great shape and confident we can continue to deliver stronger financial performance for our shareholders. This year, we are referencing key earnings metrics on a post tax basis. We are targeting normalized net profit after tax of between $440 million and $480 million with the midpoint of the range representing a 10% increase on FY '24. This represents a normalized net profit before tax range of $640 million to $700 million. Achieving the midpoint of the guidance range would also achieve our ROE target of the RBA cash rate plus a margin of 12%. As demonstrated in this result, we have a disciplined approach to cost management. And from FY '25, we are targeting an improvement in the cost-to-income ratio reducing it to a range of 32% to 34%. We will continue to operate within our 1.3x to 1.7x PCA range with a preference to remain strongly capitalized. Reflecting our confidence in the outlook ahead and how we are positioned, we will continue to target a dividend payout ratio of between 30% and 50%. In conclusion, we have delivered an exceptionally strong result this year and expect growth to continue in FY '25. As a reminder of those 3 key takeaways. Firstly, we have shown the benefit of our sales remix strategy. Secondly, this sales momentum coupled with a relentless focus on expenses, means we have shown a credible pathway to our ROE target for the year ahead. And finally, we have shown a positive step change in our PCA capital ratio, which provides a resilient balance sheet outlook. And with that, I'll hand back to Nick and look forward to joining you for Q&A.

Thank you, Alex. So, today, you've heard how the successful execution of our strategy has delivered a strong performance in FY '24. As we look ahead, the business is uniquely positioned to benefit from a range of long-term drivers. Most of our country's wealth now sits with those preparing for and in retirement and will only grow as Australians retire in ever greater numbers. This generational shift in wealth has spurred progress in building retirement framework for the future. Retirement will require affordable advice. Many across the industry are exploring how to scale advice for retirement, including integrating secure and guaranteed income solutions. Providing financial security to Australia's aging population really matters. Building an appropriate regulatory framework that enables the delivery of innovative guaranteed income products to more Australians will take time, but it is unquestionably the right thing to do and in turn, will be a further driver of growth for our business. Challenger has a clear and compelling strategy. In the short-term, our growth plans will be enabled by our customer experience uplift program. This will also support engagement with wealth managers, superannuation funds, and platforms where we'll use our expertise to deliver retirement income products and solutions in partnership. We continue to see considerable opportunity in the defined benefit market where there is growing interest from institutions seeking to derisk their pension liabilities. In Funds Management, the business' financial performance across FY '24 has seen us grow FUM without that translating into profitability, which will be an area of focus. We have built strong collaborative relationships with our strategic partners and will continue to work with them to identify ways to create shared value. Financial advisers play a key role in helping Australians achieve financial security and will increase the number of advisers we engage with and the volume of business they write with us. Our capabilities in private credit and private markets are performing extremely well, and they are starting to really attract assets. We are very focused on leveraging our in-house and affiliate partner capabilities to meet the significant demand we see here in the years ahead. And we'll consider expanding our offshore reinsurance platform, leveraging our expertise from our longstanding reinsurance relationship with MS Primary. Over the longer-term, we'll continue to scale our core capabilities and develop new products, partnerships, and reach more customers delivered through our multichannel strategy. In summary, Challenger closed FY '24 in great shape. Our focus on execution has delivered a really strong result. The strategic investments we have made in our platform will strengthen and broaden our businesses potential. And we're now in a very strong position for FY '25 and beyond, and we're on track to meet our ROE target. And will have materially improved our financial resilience, which will provide capital flexibility through the cycle and support future growth. This will deliver strong returns for shareholders. And finally, none of this could be achieved without the commitment and the energy of the Challenger team, who I thank very much for their dedication. Alex and I will be very pleased now to take questions.

[Operator Instructions]

As a matter of process, we'll take questions firstly from the room. I'll then turn to the telephones and then via the online portal. We'll start with Matt.

If I could just turn to the guidance for the first question. You've got an improving COE margin trajectory, 5.5% net book growth, the maturity rate coming down by 200 basis points and improving CTI. How could you possibly get to the bottom end of the guidance target? I'm just wondering if you could tell me what's assumed within that.

Yes, okay. I'll start, then Alex can say a few words. So, as you can imagine, at this stage of the year, we set a range which is built out from our sort of best estimates across the business. So, if you think about Challenger in '25 without the bank, if you think about our Life company, there's lots of parts of that where the result is certain, but there are parts of that where it's less certain. And so, we make an estimate as to where we'll get to with that result. In the FM business, FY '24 has been a tough year. So we've got an expectation of better performance coming out of the Funds business in the year ahead. And as just noted there at the microphone, it's going to be an area of real focus for us going forward. And then on the expenses side, we've operated -- I think we've operated the business really well, being able to pull back spending in certain areas and reinvest it into areas where we really want to strengthen and expand our capability. But so we acknowledge we're in an inflationary environment that doesn't seem to be abating so much, but we will manage the cost base as rigorously as we can. So, we think about those variables which gets us to the 10% PCP. And this year, we sort of outperformed our expectations we had at the beginning of the year, the year before we did 10%. So, we think this is a good starting position for us in terms of setting guidance. But might see if Alex wanted to...

No. I think that is all good.

Okay. And just a follow up question, if I could. On the ROE target, congratulations on a pathway to getting back there. Nick, if I could just ask, when is it time to get more ambitious? You've talked about the $1.8 billion of excess capital. What is the hurdle rate for new investments? When you're talking about some of these growth opportunities, including defined benefits, is that above your current ROE target?

Yes. Okay, maybe I'll split that up and try to have some comments on this as well. But if you think about the comments there about hitting ROE in '25, this year, we've closed the gap about 290 points, pleasing the majority of that's been through earnings improvement, and we expect that to continue. We expect net assets to improve in the year ahead. So, that goes into the equation as well. We think the target is appropriate. And hopefully in the comments, when we price any business, whether it be DB or our domestic annuity business or any of the business we're writing, that ROE target is the basis for how we price the business and it's also how we think about doing any -- not that we have to, you'd use that for the metrics for any internal investments or transactions. And so, that doesn't change. But I think what we'd like the market to hear today is that, in reducing the PCA requirement, increasing the target surplus to PCA and taking PCA to 1.67x, and as Alex commented, preference to operate at a higher PCA and achieve the ROE, that is our focus for FY '25.

Siddharth Parameswaran from JPMorgan. A couple of questions, if I can. Firstly, just on capital. The capital ratio improved significantly over the half. A lot of it seems to be -- because the combined stress charge dropped. And I think, Alex, you mentioned diversification as the key driver. Can you just explain that a bit more? Is that a change in your assumptions around diversification? Is there anything that you've changed in your asset allocation which has led to this, which you weren't able to get credit for? And related to that, I noticed a change in your wording around how you're actually seeking to operate versus your own targets as opposed to the regulatory targets. You want to be at the strongly capitalized. I presume that means you want to be at the upper end. I just want to be clear whether the improvement we're seeing is something that is changing the way you will operate or is this just an assumption change?

Yes, no. I'm happy to take that. Yes. So, if we think about what you're seeing today, it is really a step change in that PCA ratio, and it absolutely does reflect how we expect to operate going forward. And what it does is provide us with really material headroom when we think about both opportunities for growth going forward, but also how different markets might perform and therefore, how that balance sheet can travel through the cycle in different markets. And what we've done over the last couple of years now is think about what are all the ways that we can economically diversify the balance sheet. So in the first half of the year, you would have heard us talking about our increased allocation to alternatives as an example. Now, actually, in that case, alternatives are pretty capital consumptive. And so, you saw the PCA ratio actually fall from the back end of FY '23 to the first half of FY '24 as a result of a higher asset charge. But it was the right economic thing to do in order to create resilience in the balance sheet. This half, we've continued with those diversification strategies, and we have applied a number of additional hedging strategies, which have actually given us a benefit from a PCA requirement perspective. And so, I think what's important is that, the overall decisions that we're taking around diversification are to improve economic diversification. Some of them have [Technical Difficulty] on the capital position and some are more consumptive. But importantly, it provides us that resilience and option for future growth. So, the comments we made about wanting to remain well capitalized, you should hear that we're not making a change to our range. But in a benign environment, you should expect us to operate in that [ half ].

Okay. Is there any cost to these hedging strategies? That seems to be the big change from 6 months ago. Is there a cost which we should -- it doesn't seem in your guidance, there's any expectation on your normalize guidance. But usually, if you derisk or if your capital position improves, usually your COE margin should go down. I just want to understand...

Yes. So, the way to think about it, the combined stress ratio is really just an outworking of LPS, 110 is a completely prescribed capital calculation by APRA, and this is just an outworking of this. So no cost to the balance sheet or to our P&L. And obviously, we were very cognizant of taking APRA through those calculations very carefully [ and run up to the ] year end.

Nigel Pittaway from Citi. Maybe just follow up a bit on that. I mean, in terms of the better capital position, how does that change your near-term attitude to growth? Does it mean that we could see an acceleration in book growth, maybe in the near-term manner, that you've got more capital to enable you to grow?

Nigel, I'll make a few comments on that. We haven't felt capital constrained to support growth. We do see significant growth opportunities ahead for us. I mean, it's sort of splitting the 2 out a little bit. I mean, the focus in the last couple of years, we've got a sales engine, a sales resource base and a capability. We had orientated that towards longer-dated business, and that was a very deliberate choice. And all our things being equal, that is slightly more capital consumptive on the term book and more capital consumptive on the Lifetime and longer-dated book. And that journey, we've sort of spoken about a number of halves here, decelerating maturity rate, increasing the effective tenor of the overall balance sheet has been a really important outworking of what we've tried to achieve in the last couple of years. So, to the extent, there are opportunities to -- further opportunities around defined benefits, et cetera, which are larger than we feel very well capitalized to support those growth initiatives. Does that answer it for you, Nigel?

Kind of, I mean, you've obviously -- I think book growth is what about 5% this year. I mean, is that sort of -- given the amount of opportunities you've got [indiscernible].

Yes. Okay. Let me -- so, we're not targeting -- as a business, we don't target a specific book growth. What we have done is decelerated in some ways the book growth in the last couple of years as we have not seen some of the really short-dated business roll, particularly institutional because we haven't priced to retain it. But you've seen -- if you look at the 3-year plus business, which don't break down, like-for-like that's flat on last year. If you look at the Lifetime book in retail, that's up goods growth and the Care books up 50% PCP, Lifetime sales $1.5 billion of record. So, the type of book growth we've been getting has really been the focus, but we haven't felt constrained. And at the half, we spoke about the optionality that the absolute return funds were giving us on the balance sheet. These were assets that we deployed into. We took off the equity position. They're not directly correlated to equity or credit. They're very capital intensive under the capital, under the PCA asset charge. And so, we always felt that to the extent we need to support growth, we had capital stored up there to unlock, but also to the extent through -- to support the balance sheet through cycle. So that was the flexibility we had then. We haven't constrained ourselves growing because of a capital position in the business.

Okay, maybe moving on -- and maybe then just moving on. In terms of the sort of new cost-to-income target, how much of the $90 million savings from Accenture are you allowing in sort of giving that new cost-to-income target?

I'll take that. So, yes, thanks for the question, Nigel. So, just as a reminder for everybody, when we went into the arrangement with Accenture, that had 2 parts. The first part was outsourcing our IT platform servicing to them. And that was the main driver for the $90 million of savings over a 7-year period that we expected to see. We did talk about that being not completely linear, but we have -- there is a step change in the cost of our IT services that is baked into FY '25. And so, that is a component part of being able to reduce that PCA -- that CTI range for FY '25. So, there is a component in there.

So, I mean, you said it would be tail-ended. So, $90 million divided by $7 million is $13 million. So, we're presuming it's what, $8 million to $10 million?

I'm not going to be specific to that, Nigel.

Okay. And, I mean, you're already there in the second half, I mean, in a way, it doesn't seem that much of a stretch, is there?

Well, look...

It took some work to get there.

It was not easy to get there in the first place. But what we've done is, we could have left the cost-to-income ratio as it was from a range perspective and seen that as more of a through the cycle. But I think, importantly, we do want to show a step change downwards, and we'll continue to keep the market updated as we can deliver on that.

Anthony, in the back.

It's Anthony Hoo with CLSA. Just a couple of questions. Firstly, again, just on capital, interested in your comments around your capital position at the top end of your range now, I think it was 6 months ago last year where you modified your dividend payout ratio, we reduced the bottom end. So, just interesting comments around, given where you are, how do you see your payout ratio -- dividend payout ratio going forward?

I'm happy to take that one. Yes. So, given where we are with our PCA range, what we wanted to note is that, that is a step change in that PCA ratio. At the same time, we're not planning on making changes again to the dividend payout ratio. So, we did widen that to give us some capital flexibility. But you'll note that this period for the full year, the payout ratio is at 43%. And actually, although, the payout ratio has been coming down very slightly in dollar terms, the dividend has been going up period-on-period.

But should we expect -- you'll be at upper end of the payout ratio range?

So, we're not going to provide guidance within the range. But what we do as an organization, obviously, is make priority calls each period on the best use of that capital. And as long as we've got ways to earn our return on equity internally within the business, then there will be reasons to keep that capital [Technical Difficulty] the business. And if we feel at any point that there aren't, then that will be a driver to return it to shareholders.

And just a second one just on the TelstraSuper arrangement, can you give us some insight to how that is progressing? What the reception has been like from the advisers on their end, any sort of indication on volumes?

Yes. Thanks, Anthony. So, just as a background. So, we started the arrangement with TelstraSuper, it was in October last year, so it was sort of 7, 8 months into it. And we worked with them to integrate as a building block between 20% and 30% Lifetime income alongside the account-based pension. That is what they call their retire access strategy for Telstra members. Now, we have not called it out explicitly in a separate line here, because that's not appropriate, given it's a commercial matter between us and them, but it is going exactly as we hoped. And so, a couple of observations is that, Telstra has got a fantastic process to take their members through that pre-retirement retirement phase there. We've worked very closely with their advice team on how to position the retire access or the lifetime income component. And you're starting to see multiple writers coming through a very regular business now coming off the back of it. We always said around this that it should serve as a real [indiscernible] as to what's possible. An annuity is not there as a 100% solution to retirement. It is there as a building block, 20% to 30% of a retirement solution that does a whole lot of special things. And the way the Telstra set it up, the members can see it, and really pleasingly, about 1/3 of their sales have come from direct members, unadvised members through the platform. So haven't need to go through -- have not needed to go through the full comprehensive advice process to take on the retire access product. So, we are absolutely delighted with how the relationship and the sales are progressing with Telstra.

Operator, we might jump to the calls. Can we go to the first call?

[Operator Instructions] Our first question comes from Lafitani Sotiriou with MST Financial.

I just wanted to follow up on the guidance for FY '25 and whether you can add any color around the Life's net book growth, in particular, with some commentary around the 1-year term. So, during this project refresh last couple of years, the number of 1-term annuities has gone from 52% of the book to 26%. Would you say that that's broadly the natural level you expect you to base out at? Or do you still see some churn in that book? And what is the midpoint of the guidance range from net book growth that you're assuming?

Yes, thanks, Laf. I might try to split the answer a little bit to that, because my talk about the 1-year business because its contribution whilst it meets the ROE, its contribution to -- I mean, it can be -- it can have a significant contribution to book growth without that commensurate necessarily to profit given how capital -- noncapital-intensive these tend to be. So, we made decisions over the last couple of years. We are happy all things being equal to write 1-year business, particularly in the retail market where the pricing makes sense for us, where it makes the ROE. And so, you've seen really material bank competition in this period of time. And for where we had the sales team prioritize to longer-dated business and what you would have to price to win the 1-year business. It just didn't make sense for us to compete. And so, you have seen the 1-year and to an extent the 2-year sales down PCP about 30-odd percent. But then the longer-dated term sales, flat to up, flat-flat the longer-dated ones, and then the Lifetime up. And so, in terms of what we assume in guidance, probably the one thing we could say, what we haven't assumed in the guidance is, any DB wins. We've just kept it for that which we see immediately that which we can sort of easily forecast as opposed to any of the sort of the singular events. But to many extents that would have a minimal impact given that when it lands and the number of the amount of period that you would be deploying that capital. So that's probably the comment on the 1-year business there. So, we have seen a relax -- probably final comments, relaxation of some of the competition in the -- post the bank funding and TFF. So we'll see how that plays out in the next year. But there's significant assets that have built up in the term deposit market, which all things being equal should be a target for us across the retail side of the business in the year ahead, given how competitive we are on rates out through the tenor. But then, Laf, in terms of -- we don't disclose what we are expecting otherwise for book growth into that guidance. Alex, anything else?

No. I think the only other thing to say is that, it is useful to have a world diversified mix of sales across the balance sheet. And so, we're not targeting a particular level of 1-year business. The important thing for us is that, we'll write it if it can meet our ROE. But certainly, in the last few years, it's been very difficult to do that and that's why you've seen those volumes come down.

Okay. Got it. Why don't I move on. So, looking at the strong as your Life company result is on the flip side, it's actually pretty shocking. We're in a scenario now where the Funds Management business has a lower ROE than the Life company. So, there's a bunch of things you've talked through [Technical Difficulty] initiatives you've got for the next year to try and improve the Funds Management business. But as much as there was a project sort of refresh in the Life company to get the ROE reset, can you talk to how over the medium-term you're really going to see what should be a high ROE business improve its returns?

Yes. Thanks, Laf. I'll make a few comments, and Alex might add some. Yes, I think if you look at what's happened in this period, just to be sort of clear, in our Funds business, we break it down between our Challenger Investment Management and Fidante platform. So, Challenger Investment Management, which is so important to the Life results, has had a fantastic year. So, we've seen great origination coming off the back of that business, but that all sits inside the Life balance sheet. And so, seeing the benefits of that sitting in the Life result, not in the Funds result, in the main, in the main. Now, in the Fidante business, we're not alone in having had a very difficult retail sales environment that it's extended now for sort of 2 years there. We had some strategies that had performed extremely well in the low-rate environment where in addition to the actual retail environment, not seeing a lot of net flows, there are some green shoots now, we have seen some outflows coming off one of the managers that have performed extremely well during, as I said, that low-rate environment particularly, which has also impacted the overall margin. So, the way [Technical Difficulty] reflect on it is that, on the sales side, you don't get these sorts of institutional links and their specific mandate opportunities without having the highest quality investment management capability. And so, we're very confident in the platform, in the managers that we have on it. But in this period, you have had this reasonably unique, very strong top line fund growth not translating to earnings growth. Now, some of that is timing, a lot of that -- some of that flow came right at the back end of the financial year. So, there will be some benefit coming through in FY '25. The other area we've spoken about is the material step up in the expense base that we've seen there really as a result of servicing the investment management platform. So investment administration operations and data. And that has had a really material impact on the profitability of the Funds business. So, that's not to make any excuses of it, because to step back from it, the strategy that the team are executing to really focus on, a, how we come out of this very low sales environment in retail orientate some of the growth in the front book to higher margin credit product, as well as alternatives, as well as we're starting to see some of the equity manager flow come back through retail. We're very focused on the levers there that we have to control, whilst we've also been making decisions around uplift and improvements on the operating platform to reduce the cost of delivering those services. So, that's a bit of a large bag of items there. But I might just ask to see if Alex would like to add anything to that.

No, I think you said it all that, we don't have a crystal ball around when the retail sentiment will change. But we have got really strong capability, particularly alternatives capability ready for when that sentiment changes. In the meantime, what you should hear is that, management will be relentlessly focused on those investment administration expenses, particularly for FM, but it affects the Life business, too, and then how we can bring those down.

Just one very quick sort of macro question. So, we've seen a lot of currency volatility, particularly with the yen. You've got some assets over there. Could you just talk to -- and some obviously business coming out of there. Can you talk to the change in hedging costs or any change in outlook over the year ahead that may come from some of the volatility we're seeing?

Yes, maybe just to break that down, Laf. So, we have a JPY 50 billion agreement with MSP as a minimum, which -- so that gets translated to Aussie dollars. And so, there will be some variability based on what the actual yen value of annuities written has been in any given year translated -- that which are done in yen, translated back to Aussie dollar. So, you will always have that impact. We do have a Japanese property portfolio which is hedged back to Aussie dollar. So, that isn't so much an issue. And I'm trying to think if there's any other impacts.

No, that's right. And we haven't seen any material changes in actual hedging costs.

Yes, no changes in the hedging costs there.

Your next question comes from Andrew Buncombe with Macquarie Group.

Just one for me, following up from the comment before in relation to the timing of the FUM flows in Fidante. That's causing a fairly significant reduction in percentage terms for the rate in second half '24. Should we assume that, that rate gets back to the first half '24 level going forward? Or will it be somewhere in the middle for these structural changes in the portfolio?

Yes, I'm happy to take that question, Andrew. So, look, we have seen that income margin come down to 16.4% for the full year. So that's down 230 basis points. As Nick mentioned, the very big mix of institutional flows were back ended to the second half. And so, that does -- that is a high contributor to that margin coming down. As we look ahead, it's difficult to be definitive because it will depend on the mix of business that we write going forward. And as Nick said, we've seen some green shoots around retail, which can be significantly higher margin in comparison to some of the institutional flows that we have been writing. So, I'd be hesitant to guide you to a specific point.

Your next question comes from Scott Russell with UBS.

Can I just pick up on the conversation about Japan with the pretty extreme movements in the yen and JGB yields since the balance date? My understanding is that, you don't necessarily match -- naturally match the assets to the liabilities you've sold and then you manage the FX risk with derivatives at the group level. Can you just confirm that's true? And then I also look at the sensitivities, and I noticed the earnings sensitivity to yen movements has risen, albeit still a low number in absolute terms. But maybe if you could just tie the 2 together, the volatility we're seeing in markets together with the way you approach FX risk and the increase in yen sensitivity?

Thanks for the question, Scott. I'm happy to take that, because the 2 are separate. So, the way you've articulated how we manage the portfolio is right, in terms of the hedging strategy. When you look at the sensitivity table this period, there is a -- the sensitivity to currencies is slightly larger, and that is as a result of these changing and hedging strategies that we talked about is diversifying strategies. So, providing sort of tail risk protection for the balance sheet that has had that impact on the CSSA from a PCA perspective.

Okay. And then in terms of the sales, I think I saw somewhere that 60% of the MSP sales came from the new yen-denominated sales. Can you maybe comment on how you see that evolving? I mean, there's obviously going to be some demand from the surging JGB yields since you started that business. But is Challenger agnostic as to what currency that business from MSP is written in?

Yes. Thanks, Scott. I'm going to make a few comments on that. So, we are agnostic. And so, in extending the reinsurance agreement last November to yen, that was as an outworking of discussions with the MSP product team for what is happening specifically in the Japanese market. So, we've made a few comments in the past that foreign currency annuities have been very popular with Japanese annuitants, but a slightly positive nominal rate is certainly creating a lot of opportunities for yen-denominated annuities, in addition to which the Japanese regulator had also -- totally unrelated to annuities had shone something of a light on foreign currency sales of other products through certain channels. And so, that has led to stronger or larger volumes advised into yen-denominated products in Japan.

Your next question comes from Julian Braganza with Goldman Sachs.

Just following up on the discussion on the capital benefit in the CSSA. Alex, just the reason why there is no cost to the hedge, I just want to understand that because is this change in the calculation predominantly driven by assumed management action that you would take in a stress scenario? And if so, just what has changed there? Just to understand as well why the cost of the hedges is 0 and there's no impact on the margin from that capital benefit.

Yes. No, thanks, Julian. I mean, look, there is a tiny cost associated with actually putting the futures on, but it is not at all material in the context of the Life P&L. And so, you're absolutely right, that CSSA calculation looks at a single scenario where it puts all the capital charges together in one scenario and looks at what that adjustment should be to the capital that we need to hold. And as a result of having a long position on a range of foreign currencies, that requirement in the CSSA, so that adjustment is smaller and so the PCA requirement goes down. So, that's what's driving that.

Okay, great. Understand. And then just a second question on the product cash margin. So, if I look there, just in the second half, we sort of saw a 9 basis point underlying improvement in that product cash margins, excluding just the other income. Can I just kind of keen to understand what sort of benefits we should be seeing from here going forward? You have sort of been seeing a pretty regular benefit on that line over the last few halves. And this is the second -- I mean, it's a second observation as well because I sort of triangulate just your NPAT guidance and your ROE expectations into next year. It doesn't look like you're factoring a lot of improvement in COE margins. So, I'm not sure if -- so, one, is it the product cash margins expectations? Or is it, 2, are you factoring interest rate cuts to come to that might offset as well? So, just interested in understanding that.

Yes. No problem. So, a few parts to that question. So, maybe I'll take the last part first, which is just to confirm is that, as before, we don't take a position on interest rates falling or [ rising ]. So, we'll -- our guidance is based on assuming that it is at the level that it is today. When you look at the product cash margin, what we've seen is expansion both for the half and for the full year where the yield on the assets is growing faster than the interest expense. So, although we're passing on those higher interest rates to customers, we have been generating a greater yield on the asset side, which has widened that margin. And then you've also seen an increase on the shareholder fund side. The important reason why we don't provide COE guidance is, it's not internally how we think about running the business. We run it for the ROE. And so, the guidance range that we've provided today, the midpoint of that would meet our ROE target. But the actual mechanics of the outworking of the COE margin could vary depending on the mix of business that we write. So, an example of that is, we've got a really strong pipeline of Index Plus business at the moment. That business is low margin but low capital. So great for ROE, but would be -- it has a lower COE margin. But that's a good thing because it's accretive to that ROE. So, that's one of the reasons why we don't provide guidance on that COE margin explicitly.

Okay, great. And then just one last question. In terms of now, both Nick and Alex, just now that in 2025, it's looking like you meet the target. How does this change how you run the business strategically whether it be for growth -- a greater focus on growth? Or is it more competitive on pricing? So, just interested in how you think about the business now that you have to stay at the juncture where you're sort of achieving your ROE targets.

Yes. Okay. Well, I might kind of have a first stab at that one. So, Julian, it's been a real focus of ours for the last couple of years. We saw the cash rate move very quickly from 0 to 4.35%. And we have been motoring up behind it. So, we look -- very much look forward to meeting the ROE target next year. The strategy that we've laid out to grow is sort of agnostic to that. We have -- we're doing a [Technical Difficulty] things across the business to continue to expand the channels through which we operate today. And so, the results you've seen today is a significant outworking of that strategy. The really great looking sales that we're getting, the longer tenant business in retail, as we bring on the new technology, our ability to do more integrations with the platforms to bring the term business into platform, not alongside, the relationships that we're building around the wealth groups around how they think about retirement and building retirement products for their advised client base. The work we've been doing ongoing with all the super funds, none of that, whether it be DB or the flow partnerships, we have not missed a beat in the last [Technical Difficulty] years as we've pushed on those efforts because we think -- we have a very clear vision of where we want to take this business. And we're doing -- we're trying to do all these things concurrently [Technical Difficulty] business that creates the right type of return, is managed prudently. So you've seen that in CTI, you've seen that in what we've said about hitting ROE. But a business that's [Technical Difficulty] into its brand, investing to make sure that we retain our thought leadership position. And that's all happening, right? At the same time, we're investing into our technology to integrate ourselves into this evolving landscape, and it's evolving. It's not a point in time. It's going to keep developing in the years ahead but position us to be unbelievably competitive in that space through the technology investments and then all the relationships we have across the industry that we've been investing so much time in the last number of years, whether it be Superfunds, wealth groups, et cetera, so that we can play a partner role with them. So, we've been lining all these activities up concurrently. And so, I think none of that stops. But we are very pleased that as we look to FY '25, we're meeting our ROE target and we're doing it with a balance sheet that has incredible capital resilience. Clearly, there's capital there to support the growth of our annuity products in the years ahead.

[Operator Instructions] Your next question comes from Andrei Stadnik with MS.

Can I ask my first question just around the guidance? And you've highlighted that the tax rate, you're looking for about 31.3%, which is I think, a little bit higher than you've run with in the past. But what's driving that? And is that something that would persist into the next couple of years beyond '25?

Thanks for the question, Andrei. So, no, it's a straightforward answer. We have, for a number of periods, and will continue into the future, have a permanent difference arising from the nondeductibility of the interest on our capital notes. And so, to the extent to which that forms a permanent part of our capital stack, we will always have an effective tax rate just above the 30%.

And look, my other question, just going back to Slide 18 on the Life COE margin. When we compare all the drivers for the full year with the first half slide, it seems like the benefit of higher rates was just as strong in the second half as it was in the first half. So, the question there is, is there further benefits come from higher rates just given the lag in nature? So, should we expect all else equal that the COE margin would want to push higher in the first half of '25? Setting aside in sales growth potential, there's a -- is the lag benefit of high rates still coming through?

Yes. Thank you, Andrei. So, we've been playing catch up with the interest rate for some time. I would say that, the vast majority to all of the interest rate expansion, certainly to 4.35%. We'll see where it goes from here, is now reflected in that COE margin. As I said previously, it will depend on mix really to see where it goes from here. But, certainly, the annuity business that we're writing today is accretive to that 3.12%.

There are no further questions on the phone line at this time. I'll now hand back.

Are there any further questions in the room? Sorry, Sid.

Maybe just 2 quick ones. Just the -- Alex, a key focus of what you've been saying has been driving the improved results is this focus on longer tenor annuities and the fact that it generates a higher ROE. You haven't really spelled out what that difference is. Can you give us some quantum? It's very hard to tell -- there's so much moving in the numbers around write-downs and just changes in asset mix to really be sure. So if you could just tell us, in your view, what the difference is on a go forward basis the difference?

Yes. Look -- thanks, Sid. And not a new question, and it is a difficult one to articulate because what we've been saying is, extending the tenor of the liabilities, what that means is, it really opens up the asset universe for us because it's the asset side that's really delivering that return on equities -- on equity. Now, in this period, we have had a fixed income outlook where credit spreads have been quite tight. So we probably haven't fully maximized our ability to expand that ROE, which is why some of that expansion we're seeing will continue into FY '25. It's not until FY '25 that we fully meet it. And so, the ability to really invest in longer duration assets and attract that illiquidity premium, which we talk about being sort of 1% to 2%, that's where the magic comes in terms of the higher ROE as a result of the longer-dated liabilities.

So, sorry, 1% to 2%, higher margin -- COE margin. So, for an ROE, how would that translate to an ROE?

You can't do it on a completely linear basis because you could write longer-dated assets and back them with capital light -- you can write longer-dated liabilities and back it with capital light assets and deliver a lower ROE, or back them with more capital-intensive assets and deliver a higher ROE. So, it really does depend how much capital you've got to be able to deploy in any one particular period.

Okay. Just one final question, just the property write-downs. So can you just give us comfort that where you're up to now, you're happy with your valuation on property?

Yes. Thanks, Sid. So, as I said previously, we have externally valued the entire property portfolio this year. So, those are at fair values, from an external valuation perspective, I think it was 69% were done in the second half. So, very recent revaluations. That's the best way that we can give the market confidence that we're using all possible data points in capturing those valuations. It's hard to determine exactly what the outlook looks like as we look ahead. The office portfolio has clearly been the area that has been under the most pressure, but the retail portfolio and our Japanese portfolio are performing really well. So...

I think the comment we've also made is that, the thing that we can control is the performance of the assets. And so, what we've been really pleased with in the last 12 months is some of the re-leasing activity and extending existing tenants, et cetera, across some of the assets, including some of the multi-tenanted office assets that we have as well. So -- and that's where Alex's comments about the cap rate expanding 34% relative to the [ value add ] across the office part of the portfolio, this last year coming down 15%, but 20% over the last couple of years. So, we're going to continue to really try to drive the assets hard because that will support the valuations.

Okay. There's no further questions in the room. So I'll close today's briefing. If you've got any further questions, both Irene and I are available on telephones. Thank you for your interest today, and thank you for attending.

Thanks.