Challenger guides to higher earnings: Greater diversification on track

Challenger (ASX: CGF) was virtually flat at the open today after the annuities provider guided to normalised profit before tax for FY22 at the high end of the $430-$480m range it previously nominated.

What’s clearly evident within today’s investor update is the degree to which the company has diversified beyond being an annuities business, which the market has struggled to get too excited about, with the Challenger brand now including a bank and CIP Asset Management.

Healthy underlying business

While today’s update was light on numbers, management highlighted the underlying health of the business with a successful franchise, strong balance sheet and sustainable capital settings underpinning future growth opportunities.

Management note that the business is strongly capitalised with a Life PCA ratio of 1.61 times, as at April 2022, which is towards the upper end of its target range.

Commenting on today’s update, Challenger CEO Nick Hamilton reminded investors that the business is well positioned to build on its strong foundations as a leader in retirement incomes.

Investors should also note that with cash rates now on the move, annuities are likely to become progressively more appealing.

Milestone

Hamilton also regards recent approval from APRA to commence certain types of non-retail lending, including SME, commercial real estate and corporate lending as a "significant milestone" to expand the company’s guaranteed income offering and leverage the business’ yield origination platform.

“We will expand our brand and deliver more products across a greater number of channels… we will also focus on our investment capability and operating platform to deliver more of what our customers need,” said Hamilton.

One Challenger priority

Management plans to expand the Challenger brand from a leader in retirement incomes, to a brand synonymous with high-quality income generating products and a wider retirement offering.

As part of this strategy, CIP Asset Management will move to the Challenger brand, as Challenger Investment Management over the next six months.

Work is also well progressed to transition the Bank and its products to the Challenger brand by the end of this financial year, hence leveraging Challenger’s position as the leader in retirement incomes.

“As we progress our ‘one Challenger’ priority, we will capitalise on the expertise... to play a more meaningful role in our customers’ lives and enhance shareholder outcomes,” Hamilton noted.

Strong partnerships

Beyond annuities, Hamilton pointed to recently forged partnerships as strong avenues for growth.

For example, Challenger continues to progress its strategic partnership with US-based global alternative investment management firm, Apollo (NYSE: APO), which the company has been developing over a number of months.

Opportunities currently being developed include investment and life risk related, product and distribution opportunities, plus joint ventures.

Challenger has also entered a non-binding MoU with global leader in investment administration services, SimCorp (CSE: SIM) to establish a joint venture (JV) providing leading investment operations platform.

While light on detail, the JV is expected to leverage the capabilities of both Challenger and SimCorp to provide Australia’s first fully technology-led, integrated front-to-back cloud-based investment operations platform, servicing customers across Australia, and APAC.

Challenger share price: A 12 month look.