Challenger Limited

Good morning, everybody, and a warm welcome to those in person and online to Challenges 2026 Half Year Results Briefing. I'm Mark Chen, Challenges General Manager of Investor Relations. We're pleased to come to you today from Five Miner Place in Sydney. Before we begin, I would like to acknowledge the Gadigal people of the Inora Nation. the traditional custodians of the land on which we are hosting this event today and pay my respects to both Elders past and present. Today's presentation will be delivered by our Chief Executive Officer Nick Hamilton and Chief Financial Officer Alex Bell. It will then be followed by a Q&A session. You can ask a question either in person, via the online portal or through the telephone. As you'll see from today's presentation, we've made a great start to 2026. That demonstrates both the resilience of our earnings and the progress we're making in positioning Challenger for the next phase of growth. In the half, we've delivered earnings growth and returns above target alongside book growth driven by rising demand for income and financial security as retirement income tailwinds continue to strengthen. This performance is underpinned by a disciplined capital management and a very strong balance sheet. Our capital position remains a clear differentiator, providing flexibility to support growth and deliver shareholder returns, as reflected in increased dividend and on-market buyback we have announced today. Overall, this is a result that shows that Challenger is in great shape. It's delivering consistency through the cycle, and it is strongly capitalised and strongly positioned to capture the growth opportunity ahead. I'll now pass to Nick to take you through the results.

Thank you Mark and thank you everyone for joining us. So this year marks a significant moment for Challenger as we step into a new era of opportunity and growth for our business and more broadly Australia's retirement income market. We are a business that's been committed to providing – to supporting financial confidence for those approaching or entering retirement for more than four decades. Our experience and quality reputation as a leader in guaranteed retirement income has made us a trusted voice with the industry, government and regulators on ways to develop Australia's retirement income market. After many years of seemingly waiting, the industry is now moving and the difference in a year is stark. Retirement is fundamentally different and the decisions an individual makes into and through retirement requires something distinct to what we have today and that is now recognised. We are months now from entering a new capital regime for annuity providers and for Challenger this is a very material moment. Any way that you look at the changes, they will be extremely positive for our business. Today we've announced our first half results, a buyback for our shareholders and more details on the growth opportunity that has arrived for our business. We'll talk through each of these this morning and I'm joined by our CFO, Alex Bell, who will provide more details on our first half 26 financials. Let me start with an overview of the three key points in our announcement today. First, we're financially strong. We've grown earnings, maintained our disciplined expense management approach and increased returns to shareholders. Second, we have the capital flexibility we need to grow and deliver returns. And third, we are positioned to grow due to strong momentum behind our strategic initiatives. including our contribution to WAPRA's review of capital standards, which will see some of the biggest changes for providers of longevity products in a generation, establishing key partnerships for super funds and advice technology platforms, expanding our offshore reinsurance partnership, and delivering our transformation program across customer, investment and data platforms which will usher in a very contemporary and digitally enabled business model. Looking at the first half headline numbers. At the halfway point for the year, very pleasingly we are delivering earnings growth in an environment where credit spreads are at historically tight levels. Alex will say more on this in her presentation. The significant increase in our statutory result reflects our positive asset experience and gains across our investment portfolio. Strong book growth in the period was driven by a record level of annuity sales. Domestic annuity sales were up 37% to $3.1 billion, and offshore sales up 13%, also to a record level. Our longer term annuity sales also increased, driven by higher domestic lifetime and MS primary volumes. Our group return on equity at 11.4% is above our full year target of 10.7%. We're extremely well capitalised, providing us flexibility to support our growth and deliver returns to shareholders. Our performance demonstrates the strength of our fundamentals and we've continued to build for growth. Today our growth opportunity is underpinned by unique demographic and industry tailwinds. We have a world-class accumulation system that is projected to see retirement assets grow nearly fourfold, to four trillion during the next 20 years. An ageing population is one of the most significant trends. Around 780 Australians retire every day, or the equivalent of a city the size of Wollongong retiring every year. However, as Australians move from accumulation to decumulation, the vast majority are not transitioning to solutions designed for this stage of life. This is despite our own research showing 78% of people would be happier with at least partial guaranteed income for life. Unlocking demand for retirement solutions is core to our focus and where we have been driving changes during recent years. At the same time, we're seeing significant increases in demand for income from higher net wealth investors, particularly through private credit strategies as more people search for investment options that provide higher income. Our other major tailwind is the growth in offshore reinsurance markets, particularly in Japan and more broadly Asia. Over 35% of the population in countries including South Korea, Hong Kong and Japan will have populations aged over 65 in 2050. This year will mark 10 years of our reinsurance business with MS Primary in Japan, where we have recently surpassed $7 billion worth of new business cumulatively written. The strength of the partnership will see us further expand how we deliver offshore reinsurance, including a significant opportunity for growth. As a leader in retirement income over four decades, Challenger has developed unique competitive advantages that will allow us to shape the future of retirement in Australia. We have competitive advantages across our customer proposition. distribution capability, asset origination, and as a manager of long-term insurance investments and capital. On customer, we have invested to maintain our strong brand awareness for retirement income. The future customer experience will deliver simple end-to-end integration into the financial ecosystem. The re-platforming of our customer technology to a modern registry and new customer interfaces will put Challenger in a unique position in the retirement market. This half-week delivered the first phase of our customer technology uplift, and phase two is now well advanced. And once complete, we'll open our business to customers in entirely new ways. And as we say here, it will be on customer time. We have an expansive distribution footprint, and our partnerships will drive new momentum as the market develops on the premise of a retirement income system. We have established partnerships with some of the largest superannuation funds, platforms and advice technology providers in the country. Our two recently announced platform and superannuation partnerships with BT and MLC will launch real innovation in how retirement solutions are delivered at scale. And through the design of new retirement advice in the IRIS X plan and IF planning tools, for the first time financial advisers will be able to model retirement plans which incorporate guaranteed lifetime income. We're continuing to discuss partnerships with a number of other providers in the retirement sector and we're very optimistic about further partnership opportunities over the coming months. We're also remaining focused on the offshore opportunity as our annuity sales reach record levels. Challenger has operated with a limited Bermudan licence since 2016. We're working with the BMA to expand our offshore reinsurance business, which will allow us to reinsure products more broadly than we can today. Our asset origination capability remains key as we look ahead. Quality asset origination supports our life business. and it will also enable us to expand fee-related earnings under the Challenger brand. We recognise that the market environment has changed. Demand for Australian credit has risen. Our own demand is growing and will be driven by changes to our asset allocation and our growth. During the first half, through the strength of our fixed income asset origination capability, including our whole loan transaction team, We raised $5.9 billion in origination volumes, which included $2.5 billion of private credit originations. And as noted in our announcement on Monday 9 February, we are in talks with Peppermoney on a potential transaction to acquire an equity stake of up to 25% as part of our broader asset origination strategy. Whilst there is no certainty of a transaction at this stage, we will keep the market informed on any material developments. On investment excellence, we are focused on delivering superior returns to customers and meeting their evolving needs. A key part of this is continuing to innovate the retirement and savings products we offer. In September, we launched our LIFS income notes platform, the first of its kind in the market. And we acquired an equity stake in London-based Fulcrum Asset Management, a leading liquid alternatives manager. We are focused on being disciplined managers of capital. As part of our capital management framework, we're making Challenger a less capital-intensive business that is pointed for growth and has capital flexibility. Today's announcement of a proposed $150 million buyback is an initial step ahead of the changes to capital standards. This action demonstrates our strong capital position. We will continue to look at our capital management initiatives as the standards come into effect. And with that, I'll now hand to Alex to present our first half financials.

Thank you, Nick, and a very good morning to everybody. I'm delighted to now present to you our financial performance and outlook for the first half of the 2026 financial year. At a time when credit spreads remain near cyclical lows and market conditions are tight, we're delivering exactly what investors look for in this environment. We have grown earnings, we have generated returns above our targets, and we have increased dividends, all supported by a strong balance sheet and disciplined capital management. The key message for this half is consistency. We are delivering earnings growth despite a challenging reinvestment environment. By holding a more defensive portfolio at this point in the cycle, we can take advantage of attractive opportunities when they arise, and we're not taking undue risk to achieve higher returns. We achieved a normalised earnings per share of 33.3 cents, representing a 2% increase, with normalised net profit after tax of 229 million, also up 2%. Statutory MPAT reached 339 million, a particularly strong result reflecting positive total return across each asset class in the life investment portfolio. We've increased value creation for our shareholders, with normalised return on equity of 11.4%, which remains above our target. Outperformance against this target increased to 70 basis points, up from 40 basis points in the prior comparative period. Reflecting the Board's confidence in our outlook, we have increased the fully franked interim dividend by 7% to 15.5 cents per share. These outcomes highlight our ability to generate consistent returns through the cycle, maintaining capital strength and flexibility. Turning to the key drivers of our earnings result. Group net income increased 1% to $487 million driven by life cash operating earnings which benefited from higher average investment assets and funds management fee income supported by higher non-firm related revenue. Importantly, we're continuing to demonstrate strong cost discipline, with total expenses flat on the prior period at $154 million. Inflationary pressures, especially on technology costs, were offset by realised efficiencies in our operating model. As a result, the cost-to-income ratio improved 30 basis points and outperformed the target range of 32% to 34% for the period, the lowest we've ever delivered for a half. For the life company, we delivered reliable spread earnings despite cyclical dynamics in credit spreads. Life Normalised MPAT was $226 million, up 1%, supported by higher average investment assets and ongoing pricing discipline. Book growth of 5.8% and annuity book growth of 7.4% resulted in a 5% increase in our average investment assets, which will underpin future earnings and returns. This slide highlights the cyclical dynamics impacting COE earnings. This half our margin has moderated to 2.95%. Credit spreads across the fixed income spectrum remain historically tight, which has reduced reinvestment spreads in the near term. Our disciplined approach to pricing has moderated the impact of this effect. To support the change in sales mix this period, we've deliberately increased our allocation to liquid assets with cash and equivalents of $3.3 billion at 31 December, up 27% or $700 million on the prior period. This strategy reflects attractive opportunities in liquid assets to back some of the shorter duration institutional business we've written this half, as well as providing flexibility to deploy capital into higher yielding assets as opportunities arise. Like many insurers globally, this approach ensures we are not prioritising short-term yield at the risk of long-term value. Sales momentum in life was particularly strong this half. Total life sales increased 11% to 5.1 billion, driven by record annuity sales of 3.8 billion, up 32%. Domestic annuity sales rose by 37%, supported by strong institutional demand and continued demand for guaranteed income solutions. Lifetime annuity sales of 0.7 billion were up 12% for the period. Our offshore reinsurance annuity sales also reached a record, increasing 13% to 0.7 billion, further diversifying our liability book and demonstrating our strong relationship with MS Primary, the expansion of which is a strategic priority for future growth. The balance sheet continued to exhibit a stable composition by asset class. What has evolved is the increase in high quality fixed income assets within the portfolio. In the last year, we have invested $1.6 billion of additional fixed income, almost all of this being deployed into cash and AAA securities. This move up in quality ensures we are well positioned for any repricing. As evidence of our commitment to investment excellence, we've achieved a strong scorecard this period, with total return across all asset classes significantly exceeding the COE investment yield that we include in our normalized result. This generated a substantial after-tax asset experience of $105 million for the period, which supports a strong statutory earnings result. Now turning to funds management. Funds management delivered normalised NPAT of 29 million, up 7%, driven by higher net fee income and continued cost efficiencies across the platform. While average funds under management were lower period on period, the focus here is flow, quality and margin sustainability, not just headline funds. 2025 and the start of 2026 has been one of the most difficult periods for active equity managers domestically and globally. Fidante continues to showcase the strength of its multi-affiliate model with total net flows of 1.5 billion for the half. The platform remains one of Australia's largest active managers with 83% of strategies externally rated as recommended or highly recommended. During the half, we recognised 12.6 billion of FUM from adding Fulcrum Asset Management to the affiliate platform, and de-recognised 2.9 billion upon completion of the Aries distribution agreement. Demonstrating the success of our diversification strategy, alternatives now represent 15% of Vedante's FUM. This shift demonstrates the platform's ability to adapt to evolving investor preferences and broaden its investment offering. A strategic priority for Challenger has been to grow our Challenger investment management business and to scale originations for Challenger Life and third parties. Challenger Investment Management continues to deliver on its mandate to grow third-party capital and scale origination for the life company balance sheet. This investment team will form part of our group investment capability under our new group CIO going forward. Third-party FAM has increased at a 38% four-year CAGR to $3.1 billion, supported by investor demand for credit and income strategies and by the listed SIM lifts notes launched this period. For our life company balance sheet, the originations remain well diversified with $5.9 billion of new originations across public and private opportunities. Our capital strength remains a key differentiator. This period, S&P upgraded the capital rating for CLC and Challenger Limited by one notch to A plus and A minus, respectively. S&P noted that the upgrade in ratings reflects CLC maintaining its market leadership position in the Australian annuity market, better regulatory settings and strong retirement savings trends that will support earnings. At 31 December, the Life Company had $1.7 billion of capital above APRA's minimum requirements, with a PCA ratio of 1.58 times based on the current capital standards. This capital position supports ongoing organic growth, continued dividend growth and disciplined capital management initiatives such as an undertaking to do an initial buyback of $150 million. This slide serves as a reminder of our capital allocation framework and the progress that we have made to maximise shareholder returns. In addition to supporting meaningful organic growth this period, we have announced a $0.155 per share fully franked interim dividend that is up 7%. In respect of capital returns, we intend to undertake an initial on-market buyback of $150 million, subject to market conditions and regulatory approval. This reflects our confidence in our ability to support organic growth and return excess capital to shareholders. Last Monday, we announced that we were exploring an investment in Pepper Money. Whilst not finalised, a modest minority stake like this would require no integration and would be just one of the ways to accelerate the expansion of our asset origination capability. Importantly, we are maintaining a strong and resilient balance sheet through these actions and remain disciplined and focused on delivering shareholder value, demonstrating that we are good allocators of capital. Although not yet effective, I wanted to spend a couple of minutes reminding investors why APRA's proposed changes to capital standards are so important and what to expect from the 1st of July, 2026. Using our 31 December 25 balance sheet, our reported PCA ratio of 1.58 times is expected to increase 16 basis points to a pro forma of 1.74 on day one. If spreads were at their long-term average, the improvement in PCA ratio from applying the new standards would be even greater, equivalent to an increase in pro forma PCA to around 1.82 times. These numbers reflect the lower PCA requirement from the enhanced liability offset within the credit spread stress and the interaction of the standard and advanced illiquidity premium approaches on CET1 through the cycle. We view these reforms as very supportive of financial resilience, reducing capital pro-cyclicality and creating a more favourable environment for retirement income innovation, consistent with the objectives that APRA has outlined and the sector's policy focus. Then as we move forward with the implementation of APRA's capital standard changes, we anticipate a meaningful shift in our asset allocation mix over time, with an increased emphasis on fixed income assets and a corresponding decrease in growth assets. This change is expected to lower capital intensity of our portfolio and reduce earnings volatility throughout the economic cycle. By adopting a higher proportion of fixed income, we aim to achieve more predictable spread income, which will then be further supported by the expansion of capital light fee income streams. Although investment gains will continue to vary over time, we expect them to remain positive through the cycle. The overall effect of these changes will be a relative improvement in return on equity as we gradually shift away from capital-intensive assets that currently yield lower relative ROEs. In managing our equity base, earnings per share will remain a key focus, guiding our efforts to optimise earnings with the most efficient use of our equity capital base. The proposed changes to APRA's capital standards in FY27 will be an opportunity to revisit our existing normalised cash operating earnings framework that we use for management reporting and ensure that it is fit for purpose as Challenger evolves. With the appointment of Damien Graham as Group Chief Investment Officer, we are aligning our investment capability under a single leadership structure. So consistent with this, we intend to evolve our internal and external reporting away from separate business unit segments to a more integrated challenger group view. Looking ahead, we reaffirm our FY26 normalised EPS guidance of 66 to 72 cents per share, with 33.3 cents delivered in the first half. Our through the cycle targets for ROE, cost to income and capital remain unchanged and we continue to see strong structural tailwinds across retirement income, advice integration and asset origination. In summary, the first half of FY26 was characterised by solid financial delivery and continued strategic momentum. During the period, we've delivered earnings growth and returns above our target. Our focus on disciplined capital management allows us to maintain significant capital flexibility, ensuring that we remain well positioned to respond to market opportunities and challenges as they arise. I will now hand back to Nick, and I look forward to taking your questions as part of Q&A.