Challenger : 1H22 Analyst Pack

For personal use only

Challenger Limited 1H22 Analyst Pack

Contents

Challenger Group

1H22 financial highlights Business and market overview

onlyPurpose and corporate strategy 1H22 strategic progress

Key performance indicators Consolidated profit and loss Dividends

Credit ratings FY22 outlook Group balance sheet

Issued share capital, dilutive share count and earnings per share Group regulatory capital

useConsolidated operating cash flow

Life

Life financial results Life sales and AUM

Mitsui Sumitomo Primary Life Insurance Company Limited (MS Primary) and MS&AD relationship

Retirement income regulatory reforms Life balance sheet

Life investment portfolio overview personalChallenger Life Company Limited (CLC) debt facilities

Challenger Life Company Limited (CLC) regulatory capital Profit and equity sensitivities

Risk management framework

Funds Management

Funds Management financial results

Bank

Bank financial results

Bank quarterly sales and lending and financing assets

Bank balance sheet

Bank regulatory capital

Corporate

Corporate financial results

Additional information

Normalised Cash Operating Earnings framework

Glossary of terms

ForImportant note

Information presented in the 1H22 Analyst Pack is presented on an operational (rather than statutory) basis to reflect a management view of the business.

Challenger Limited (ACN 106 842 371) also provides statutory reporting as prescribed under the Corporations Act 2001 (Cth).

The 2022 Interim Financial Reportis available from Challenger's

shareholder centre at:www. challenger.com.au/shareholder

The 1H22 Analyst Pack is not audited. The statutory net profit after tax as disclosed in the consolidated profit and loss(page 11) has been

prepared in accordance with Australian Accounting Standards and the Corporations Act 2001. Normalised net profit after tax, as disclosed

in the consolidated profit and loss (page 11), has been prepared in accordance with a normalised profit framework, which is disclosed as part of the Operating and Financial Review in the Directors' Report in the 2022 Interim Financial Report.

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21 2022 Interim Financial Report

	can be downloaded from
22	Challenger's online
29	Shareholder Centre
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32 challenger.com.au/shareholder

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34	Investor Relations
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46	Mark Chen
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49Head of Investor Relations

[phone]

[e-mail]

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Irene Xu

58Manager Investor Relations

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[phone]

[e-mail]

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The 2022 Interim Financial Report and normalised profit framework have both been subject to a review performed by Ernst & Young.

Any forward-looking statements included in this document are, by nature, subject to significant uncertainties, risks and contingencies, of which many are outside the control of, and unknown to, Challenger, so that actual results or events may vary from those forward-looking statements, and the assumptions on which they are based.

Past performance is not an indicator of future performance.

While Challenger has sought to ensure that information is accurate by undertaking a review process, it makes no representation or warranty as to the accuracy or completeness of any information or statement in this document. In particular, information and statements in this document do not constitute investment advice or a recommendation on any matter and should not be relied upon.

Challenger Group	Challenger Limited 1H22 Analyst Pack

1H22 financial highlights1

Group

only
use	Life
personal	Funds Management
For	Bank

Normalised net profit before tax $238m, up 21%

Normalised net profit after tax $166m, up 21%

Statutory net profit after tax $282m, up 27%

Normalised EPS2 24.5 cents per share, up 20%

Statutory EPS2 41.8 cents per share, up 26%

Net income $387m, up 19%

Expenses $147m, up 16%

Normalised cost to income ratio 38.1%, down 90 bps Group assets under management $114.9b, up 20% Normalised Return On Equity (pre-tax) 12.1%, up 60 bps Statutory Return On Equity (post-tax) 14.3%, up 130 bps Full-year dividend 11.5 cents per share (fully franked), up 21% Normalised dividend payout ratio 47%

Normalised Cash Operating Earnings (COE) $287m, up 18% COE margin 2.56%, up 1 bps

Expenses $54m, up 6%

Normalised EBIT3 $233m, up 21%

Total Life sales $4.9b, up 44%

Annuity sales $2.5b, up 15%

Total Life book growth $1.4b, or 8.4% growth in opening liabilities Annuity net book growth $0.6b, or 4.4% growth in opening liabilities Average investment assets $22.3b, up 17%

Investment assets $22.9b, up 17%

Normalised Return On Equity (pre-tax) 13.1%, up 60 bps

Prescribed Capital Amount (PCA) ratio 1.69 times, up from 1.63 times4 Common Equity Tier 1 (CET1) ratio 1.20 times, up from 1.14 times4 Capital intensity 11.3%, down from 12.1%4

Net income $98m, up 21%

Expenses $53m, up 15%

EBIT3 $45m, up 28%

Net flows $0.9b, down from $6.4b

Funds Under Management (FUM) $109b, up 20%

Return On Equity (pre-tax) 33.8%, up 600 bps

Net interest income $1m

Net interest margin 0.99%

Expenses $4m

Normalised loss before interest and tax $3m

Deposit sales $73m

Net deposit book growth $18m, or 13.7% of opening deposits Average lending and financing assets $218m

Capital adequacy ratio 72.9%

CET1 capital ratio 6.90 times

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• All percentage movements compare 1H22 to the prior corresponding period (1H21) unless otherwise stated.
  2 Earnings per share (EPS).
  3 Earnings before interest and tax (EBIT).
  4 Comparison period refers to 30 June 2021 (FY21).

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Challenger Limited 1H22 Analyst Pack	Challenger Group

Business and market overview

Challenger's purpose is to provide customers with financial security for a better retirement. To fulfil this purpose, Challenger leverages capabilities across its Life, Funds Management and recently acquired Bank businesses.

onlyChallenger's Life, Funds Management and Bank businesses are expected to benefit from the long-term growth in Australia's superannuation system and savings culture.

Australia's superannuation system commenced in 1992 and is the fifth largest pension system globally and one of the fastest growing, with assets increasing by 11% per annum over the past 20 years1.

Critical features driving the growth of Australia's superannuation system include government-mandated and increasing contributions, tax incentives to encourage

useretirement savings and an efficient and competitive institutional model.

Australia's superannuation system is forecast to grow from over $3 trillion today2 to almost $9 trillion3 over the next 20 years.

Growth in the retirement phase of the system is supported by ageing demographics and the Government's focus on enhancing the retirement phase of superannuation.

Life

personalLife focuses on the retirement spending phase of superannuation, providing products that help customers

convert retirement savings into safe and secure income in retirement.

As Australia's superannuation system grows, the retirement phase of superannuation is expected to increase significantly. The number of Australians over the age of 65, which is Life's target market, is expected to increase by 50% over the next

20 years4. Reflecting these demographic changes, and growth in the superannuation system, the annual transfer from the savings phase of superannuation to the retirement phase was estimated to be approximately $70 billion5 in 2020.

The purpose of the superannuation system is to provide income in retirement to substitute or supplement the Government-funded age pension. With the transition from Government-funded age pensions to private pensions, retirees need retirement income products that convert savings into regular and secure income, helping to provide financial security in retirement.

ForThe Australian Government is progressing a range of retirement income regulatory reforms designed to enhance the retirement phase and better align it with the overall objective of the superannuation system (refer to page 32 for more detail).

These reforms provide an opportunity to increase the proportion of savings invested in products that deliver stable, regular and reliable retirement income. Annuities currently represent only a small part of the retirement phase, with lifetime annuities representing less than 2% of the annual transfer to the retirement phase.

As Australia's leading provider of annuities6, Challenger Life is expected to continue to benefit from the long-term growth in Australia's superannuation system and regulatory reforms designed to enhance the retirement phase.

Challenger has been recognised as a retirement income product innovator and has won the Association of Financial Advisers 'Annuity Provider of the Year' for the last 13 years and remains the dominant retirement income brand in Australia.

An important distribution channel for Life's products are third- party financial advisers. Life's products are included on all major advice hubs' Approved Product Lists (APLs) and are available on leading independent investment and administration platforms.

Challenger is also focused on building institutional partnerships with large superannuation funds. As their members transition to retirement, major superannuation funds are increasing their focus on providing more comprehensive retirement solutions to their members. As the retirement system develops, the profit-for-member sector provides a significant growth opportunity for Challenger.

In Japan, Life has an annuity relationship with Mitsui Sumitomo Primary Life Insurance Company Limited (MS Primary) to provide Australian dollar and US dollar annuities. MS Primary is a leading provider of annuity products in Japan and is part of MS&AD Insurance Group Holdings Inc. (MS&AD Group).

Under a reinsurance arrangement with MS Primary, which commenced in July 2019, MS Primary provides Challenger an annual amount of reinsurance, across both Australian and US dollar annuities, of at least ¥50 billion (equivalent to ~A$600 million7) per year8. This is subject to review in the event of a material adverse change for either MS Primary or Challenger Life.

At 30 June 2021, MS&AD held ~15% of Challenger Limited issued share capital and a representative from MS&AD and an Alternate Director have been appointed Non-Executive Directors of Challenger Limited.

Refer to page 31 for more detail on the MS Primary and MS&AD relationship.

The retirement incomes that Life pays are backed by a high- quality investment portfolio, predominantly invested in fixed income and commercial property investments. These long-term investments generate regular and predictable investment income which is used to fund retirement income paid to Life's customers.

• Willis Towers Watson Global Pension Study 2021.

• The Australian Prudential Regulation Authority (APRA), as at September 2021.

• Deloitte Dynamics of the Australian Superannuation System: The Next 20 Years to 2041.

• 2021 - 2041 comparison based on Australian Bureau of Statistics, Population Projections Series B, cat no. 3222.0.
  5 Based on Taxation Statistics 2018-19 from Australian Taxation Office.
  6 Plan for Life - September 2021 - based on annuities under administration.
  7 Based on the exchange rate as at 30 June 2021.
  8 Reinsurance across both Australian and US dollar annuities, of at least ¥50b per year for a minimum of five years, commencing 1 July 2019.

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Challenger Group	Challenger Limited 1H22 Analyst Pack

Funds Management

Bank

Funds Management focuses on building savings for retirement. As people work and save for retirement, the business supports them to build their wealth and savings by providing investment

onlystrategies that seek to deliver superior investment returns. Funds Management is one of Australia's fastest growing9 and third largest active fund manager10, and is diversifying globally with operations in the United Kingdom and Europe, Japan and more recently Singapore.

Growth in funds under management can be attributed to the strength of Challenger's retail and institutional distribution teams, a market-leading business model focused on alignment with clients and high-quality managers with strong long-term investment performance.

useFunds Management is well positioned to benefit from ongoing growth in both Australia's superannuation system and global pension markets.

Funds Management comprises Fidante Partners and CIP Asset Management.

The Fidante Partners' business model involves taking minority equity interests in separately branded boutique funds management firms, with Challenger providing distribution, administration and business support, leaving investment

personalmanagers to focus entirely on managing investment portfolios. Fidante Partners' business model has allowed it to attract and build successful active equity, active fixed income and alternative investment managers, while maintaining strong investment performance. Over the last three years, long-term performance for Fidante Partners Australian boutiques remains strong with 97% of funds and mandates outperforming their respective benchmarks.

Fidante Partners is focused on broadening its product offering, which includes partnering with best-in-class managers, expanding the product offering of existing managers and accessing new distribution channels.

Funds Management has extensive client relationships, for example over 90% of Australia's top 50 superannuation funds are clients of Fidante Partners.

CIP Asset Management principally originates and manages fixed income and commercial real estate, along with providing investment solutions for leading global and Australian institutions, including Challenger Life. Challenger is committed to growing the business and building on CIP Asset

ForManagement's breadth of investment expertise.

Challenger is diversifying its product offering and extending its customer reach.

In December 2020, Challenger announced it had entered into an agreement to acquire MyLifeMyFinance Limited (MyLife MyFinance or the Bank), an Australian-based customer digital bank.

The acquisition received formal approval from the Treasurer of the Commonwealth of Australia, with the acquisition completing on 30 July 2021.

MyLife MyFinance is an Australian-based authorised deposit- taking institution (ADI) and digital bank, offering a range of simple savings and lending products. MyLife MyFinance has an ADI licence with an existing term deposit offering.

The Bank provides Challenger the opportunity to significantly expand its secure retirement income offering by entering Australia's term deposit market.

Adding an ADI capability to sit alongside the existing Life and Funds Management operations broadens Challenger's product and distribution reach and helps fulfil its purpose of providing customers with financial security for a better retirement.

The Bank provides Challenger the opportunity to attract and engage with customers at an earlier age, as they approach and enter the retirement phase, increasing Challenger's brand recognition in early age demographics.

Initially, Challenger will offer government guaranteed retail term deposits11, which are familiar banking products and represent a significant portion of both retiree and pre-retiree wealth.

The Bank will provide Challenger with access to a wider range of customers through multiple distribution channels, including new intermediated channels, such as the broker term deposit market and retail aggregator websites, to help accelerate Challenger's direct to customer offering.

To ensure speed to market, term deposits have initially been marketed under the MyLife MyFinance brand, with the business to transition to the Challenger brand during 2H22.

• Based on Rainmaker Roundup, September 2021 and September 2016 - 5-year CAGR for active managers.
  10 Calculated from Rainmaker Roundup, September 2021 data.
  11 Bank term deposits are guaranteed under the Financial Claims Scheme up to $250,000 per account-holder per authorised deposit-taking institution (ADI).

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