The Challenger Ltd (ASX: CGF) share price went up 9% after reporting a strong set of numbers in the HY24 result.
Challenger FY24 half-year result
Here are some of the highlights from the first six months of FY24:
- Lifetime annuity sales increased 190% to $1.1 billion
- Record new business annuity sales of $1.9 billion, up 19%
- Total assets under management (AUM) went up 18% to $117 billion
- Normalised net profit before tax up 16% to $290 million
- Statutory net profit after tax (NPAT) grew 80% to $56 million
- Interim dividend per share of $0.13, up 8%
Breakdown
Challenger Life, which Challenger says is Australia’s leading retirement income brand, saw EBIT (EBIT explained) increase 15% to $302 million, reflecting the business’ focus on driving longer duration sales, which has helped deliver a strong profit margin and expand the return on equity (ROE).
The Life normalised cash operating margin increased 28 basis points to 3.04% and the pre-tax ROE increased 330 basis points (3.30%) to 18.1%. Total Life sales were $5.3 billion.
Japanese (MS Primary) annuity sales were $346 million, representing around 67% of the annual minimum target. In November 2023, Challenger Life started reinsuring Japanese yen-denominated annuities after the expansion of the arrangement with MS Primary, with a “promising start to the expanded arrangement”.
Challenger has also been making progress on building and deepening its partnerships with superannuation funds, including Commonwealth Superannuation Corporation and TelstraSuper.
The funds management division saw EBT fall 7% to $29 million, but the funds under management (FUM) grow 9% to $108 billion at the end of the FY24 first half thanks to institutional net inflows of $6.5 billion and positive investment markets.
Challenger also announced that Accenture will run Challenger’s technology platform and modernise Life’s customer technology. The initial agreement is expected to commence by the start of FY25 for a seven-year term. This is expected to deliver $90 million of operating savings over seven years, starting FY25.
Outlook for the Challenger share price
Challenger reaffirmed its FY24 normalised net profit before tax guidance and now expects it to be in the top half of the $555 million to $605 million guidance range.
It’s great news for Challenger that it’s delivering such strong growth and returns for shareholders. The higher interest rate environment is making Challenger’s products seem much more appealing. However, interest rates seem destined to drop, at least a little, in the next year or so, but this could boost asset prices and help Challenger’s balance sheet.
It’s exposed to useful tailwinds, including a large number of people moving from the wealth accumulation phase to retirement phase, which could mean more demand for annuities.
I’m not sure if Challenger shares are a buy, considering the good news is now known. I think there are other businesses which can deliver more long-term growth and aren’t affected by interest rates as much – it’s hard to say what the long-term interest rates are going to be.
