2019
Annual
Report
Providing
our customers
with financial
security for
retirement
Providing our customers with financial security for retirementchallenger.com.au Challenger Limited ACN 106 842 371 Challenger Limited 2019 Annual Report
Contents
Group performance highlights
Operating and financial review
Five-year history
Directors’ report
Directors
Company Secretary
Corporate governance summary
Remuneration report
Indemnification and insurance of Directors and officers
Indemnification of auditor
Environmental regulation and performance
Significant events after the balance date
Rounding
Non-audit services
Authorisation
Auditor’s independence declaration
Sustainability
Financial statements
Statement of comprehensive income
Statement of financial position
Statement of changes in equity
Statement of cash flows
Signed reports
Investor information
01
02
17
19
19
20
21
24
48
48
48
48
48
48
49
49
50
54
54
55
56
57
111
118
Key dates
25 September 2019
Final dividend payment date
31 October 2019
2019 Annual General Meeting
11 February 2020
Half year financial results
24 March 2020
Interim dividend payment date
11 August 2020
Full year financial results
23 September 2020
Final dividend payment date
29 October 2020
2020 Annual General Meeting
Full listing of key dates available at
› challenger.com.au/share/keydates
Dates may be subject to change
About this Annual Report
The 2019 Annual Report, including the
financial report for the year ended
30 June 2019, can be downloaded from
Challenger’s online Shareholder Centre at:
› challenger.com.au/annualreport2019
2019 Corporate
Governance Report
The 2019 Corporate Governance Report
can be viewed online at:
› challenger.com.au/
corporategovernance2019
2019 Annual General
Meeting
Location
Wesley Centre, 220 Pitt Street,
Sydney NSW
2019 Annual Review
The 2019 Annual Review is intended to
provide you with useful information about
your company in an easy-to-read document.
Included in the Annual Review is an
operational and financial performance
update, reports from the Chair and the
Chief Executive Officer, and information on
the environmental, social and governance
matters that affect your company.
The Annual Review can be viewed online at:
› challenger.com.au/
annualreview2019
2019 Sustainability
Report
The 2019 Sustainability Report can be
viewed online at:
› challenger.com.au/
sustainabilityreport2019
Date
31 October 2019
Time
9.30am (Sydney time)
Full details of the meeting will be
included in your Notice of Annual
General Meeting, which will be sent to
shareholders in September 2019.
Group performance highlights
Group performance highlights
Challenger Limited 2019 Annual Report
Challenger Limited 2019 Annual Report
Group performance highlights
Group performance highlights
Statutory net profit
after tax ($m)
398
323
308
5%
Normalised net profit
after tax ($m)
406
396
385
EXPANDED
STRATEGIC
RELATIONSHIP
2%
2017
2018
2019
2017
2018
2019
Full year
dividend
Total Group assets
under management
35.5
cents per share
fully franked
$82bn
Life book
growth ($bn)
1.8
1.3
Funds Management
net flows ($bn)
6.2
5.3
0.5
74%
2017
2018
2019
2017
2018
2019
-2.4
1 Adviser – Marketing Pulse Adviser Study April 2011 to December 2018. Peers include major Australian
wealth managers.
2 Willis Towers Watson – March 2019.
3 Workplace Gender Equality Agency (WGEA) 2017-18 WGEA Employer of Choice for Gender Equality.
#1
RETIREMENT
INCOME BRAND1
84%
SUSTAINABLE
EMPLOYEE
ENGAGEMENT2
EMPLOYER
OF CHOICE FOR
GENDER
EQUALITY3
1
1
Challenger Limited 2019 Annual Report
Operating and financial review
Operating and financial review
1 About Challenger
Challenger Limited (Challenger, CGF, the Group or the
Company) is an investment manager founded in 1985.
Challenger is the largest annuity provider and one of the
fastest growing fund managers in Australia. It is also
expanding into international markets.
Challenger is listed on the Australian Securities Exchange
(ASX) and has offices in Australia, London, New York and
Tokyo. Challenger is regulated by the Australian Prudential
Regulation Authority (APRA), the Australian banking,
superannuation, general insurance and life insurance
regulator.
Challenger’s activities are also subject to supervision by other
regulatory agencies both in Australia and in other markets in
which it operates.
Challenger’s assets under management were $81.8 billion, up
0.8% (30 June 2018: $81.1 million). Normalised net profit
before tax was $548.3 million, up $1.0 million or 0.2%
(30 June 2018: $547.3 million). Earnings were impacted by
investment market volatility resulting in lower asset returns in
the Life business and lower Funds Management performance
fees. See sections 2 and 8 for a description of Challenger’s
operating segments and its normalised cash operating
earnings framework.
Normalised net profit after tax was down $10.0 million or
2.5% to $396.1 million (30 June 2018: $406.1 million).
Statutory net profit after tax, which includes investment
experience, being the valuation movements on assets and
liabilities supporting the Life business, was $307.8 million
(30 June 2018: $322.5 million), down $14.7 million mainly
due to volatile investment markets in the year.
Challenger has total equity of $3.6 billion as at 30 June 2019
and employs 687 people on a full-time equivalent (FTE) basis.
2 Operating segments and
principal activities
For internal reporting and risk management purposes,
Challenger’s principal activities are divided into two operating
segments, Life and Funds Management. The Life operating
segment is serviced by the Distribution, Product and Marketing
team, which is responsible for ensuring the appropriate
marketing and distribution of Life’s products. Both operating
segments and the Distribution, Product and Marketing team
are supported by centralised operations which are responsible
for appropriate processes and systems and for providing the
necessary resources to meet regulatory, compliance, financial
reporting, legal and risk management requirements.
Life – the Life segment comprises Challenger Life Company
Limited (CLC), Australia’s leading provider of annuities and
guaranteed retirement income products and Accurium Pty
Limited, a provider of self-managed superannuation fund
(SMSF) actuarial certificates.
As Australia’s largest annuity provider, Life provides reliable
guaranteed1 incomes to approximately 60,000 Australian
retirees.
Life’s annuity products appeal to retirees because they provide
security and certainty of guaranteed income while protecting
against risks from market downturns and inflation. Lifetime
annuities protect retirees from the risk of outliving their
savings by paying guaranteed income for life.
The retirement incomes Life pays are backed by a high-quality
investment portfolio, predominantly in fixed income and
commercial property investments. These long-term
investments generate regular and predictable investment
income which is used to fund retirement incomes paid to
Life’s customers.
Life’s products are distributed via both independent financial
advisers and financial advisers tied to the administrative
platforms serviced by the four major Australian banks and
AMP (the ‘major hubs’). Life’s products are included on all
major hub Approved Product Lists (APLs) and are available on
other leading investment and administration platforms, such as
HUB24 and Netwealth.
Life is the market leader in Australian retirement incomes, with
a 76%2 annuity market share and has won the Association of
Financial Advisers ‘Annuity Provider of the Year’ for eleven
consecutive years.
Life also has an annuity relationship with Mitsui Sumitomo
Primary Life Insurance Company Limited (MS Primary), a
leading provider of both US dollar and Australian dollar
denominated annuities in Japan.
Funds Management – the Funds Management segment
focuses predominantly on the retirement savings phase of
Australia’s superannuation system by providing products
seeking to deliver superior investment returns. Funds
Management is also expanding into international markets.
As one of Australia’s fastest growing asset managers, Funds
Management invests across a broad range of asset classes
including fixed income, commercial property and Australian
and global equities. The Funds Management segment
comprises two business divisions, Fidante Partners and
Challenger Investment Partners (CIP).
Fidante Partners encompasses a number of investments in
boutique investment managers that each operate under their
own brands. Fidante Partners provides administration and
distribution services to the boutique investment managers and
shares in the profits of these businesses through equity
ownership. Fidante Partners also has a presence in Europe with
interests in alternative asset managers.
1 The word ‘guaranteed’ means payments are guaranteed by Challenger Life
2 Strategic Insights – March 2019.
Company Limited from the assets of its relevant statutory fund.
2
Operating and financial review
Challenger Limited 2019 Annual Report
2 Operating segments and principal
4 Risk management
activities (continued)
CIP develops and manages assets for CLC and under
Challenger’s brand principally on behalf of third-party
institutional investors. The investments managed by CIP are
predominantly in fixed income and commercial property.
The Funds Management business is growing strongly, with
funds under management (FUM) increasing by more than 68%
over the last five years to $79 billion.
Principal activities – there have been no significant changes in
the nature of these principal activities or the state of affairs of
the Company during the year.
3 Challenger’s vision and strategy
Challenger’s vision is to provide its customers with financial
security for retirement. Challenger has four strategic pillars to
ensure that it achieves its vision over the long-term. The four
strategic pillars are:
• increase the use of secure retirement income streams;
• lead the retirement incomes market and be recognised as
the partner of choice;
• provide customers with excellent funds management
solutions; and
• maintain leading operational and people practices.
An integral part of risk management for Challenger is the
maintenance of a strong risk culture amongst its employees.
Challenger’s expectations of its employees are encapsulated in
the ‘Challenger Principles’ of integrity, commercial ownership,
working together, compliance and creative customer solutions.
Employees are made aware that these principles should form
the basis of all behaviours and actions.
The management of risk is fundamental to Challenger’s
business and to building shareholder value and has been the
key to Challenger’s profitable and disciplined growth over
many years. At Challenger, risk is everyone’s business. The
Board’s Risk Appetite Statement outlines the level of risk that
is acceptable in striving to achieve Challenger’s strategic goals
and financial objectives. This is combined with a robust risk
management framework which monitors, mitigates and
manages the risks to which Challenger is exposed.
Challenger’s Board recognises the broad range of risks that
apply to a participant in the financial services industry. These
include funding and liquidity risk, investment and pricing risk,
counterparty risk, business and reputational risk, operational
risk, licence and regulatory risk, cyber and information security
risk and environmental and social risks. Increasingly, the risk of
climate change is being considered within the investment
process. Challenger invests in assets with long term cash flows
to match the annuity payments required to be made within its
portfolio. This means that Challenger must consider the risk of
climate change within its risk management framework and
work to ensure that these risks are mitigated where possible.
Challenger is not currently materially exposed to climate risk.
3
Challenger Limited 2019 Annual Report
Operating and financial review
5 Challenger’s 2019 strategic progress
2019 strategic progress
Progress in 2019 against our strategic priorities is set out below:
Increase the use
of secure
retirement
income streams
Industry lifetime annuity sales represent less than 2% of the annual transfer from the retirement savings
(accumulation) phase to the retirement spending (retirement) phase. Challenger is focused on growing
the allocation of Australian retirement savings to secure and stable incomes.
2019 progress includes:
• Australian annuity sales were down 4%;
• Term annuities sales were down 6%;
• Lifetime annuity sales were unchanged; and
• Japan annuity sales were down 54%.
Significant financial advice market disruption
In 2019, Challenger’s Australian annuity sales reduced by 4% as a result of disruption to the wealth
management and financial advice industry following the Royal Commission into Misconduct in the
Banking and Financial Services Industry (Royal Commission). The major financial advice hubs1 have been
impacted more than independent financial advisers, and as a result Challenger annuity sales via major
hubs reduced by 16% on 2018 and represented 62% of total Australian annuity sales.
Partially offsetting the decline in sales by major advice hubs was strong growth in sales by independent
financial advisers (IFAs), which increased by 26% on 2018. Growth in IFA sales reflect the evolution of
the advice industry over the past 12 months, with advisers moving from the major hubs to independent
groups. Challenger is evolving its service model to support an increased proportion of advisers being
independent and not aligned to the major hubs.
Life sales mix and focus on long-term products
Challenger's annuity sales mix continues to evolve to long-term products. Long-term annuities embed
more value for shareholders as they lengthen the annuity book tenor, improve the maturity profile and
typically enhance return on equity (RoE).
In 2019, long-term annuity sales, which represent Australian lifetime annuities and fixed term annuities
distributed through MS Primary in Japan, represented 32% of total annuity sales, down from 36% in
2018. The reduction in long-term annuity sales relates to lower MS Primary Australian dollar annuity sales
as a result of higher US interest rates relative to Australia. The higher relative US interest rates increased
demand for US dollar products and reduced demand for Australian dollar denominated products.
Long-term annuity sales are expected to benefit from a new reinsurance agreement with MS Primary that
commences on 1 July 2019 and includes US dollar annuity reinsurance, and new means test rules that
support lifetime income streams.
Solid lifetime annuity sales in disrupted advice market
Despite the significant disruption occurring in the Australian financial advice market, Challenger’s lifetime
annuity sales were unchanged from 2018. Lifetime sales by major financial advice hubs were down 22%
on 2018, reflecting the industry disruption, while lifetime sales by independent financial advisers
increased by 35%.
Lifetime annuity sales are benefiting from rising superannuation savings and retirees taking less risk in
retirement and placing more value on lifetime income streams. Sales of CarePlus, a lifetime annuity
specifically designed for the aged care market, are benefiting from demographic trends with
approximately 300 older Australians entering home or residential care each day.
Retirement reforms engagement and advocacy
The Australian Government is considering a range of superannuation reforms aimed at enhancing the
retirement phase of superannuation.
The Government announced a Retirement Income Framework policy in May 2018. The first stage of the
proposed Retirement Income Framework is to include a Retirement Income Covenant in the
Superannuation Industry (Supervision) Act 1993, which would require superannuation trustees to have a
retirement income strategy in place for members by 1 July 2020.
The second stage of the Retirement Income Framework is to develop simplified, standardised metrics in
product disclosures to help members make decisions about the most appropriate retirement income
product for them. The Government consulted on disclosure in late 2018 and has indicated consumer
testing will be undertaken on the design and content of product disclosures.
1 Major advice hubs include AMP and the wealth management operations of the major Australian banks.
4
Operating and financial review
Challenger Limited 2019 Annual Report
5 Challenger’s 2019 strategic progress (continued)
2019 strategic progress (continued)
Increase the use
of secure
retirement
income streams
(continued)
From 1 July 2019, new pension means test rules commenced for lifetime income stream products. The
new means test rules are expected to encourage the development of innovative lifetime income products
that will help retirees manage the risk of outliving their savings, while ensuring a fair and consistent
means test treatment for all retirement income products.
Following the Australian federal election in May 2019, the Government has indicated it is considering
accepting the Productivity Commission’s recommendation for an independent review of Australia’s
retirement income system. The terms of reference and timeline for the review have not yet been released.
Lead the
retirement
incomes market
and be the
partner of choice
Maintaining thought leadership position
As a key thought leader in retirement incomes in Australia, Challenger works with industry and consumer
organisations and the Government to develop policy outcomes that will provide Australians with financial
security for retirement.
In 2019, Challenger partnered with National Seniors Australia to understand retirees’ attitudes to and
confidence in managing the financial aspects of retirement. Challenger has also supported the Council of
the Ageing (COTA) to explore consumer-related retirement income issues.
Throughout 2019, Challenger published a range of thought leadership papers, made presentations and
conducted workshops focusing on retirement income policy settings and outcomes.
Challenger's strategy includes being the partner of choice for superannuation funds, wealth managers
and investment platforms for providing retirement income solutions. Challenger is the market leader in
retirement incomes with 76%1 annuity market share.
2019 progress includes:
Leading adviser ratings
Among Australian financial advisers, Challenger continues to be the most recognised retirement income
provider with 95%2 of financial advisers rating Challenger as a leader in retirement income.
Challenger’s leadership position in retirement increased by 2 percentage points over the year, despite the
adviser and industry disruption. Challenger’s retirement income leadership position, which is important in
supporting new distribution relationships, is 36 percentage points above its nearest competitor and has
increased by 31 percentage points over the past eight years.
In 2019, Wealth Insights undertook an analysis to compare the service level of Challenger Annuities to
the broader Australian funds management market. When compared to the market, Challenger annuities
rated number one across six key categories, including Overall Adviser Satisfaction (4th consecutive year);
BDM Team (8th consecutive year); Adviser Contact Centre (4th consecutive year); Image and Reputation
(4th consecutive year); Technical Services (4th consecutive year) and Website (3rd consecutive year).
Increased product access via investment and administration platforms
Challenger's strategic priorities include making its annuity products available on leading investment and
administration platforms, allowing financial advisers and their customers easy and efficient access to
Challenger annuities.
By making Challenger annuities available via investment and administration platforms, advisers and
superannuation funds can easily create solutions that combine lifetime income streams with other
products, such as account-based pensions.
1 Strategic Insights – March 2019 – based on annuities in force at 31 March 2019.
2 Marketing Pulse Adviser Study December 2018.
5
Challenger Limited 2019 Annual Report
Operating and financial review
5 Challenger’s 2019 strategic progress (continued)
2019 strategic progress (continued)
Lead the
retirement
incomes market
and be the
partner of choice
(continued)
In 2019, Challenger's full range of annuity products were made available via BT’s Panorama, and leading
independent platforms HUB24 and Netwealth. By making annuities available via platform, it makes it
simple and easy for advisers to include secure and stable income streams in their client portfolios.
These new annuity relationships further expand Challenger’s distribution reach, with Challenger annuities
now available on a wide range of traditional retail hub platforms and the fast-growing independent
platform market. Challenger annuities are now available to over 70% of Australian financial advisers via
their primary investment and administration platform.
New brand campaign
In June 2019, Challenger launched a new consumer brand campaign that responds to extensive adviser
and consumer research undertaken. The new integrated campaign focuses on building product
familiarity, with annuities an important component to creating confidence in retirement. Previous brand
campaigns have focused on building Challenger brand awareness rather than promoting product
familiarity.
Investing in new customer and adviser growth initiatives
In 2020, Challenger will invest up to $15 million in a range of new initiatives to drive the next phase of
growth and enable annuities to become a mainstream option in retirement. Research conducted in 2019
identified two areas of focus to drive growth which centred around building bottom-up customer
demand and increasing the allocation made to annuities via retail financial advice.
Customer research showed that improving understanding of annuities leads to a higher consideration of
them in retirement. A range of customer initiatives has been identified and will be implemented in 2020
with a focus on greater engagement and education on retirement income and the role annuities can
play, which is expected to build more bottom-up customer demand.
Challenger will also be investing in improving the adviser experience to drive increased use of annuities in
financial advice. Investment will focus on increasing efficiency for advisers and providing more tailored
marketing and sales support to better meet the needs of more diverse financial advice groups, including
independent financial advisers.
In 2019, Challenger also simplified its product offering, including removing over 1,000 lifetime product
permutations from its Liquid Lifetime product range. Product positioning was also refined, with improved
marketing collateral. Simplifying the product offering is expected to assist both consumers and advisers in
their understanding of Challenger’s products.
Challenger is focused on providing relevant investment strategies that exhibit superior investment
performance in order to help build retirement savings.
2019 progress includes:
Maintaining superior investment performance
Funds Management has a long track record of achieving superior investment performance, which is
helping attract superior net flows. Over five years, 93% of Funds Management funds have outperformed
their benchmark1.
For Fidante Partners, over the past ten years, 86% of funds have achieved either first or second quartile
investment performance2, with most funds performing well above average. Over three years, 76% of
funds achieved first or second quartile investment performance.
Adding new boutiques and investment strategies
Fidante Partners continues to expand its product offering by adding new boutiques and new investment
strategies for existing managers. In April 2019, Eiger Capital, a new Australian small cap boutique was
formed through partnering with an experienced and highly rated small caps team.
Provide
customers with
excellent funds
management
solutions
1 Fidante Partners as at 31 March 2019. Percentage of Funds Management Australian boutiques and CIP funds meeting or exceeding performance benchmark over five
years.
2 Mercer as at 30 June 2019.
6
Operating and financial review
Challenger Limited 2019 Annual Report
5 Challenger’s 2019 strategic progress (continued)
2019 strategic progress (continued)
Provide
customers with
excellent funds
management
solutions
(continued)
During 2019, Funds Management expanded its product offering:
• Ardea Investment Management commenced development of the High Alpha Real Outcome Fund,
which is a higher returning version of the flagship Ardea Real Outcome Fund;
• Kapstream launched the Kapstream Absolute Return Income Plus strategy, which targets an absolute
return of 3– 4% above the cash rate;
• Whitehelm Capital launched the Smart City Infrastructure Fund backed by Dutch pension fund APG,
which aims to bring the traditional long-term infrastructure investment model to new business models
and use cases; and
• Eiger Capital launched its flagship Australian Small Companies Fund, which aims to outperform its
benchmark over rolling five-year periods (after fees).
Award-winning investment strategies
The quality of Fidante Partners’ investment managers continues to be externally recognised. During 2019,
the following funds won investment manager awards.
• Ardea Investment Management – Kanganews Australian Rates Fund Manager of the Year (2018);
• Bentham Asset Management – Money Magazine Best of the Best Award for Best Income Fund (2019);
• Greencape Capital – Money Magazine Best of the Best Award for Best Australian Share Fund (2019);
• Kapstream – Kanganews Australian Credit Fund Manager of the Year (2018);
• Lennox Capital Partners – SuperRatings & Lonsec Rising Star Award (2018); and
• Lennox Capital Partners – Lonsec/Money Management Emerging Manager of the Year (2019).
Highly rated investment products
Fidante Partners’ investment managers and funds are highly rated by external asset consultants. For
Fidante Partners’ funds rated by asset consultants:
• 39% of ratings are the top rating (e.g. ‘Highly Recommended’ or ‘Gold’) compared to an average of
approximately 10% across the Australian funds management industry; and
• 95% of ratings are a ‘buy’ rating compared to an average of approximately 70% across the Australian
funds management industry.
Expanding capability into exchange traded fund (ETF) market
There is strong demand from investors for simple and easy-to-access liquid investment products. ETFs
have experienced very strong growth in a number of markets as they provide the ability to deliver
diversified investment strategies in a liquid and simple-to-execute format. ETFs have traditionally focused
on passive or factor-based investments; however, Funds Management identified an opportunity to
expand ETF usage to active manager products.
In December 2018, Fidante Partners launched one of Australia’s first active fixed income ETFs, the ActiveX
Ardea Real Outcome Bond Fund (Managed Fund) (ASX: XARO). The fund was listed on the ASX in
December 2018 and is managed by Ardea Investment Management.
Fidante Partners is well advanced to launch more ETFs for its boutique managers, which are expected to
be rolled out progressively throughout 2020.
Expanding into Japanese funds management market
Funds Management is expanding its presence in Japan. Following the opening of a Tokyo office to
support the MS&AD strategic relationship, in the second half of 2018 the business was granted a licence
to manage real estate assets in Japan. In late March 2019, the funds management business was granted
an investment advisory and agency business licence, which enables it to introduce Fidante and CIP
investment capabilities into the Japanese market. Following granting of the relevant investment licences,
Funds Management has assumed responsibility for managing Life’s $0.8 billion Japanese commercial
property portfolio and is well progressed to start managing Japanese property on behalf of its third party
client base.
7
Challenger Limited 2019 Annual Report
Operating and financial review
5 Challenger’s 2019 strategic progress (continued)
2019 strategic progress (continued)
Provide
customers with
excellent funds
management
solutions
(continued)
Challenger Investment Partners (CIP) Credit Income Fund
CIP Fixed Income manages funds and investment mandates across multiple underlying investment
strategies that includes both public and private credit investments in the Australian market.
In October 2017, CIP launched its first fund, the CIP Credit Income Fund. The fund is a floating rate,
multi-sector credit income strategy that invests in investment grade public and private debt investments.
With an investment grade average portfolio credit rating1, the fund provides investors with a higher
income, defensive and diversifying investment without taking excessive credit or interest rate risk.
The Credit Income Fund is performing strongly and since inception has outperformed its benchmark,
which is a return of 3% above the Bank Bill rate and is currently ranked top quartile in relevant
investment surveys. Importantly, the fund has demonstrated its defensive characteristics during periods of
heightened market volatility during the year.
Reflecting the success of the fund, during 2019 the fund continued to attract interest from institutions
looking to benefit from the enhanced yield without taking excessive credit risk. As a result of investor
interest, distribution of the fund will be expanded to target high net-worth investors.
Maintain leading
operational and
people practices
Challenger believes maintaining a highly engaged, diverse and agile workforce committed to sustainable
business practices and a strong risk and compliance culture is essential for providing customers and
shareholders with superior outcomes.
2019 progress includes:
Employee engagement and risk culture
Employee engagement measures the nature of the relationship between an organisation and its
employees. Challenger believes having a highly engaged team with a positive attitude towards the
organisation and its values will lead to superior shareholder and customer outcomes.
Challenger’s latest employee engagement survey, which was conducted by Willis Towers Watson in
March 2019, showed a sustainable employee engagement score of 84%, which was above both the
Australian Company and Global Financial Services Norms.
Challenger’s employee engagement survey also measured employee attitudes to important matters such
as risk culture and views on diversity and flexibility. Challenger’s risk culture score was 85%, which was
well above all Willis Towers Watson’s benchmarks, including the Global High Performance Norm.
Diversity and gender pay equality
Challenger seeks to create an inclusive workforce and values the capability and experience that diversity
brings to the organisation. To encourage greater representation of women at senior levels of the
organisation, Challenger continues to develop initiatives targeted at improving gender equality, including
setting gender diversity targets.
Challenger set diversity targets in December 2015, which included a target of 38% of management roles
being held by women in 2020. In 2019, the 2020 target for women in management roles was increased
from 38% to 40%.
At 30 June 2019, Challenger had 37% of management roles held by women.
Challenger is committed to pay equality. Management and the Board review gender pay equality
annually as part of the remuneration process. This focus has ensured that for the past five years, the
gender pay gap has been closed and gender pay equality for similar roles has been maintained.
During 2019, Challenger was recognised as an Employer of Choice for Gender Equality (WGEA) for the
second year running. Challenger’s commitment to diversity was recognised in Challenger’s March 2019
employee engagement survey, with a diversity and flexibility engagement score of 94%, which was well
above Willis Towers Watson’s Australian Company and Global Financial Services Norms.
Flexible work
Challenger has a focus on providing its employees with flexibility. Over the past year, almost 90
employees moved to a formal flexible working arrangement, representing approximately 15% of
Challenger’s people. In addition, a large number of men and women took advantage of informal flexible
work arrangements throughout the year.
1 Based on Moody’s Investors Service Inc weighted average rating factors.
8
Operating and financial review
Challenger Limited 2019 Annual Report
5 Challenger’s 2019 strategic progress (continued)
2019 strategic progress (continued)
Maintain leading
operational and
people practices
(continued)
Maintain superior cost to income ratio
Challenger's business is highly scalable and efficient. Challenger’s normalised cost to income ratio target
is a range of 30% to 34%. The cost to income ratio in 2019 was a record low of 32.6% and has fallen
by 18 percentage points over the past ten years.
Challenger maintains one of the leading cost to income ratios in the Australian wealth management
industry.
Enhancing sustainability capability
At Challenger, being sustainable is about addressing environmental, social and governance (ESG)
opportunities and risks that have the potential to affect Challenger’s vision to provide financial security
for retirement.
Challenger has made significant progress during the year implementing priorities under its sustainability
strategy and this is highlighted in Challenger’s Sustainability Report.
Challenger continues to be a constituent of the FTSE4Good Index and a signatory to the Principles for
Responsible Investment (PRI). Challenger has adopted an integrated investment management approach
to deliver responsible investment outcomes and believes there are links between long-term sustainable
returns and the quality of an organisation’s ESG practices.
In 2019, ESG capability was increased across Challenger with the appointment of specialist resources. In
addition, CLC released an ESG statement in May 2019, outlining Challenger's approach to ESG risks and
opportunities in investment analysis and decision-making. Challenger continued to support Fidante
Partners to develop ESG practices across their boutique firms. As a result, most of the boutiques have
become signatories to the PRI and many have developed stand-alone ESG policies. Challenger has also
supported a number of boutiques in documenting their own responsible investment policies.
Commitment to reducing emissions
Challenger is committed to reducing the environmental impact of its operations and offsets all known
greenhouse gas emissions, making Challenger’s business operations carbon neutral. In 2019, Challenger
extended the calculation of emissions from Scope 2 to include Scope 3 and had the emission calculation
independently verified. In 2019, greenhouse emissions were 4% lower than in 2018 and electricity usage
in our three largest offices (Sydney, Melbourne and Tokyo) reduced by 5%.
6 Market overview and outlook
Challenger is an investment management firm focusing on
providing customers with financial security for retirement.
Life outlook
Challenger has two businesses, Life and Funds Management,
both providing products for Australia’s growing
superannuation system.
Australia’s superannuation system commenced in 1992 and is
now the fourth largest pension system globally, with pension
assets having increased by 10% per annum over the past 20
years1.
Growth in Australia’s superannuation system is underpinned
by mandatory contributions, which are scheduled to increase
from currently 9.5% of gross salaries to 12.0% by 2025. The
superannuation system is forecast to grow from $2.8 trillion
today2 to over $10 trillion by 20353. Growth in the
superannuation system is also supported by changing
demographics and the Government enhancing the retirement
phase of superannuation.
Both Life and Funds Management are expected to benefit
from growth in Australia’s superannuation system.
Life focuses on the retirement spending phase of
superannuation by providing products that convert retirement
savings into safe and secure income. Challenger Life is
Australia’s leading provider of annuities4 providing reliable
guaranteed5 incomes to approximately 60,000 Australian
retirees.
The retirement spending phase of superannuation is expected
to grow strongly over the next 20 years, driven by
demographic changes and maturing of the superannuation
system.
The number of Australians over the age of 65, which is Life's
target market, is expected to increase by ~56% over the next
twenty years6.
1 Willis Towers Watson Global Pension Study 2018.
2 The Association of Superannuation Funds of Australia, Superannuation
4 Strategic Insights – March 2019 – based on immediate annuities under
administration at 31 March 2019.
Statistics as at the end of March 2019.
3 Rice Warner 2017 superannuation projections.
5 The word ‘guaranteed’ means payments are guaranteed by Challenger Life
Company Limited from the assets of its relevant statutory fund.
6 Australian Bureau of Statistics population projections series B, Cat No 3222.0.
9
Challenger Limited 2019 Annual Report
Operating and financial review
6 Market overview and outlook (continued)
Life outlook (continued)
Reflecting the demographic changes underway, and growth in
Australia's superannuation system, the annual transfer from
the retirement savings phase of superannuation to the
retirement spending phase was estimated to be ~$67bn1 in
2019. Industry annuity sales (term and lifetime annuities)
currently represent less than approximately 5% of the annual
transfer to the retirement phase. Lifetime annuity sales
represent less than 2% of the annual transfer.
There is growing recognition that retirees need to take a
different approach to investing in retirement. As retirees
transition from Government-funded age pensions to private
pensions, retirees are demanding safe, secure retirement
income products that convert savings into income and provide
financial security.
The superannuation system is helping Australians build savings
for their retirement. Australians now have meaningful
superannuation balances when they retire, with an estimated
total financial wealth at retirement of $680,0002, despite the
system only being in place for half the working life of today’s
retirees.
There are a range of Government retirement income
regulatory reforms that are being implemented and are
currently proposed, designed to enhance the retirement phase
and better align it with the overall objective of the
superannuation system – to provide income in retirement to
substitute or supplement the age pension. These reforms
provide a significant opportunity to increase the proportion of
retirement savings invested in longevity products, including
annuities.
As Australia's leading provider of annuities, 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. Life has a range of initiatives
underway to build bottom-up customer demand for annuities
and to increase the allocation of retirement savings made to
annuities through retail financial advice.
Life is also diversifying its range of products and expanding its
distribution relationships in both Australia and Japan.
In Australia, Life is broadening access by making annuities
available via leading investment and administration platforms.
As a result, Challenger’s range of annuities are accessible by
more than 70% of Australia’s financial advisers via their
primary investment and administration platform.
Challenger has been recognised as a product innovator and
was awarded the Association of Financial Advisers Annuity
Provider of the Year, as well as the Long Term Income Stream
and Annuity and Income Stream Innovation Award for its
Deferred Lifetime Annuity product. Challenger is also
recognised by 95%3 of advisers as a leader in Australian
retirement incomes.
The Life business is resilient and well-positioned to capture the
long-term growth opportunity through increased
superannuation savings and a greater allocation made to
annuities. Over the short term, the Australian wealth
management and adviser market has been disrupted, which is
impacting Life domestic annuity sales.
Life relies on third party financial advisers, both independent
and part of the major advice hubs4, to distribute its products.
Following the public hearings and completion of the Royal
Commission, there has been significant disruption across the
financial advice market which has reduced customer
confidence in retail financial advice and reduced the
acquisition of new customers by financial advisers. The
financial advice market disruption is impacting the Australian
wealth management industry sales over the short term.
While Challenger was not called to give evidence at the Royal
Commission and Life’s customers are not questioning the
quality of its products or services, the disrupted advice market
is impacting Life’s domestic annuity sales, which reduced by
4% on 2018.
Life has a strong reputation with both consumers and advisers
and is undertaking a range of initiatives to support sales while
the financial advice market is disrupted.
Life is engaging and educating customers in order to increase
consumer understanding in order to build bottom-up demand.
Initiatives include enhancing and simplifying its product
offering, developing engagement and education initiatives and
nurturing prospective clients.
Following the Royal Commission, the financial advice
landscape is evolving and there are opportunities to improve
the adviser experience. Challenger is evolving its service model
to cater for an increased number of independent financial
advisers and has a range of initiatives under way to support
advisers by providing efficiencies and support in order to meet
best interests duty requirements.
The profit-for-member sector of superannuation is growing
strongly and as their members transition to retirement, their
focus on providing retirement solutions to retiree members is
increasing. The profit-for-member sector provides a significant
growth opportunity for Challenger.
In Japan, Life commenced an annuity relationship with Mitsui
Sumitomo Primary Life Insurance Company Limited (MS
Primary) to provide Australian dollar annuities in November
2016.
1 Australian Taxation Office.
2 Australian Bureau of Statistic Household Income and Wealth 2017-18 Cat No
3 Market Pulse Adviser Study December 2018.
4 Major advice hubs include AMP and the wealth management operations of the
6523.0. Average household wealth includes superannuation and non-
superannuation assets and excludes the family home.
major Australian banks.
10
Operating and financial review
Challenger Limited 2019 Annual Report
6 Market overview and outlook (continued)
Life outlook (continued)
MS Primary is a leading provider of annuity products in Japan
and is part of the MS&AD Insurance Group Holdings Inc.
(MS&AD).
As part of the reinsurance agreement with MS Primary,
Challenger Life currently reinsures an Australian dollar 20-year
term product and an Australian dollar lifetime annuity product.
In March 2019, Challenger entered into a new agreement with
MS Primary to commence reinsuring a 20-year term US dollar
annuity product from 1 July 2019.
Under the new reinsurance arrangement, MS Primary provides
Challenger an annual amount of reinsurance, across both
Australian and US dollar annuities, of at least ¥50 billion
(~$660 million1) per year for a minimum of five years2,3.
MS&AD also announced its intention to increase its
shareholding in Challenger to over 15% of issued capital and
seek representation on the Challenger Limited Board. At 30
June 2019, MS&AD held 16% of Challenger’s issued capital
and a representative from MS&AD is expected to join the
Board early in the 2020 financial year.
Funds Management outlook
Funds Management focuses on building savings for retirement
by providing products seeking to deliver superior investment
returns. Funds Management is one of Australia’s largest4 active
fund managers.
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 investor
alignment and strong long-term investment performance.
The Fidante Partners business model involves taking minority
equity interests in separately branded, boutique fund
management firms, with Challenger providing the distribution,
administration and business support, leaving investment
managers to focus on managing investment portfolios.
Fidante Partners is expanding its product offering by adding
new boutiques and accessing new distribution channels.
During 2019, new products were added, including new
boutiques, new investment strategies and Fidante Partners
launched its first actively managed exchange traded fund.
Funds Management also includes Challenger Investment
Partners (CIP), an institutional manager that originates and
manages fixed income and property assets for leading global
and Australian institutions, including Challenger Life. CIP
clients benefit from the broad product offering and market
insights CIP gains through its experienced team and scale of its
investment business.
Funds Management is also expanding its presence in Japan,
with Challenger opening a Tokyo office in order to support the
MS&AD strategic relationship and to develop distribution
opportunities in the region. A Japanese real estate funds
management licence and an investment advisory licence has
been granted, which will facilitate distribution of investment
products in Japan.
Funds Management is expected to continue to benefit from
the overall growth in Australia’s superannuation system and
Challenger’s expansion into international funds management
and pension markets.
Risks
The above outlook for the Life and Funds Management
segments is subject to the following key business risks:
• regulatory and political changes impacting financial services
participants;
• demand for and competition with Challenger products,
including annuities and managed funds;
• investment market volatility; and
• general uncertainty around the global economy and its
impact on markets in which Challenger operates and invests.
Challenger's Fidante Partners business model has allowed it to
attract and build successful alliances with traditional and
alternative investment managers.
Other risks to which Challenger’s businesses are exposed are
summarised in section 4 Risk Management and in the
Corporate Governance summary on page 23.
Fidante Partners has operations in Australia and the United
Kingdom. Fidante Partners is authorised and regulated by the
Financial Conduct Authority in the United Kingdom and also
holds a registration as a broker-dealer with the Financial
Industry Regulatory Authority in the United States.
1 Based on AUD/JPY close of 75.705 as at 28 June 2019.
2 Challenger Life has entered into a new agreement with MS Primary to
commence reinsuring the US dollar version of the 20-year term product.
Challenger will provide a guaranteed interest rate and assume the investment
risk in relation to those policies issued by MS Primary and reinsured by
Challenger.
3 Subject to review in the event of a material adverse change for either MS
Primary or Challenger Life.
4 Consolidated FUM for Australian Fund Managers – Rainmaker Roundup March
2019.
11
Challenger Limited 2019 Annual Report
Operating and financial review
7 Key performance indicators (KPIs)
7.1 Profitability and growth
KPIs for the year ended 30 June 2019 (with the year to 30
June 2018 being the prior comparative period (PCP), unless
otherwise stated) include:
2019
2018
Change
%
Profitability
Statutory profit attributable
to equity holders ($m)
322.5
Normalised NPBT
547.3
406.1
Normalised NPAT ($m)
Statutory EPS (cents)
54.0
68.1
Normalised EPS (cents)
35.5
Total dividend (cents)
Total dividend franking
100%
Normalised cost: income ratio 32.6% 32.7%
Statutory RoE after tax
9.7%
15.8% 16.5%
Normalised RoE pre-tax
Normalised RoE after tax
11.4% 12.2%
307.8
548.3
396.1
50.9
65.5
35.5
100%
8.9%
(4.6)
1.0
(2.5)
(5.7)
(3.8)
-
-
(0.1)
(0.8)
(0.7)
(0.8)
Growth
Total Life annuity sales ($m)
Life annuity net book
growth ($m)
Life annuity net book
growth (%)
Total FM net flows ($bn)
Total AUM ($bn)
3,543.1 4,000.7
(11.4)
685.8 1,392.7
(50.8)
5.8% 13.5%
5.3
81.1
(2.4)
81.8
(7.7)
(Large)
0.9
Challenger’s statutory profit attributable to equity holders was
4.6% lower for the year ended 30 June 2019. Statutory EPS
has decreased for the year when compared to the prior year,
reflecting the lower profit attributable to equity holders as a
result of higher pre-tax normalised earnings offset by the
impact of fair value changes on Challenger Life Company
Limited’s (CLC’s) assets and liabilities together with the impact
of the issue of additional ordinary shares in the period to
satisfy the dividend reinvestment plan (DRP) and as a result of
a reduction in Treasury shares. Statutory EPS has decreased by
5.7% for the year when compared to 2018.
Normalised net profit after tax decreased by 2.5%, and
normalised EPS decreased by 3.8% compared to 2018,
reflecting slightly higher earnings in Life and marginally lower
earnings in the Funds Management business, offset by a
higher effective tax rate in the period and a higher share count
as a result of additional capital being issued to satisfy the DRP
and as a result of a reduction in Treasury shares.
A final dividend of 18.0 cents was announced, franked at
100%, taking the total dividend for 2019 to 35.5 cents
franked at 100%, which is unchanged from the prior year
(100% franked).
Challenger’s normalised cost to income ratio of 32.6%
remains within the targeted range and is lower than the ratio
in 2018 (32.7%). This reflects continued cost discipline
throughout the business. Challenger’s medium-term expected
normalised cost to income ratio target is 30–34%.
12
However, it is expected that this range will be exceeded in the
next period as a result of additional costs being incurred in the
Distribution, Product and Marketing area to support growth
initiatives.
Challenger has historically targeted a normalised pre-tax RoE
of 18%. The normalised pre-tax RoE was 15.8% in 2019
compared to 16.5% in the prior year due to higher average
capital levels. The RoE target has been lowered for 2020 and
beyond from 18% to the Reserve Bank of Australia (RBA) cash
rate plus a margin of 14%. This reflects the structural change
in interest rates, being at historic lows and expected to remain
low for the foreseeable future.
Statutory RoE after tax of 8.9% has decreased compared to
the prior year (2018: 9.7%) as a result of lower after-tax
statutory profit and higher capital levels. Normalised RoE after
tax decreased from 12.2% in the prior period to 11.4%,
primarily reflecting the increased share count and the reduced
normalised net profit after tax.
7.2 Capital management
Challenger’s capital position is managed at both the Group
and the prudentially-regulated CLC level, with the objective of
maintaining the financial stability of the Group and CLC whilst
ensuring that shareholders earn an appropriate risk-adjusted
return. Refer to Note 12 Contributed equity for further
information on the Group’s Internal Capital Adequacy
Assessment Process.
The following table highlights the key capital metrics for CLC
and the Group:
Capital
Net assets attributable to
equity holders ($m)
CLC excess capital over
PCA ($m)
Group cash ($m)
CLC excess capital over PCA +
Group cash ($m)
CLC PCA ratio (times)
CLC Tier 1 ratio (times)
2019
2018 Change
3,600.3 3,485.4
114.9
1,377.0 1,341.9
84.9
91.5
1,468.5 1,426.8
1.53
1.37
1.53
1.37
35.1
6.6
41.7
-
-
CLC regulatory capital base
CLC holds capital in order to ensure that, under a range of
adverse scenarios, it can continue to meet its regulatory and
contractual obligations to its customers. CLC is regulated by
APRA and is required to hold a minimum level of regulatory
capital. CLC has ongoing and open engagement with APRA.
CLC maintains a level of capital representing the Prescribed
Capital Amount (PCA) plus a target surplus. The target surplus
is a level of excess capital that CLC seeks to carry over and
above APRA’s minimum requirement in order to provide a
buffer against adverse market conditions, having regard to
CLC’s credit rating.
Operating and financial review
Challenger Limited 2019 Annual Report
7 Key performance indicators (KPIs) (continued)
CLC regulatory capital base (continued)
CLC uses internal capital models to determine its target
surplus, which are risk-based and are responsive to changes in
CLC’s asset allocation and market conditions. While CLC does
not target a specific PCA ratio, CLC’s internal capital models
result in a PCA ratio under current circumstances in the range
of 1.3 to 1.6 times. This range may change over time and is
dependent on a number of factors.
In addition to CLC’s excess regulatory capital, Challenger
maintains cash at a Group level which can be used to meet
regulatory capital requirements. Challenger further maintains a
Group corporate debt facility of $400 million in order to
provide additional financial flexibility. The facility remained
undrawn throughout the period.
APRA’s Level 3 (conglomerate) proposals
The Group is a Level 3 Head (as defined in Prudential Standard
3PS 001) under the APRA conglomerates framework. Level 3
groups are groups of companies that perform material activities
across more than one APRA-regulated industry and/or in one or
more non-APRA regulated industries. APRA’s non-capital
conglomerate prudential standards relating to measurement,
management, monitoring and reporting aggregate risk
exposures and intragroup transactions and exposures came into
effect 1 July 2017.
In March 2016, APRA announced that it would defer the
implementation of conglomerate capital requirements until a
number of other domestic and international policy initiatives
were further progressed. There has been no further update
from APRA in relation to this position.
Dividends and dividend reinvestment plan
2019 2018 Change
Dividends
Interim dividend (cents)1
-
17.5 17.5
Final dividend (cents)2
-
18.0 18.0
Total dividend (cents)
-
35.5 35.5
Interim dividend franking 100% 100%
-
Final dividend franking
-
100% 100%
Change
%
-
-
-
-
-
1
Interim dividend declared on 12 February 2019 and paid on 26 March 2019 in
respect of the half year ended 31 December 2018.
2 Final dividend declared on 12 August 2019 and payable on 25 September
2019 in respect of the half year ended 30 June 2019.
The Board targets a dividend payout ratio range of 45% to
50% of normalised net profit after tax. The dividend payout
ratio for the year ended 30 June 2019 was 54.2% (30 June
2018: 52.1%).
The payout ratio is currently above the target reflecting the
resilience of Challenger’s business and strong capital position.
The Company also seeks to frank its dividend to the maximum
extent possible and expects future dividends over the medium
term to be fully franked. However, the actual dividend payout
ratio and franking will depend on prevailing market conditions
and capital allocation priorities at the time.
The Company continued to operate its DRP during the period.
The DRP participation rate for the 2018 final dividend was
3.1% of all issued shares, and 329,710 ordinary shares were
issued to satisfy the DRP requirements on 26 September 2018.
The participation rate for the 2019 interim dividend was 3.1%,
and 411,192 ordinary shares were issued to satisfy DRP
requirements on 26 March 2019.
The DRP will continue in operation for the 2019 final dividend,
and the Board has determined that new shares will be issued
to fulfil DRP requirements in respect of the final dividend. The
new shares will not be issued at a discount to the prevailing
Challenger share price.
No shares were bought back during the year.
7.3 Credit ratings
Challenger Limited and CLC are rated by Standard & Poor’s
(S&P). In December 2018, S&P reaffirmed both CLC and
Challenger Limited’s credit ratings.
Ratings were confirmed as:
• CLC: ‘A’ with a positive outlook; and
• Challenger Limited: ‘BBB+’ with a positive outlook.
The S&P ratings reflect the financial strength of Challenger
Limited and CLC. In particular, S&P note that CLC has an
extremely strong capital and earnings position with significant
financial flexibility.
8 Normalised profit and investment
experience
Normalised framework (Non IFRS)
CLC and its consolidated entities are required by AASB 1038
Life Insurance Contracts to value all assets and liabilities at fair
value where permitted by other accounting standards.
This gives rise to fluctuating valuation movements on assets
and liabilities being recognised in the profit and loss in CLC
and on consolidation in Challenger Limited. CLC is generally a
long-term holder of assets, due to holding assets to match the
term of life contract liabilities. As a result, Challenger takes a
long-term view of the expected capital growth of the portfolio
rather than focusing on short-term movements. Investment
experience represents the difference between actual
investment gains/losses (both realised and unrealised) and
expected gains/losses based on CLC’s medium to long-term
expected returns together with the new business strain1 that
results from writing new annuities. Investment experience also
includes any impact from changes in economic and other
actuarial assumptions.
1 New business strain is a non-cash accounting adjustment recognised when
annuity rates on new business are higher than the risk-free rate used to fair
value annuities. The new business strain unwinds over the annuity contract.
13
Challenger Limited 2019 Annual Report
Operating and financial review
8 Normalised profit and investment experience (continued)
Normalised framework (Non IFRS) (continued)
Management analysis – normalised results
Operating expenses decreased (down $1.0 million), with cost
discipline maintained across the Group.
In 2019, Challenger’s full-time equivalent employee numbers
increased by 11 (or 1.6%) to 687.
Normalised tax for the year was $152.2 million, up
$11.0 million (or 7.8%) from 2018 due to flat earnings before
interest and tax, offset by a higher normalised effective tax
rate. The normalised effective tax rate for the period increased
to 27.8% (25.8% at 30 June 2018).
Management analysis – investment experience
Actual capital growth1
– Cash and fixed income
– Infrastructure
– Property (net of debt)
– Equity and other investments
Total actual capital growth
Normalised capital growth2
– Cash and fixed income
– Infrastructure
– Property (net of debt)
– Equity and other investments
Total normalised capital growth
Investment experience
– Cash and fixed income
– Infrastructure
– Property (net of debt)
– Equity and other investments
– Policy liability experience3
Asset and policy liability experience
New business strain4
Investment experience before tax
Tax benefit/(expense)
Investment experience after tax
2019
$m
2018
$m
9.4
116.9
43.5
(90.7)
79.1
40.8
(34.2)
134.6
(80.2)
61.0
(42.0)
30.2
72.1
94.8
155.1
(38.9)
24.4
70.3
74.7
130.5
51.4
86.7
(28.6)
(185.5)
5.8
(70.2)
(33.3)
(103.5)
15.2
(88.3)
79.7
(58.6)
64.3
(154.9)
24.5
(45.0)
(58.9)
(103.9)
27.9
(76.0)
1 Actual capital growth represents net realised and unrealised capital gains or
losses and includes the attribution of interest rate, inflation and foreign
exchange derivatives that are used to hedge exposures.
2 Normalised capital growth is determined by multiplying the normalised capital
growth rate for each asset class by the average investment assets for the
period. The normalised capital growth rates represent Challenger’s expectations
for each asset class over the investment cycle. The normalised growth rate is
+4.5% for equity and other investments (revised to +3.5% from 1 July 2019),
+4.0% for infrastructure, +2.0% for property and -0.35% for cash and fixed
income in order to allow for credit defaults. The rates have been set with
reference to medium to long-term market growth rates and are reviewed to
ensure consistency with prevailing market experience.
3 Policy liability experience represents the impact of changes in macroeconomic
variables, including bond yields and inflation factors, expense assumptions and
other factors applied in the valuation of life contract liabilities.
4 New business strain is a non-cash accounting adjustment recognised when
annuity rates on new business are higher than the risk-free rate used to fair
value annuities. The new business strain unwinds over the annuity contract.
A reconciliation between statutory revenue and the
management view of revenue and net income is included in
the financial report as part of Note 3 Segment information.
This note also includes a reconciliation of statutory profit
after tax and normalised net profit after tax (the management
view of post-tax profit). The application of the normalised
profit framework has been reviewed by Challenger’s
independent auditor to ensure that the reported results are
consistently applied in accordance with the methodology
described in Note 3 Segment information in the financial
report.
Management analysis – normalised results
2019
$m
2018
$m
821.0 821.8
Change
$m
(0.8)
Change
%
(0.1)
670.1 669.6
149.9 151.2
0.5
(1.3)
0.1
(0.9)
1.0
1.0
(267.4) (268.4)
553.6 553.4
-
1.0
0.2
-
0.4
-
563.6 562.7
57.9
50.9
0.9
(7.0)
0.2
(12.1)
Net income1
Comprising:
– Life normalised COE
– FM net income
– Corporate and other
income
Operating expenses1
Normalised EBIT
Comprising:
– Life normalised EBIT
– FM normalised EBIT
– Corporate and other
normalised EBIT
(60.9)
(67.2)
6.3
9.4
Interest and borrowing
costs
Tax on normalised
profit
Normalised NPAT
Investment experience
after tax
Significant items
after tax
Statutory net profit
after tax attributable
to equity holders
(5.3)
(6.1)
0.8
13.1
(152.2) (141.2)
396.1 406.1
(11.0)
(10.0)
(7.8)
(2.5)
(88.3)
(76.0)
(12.3)
(16.2)
-
(7.6)
7.6
100.0
307.8 322.5
(14.7)
(4.6)
1 ‘Net income’ and ‘Operating expenses’ are internal classifications and are
defined in Note 3 Segment information in the financial report. These differ
from the statutory revenue and expenses classifications, as certain costs
(including distribution expenses, property expenses, management fees, special
purpose vehicle expenses and finance costs) are netted off against gross
revenues. These classifications have been made in the Directors’ report and in
Note 3 Segment information to reflect how management measures business
performance. Whilst the allocation of amounts to the above items and
investment experience differ to the statutory view, both approaches result in
the same total net profit after tax attributable to equity holders.
Life normalised cash operating earnings (COE) and earnings
before interest and tax (EBIT) increased marginally as a result
of higher Life investment assets, offset by a lower margin
being earned on those assets. Life’s average investment assets
increased by 8.6% as a result of increased net book growth in
annuities and valuation movements on those assets.
Funds Management net income decreased (down $1.3 million)
due to both reduced Fidante Partners fee income and reduced
Challenger Investment Partners income. Funds Management
average FUM increased by 5.5%.
14
Operating and financial review
Challenger Limited 2019 Annual Report
8 Normalised profit and investment
experience (continued)
Management analysis – investment experience
Investment experience after tax relates to changes in the fair
value of Life’s assets and liabilities. Investment experience is a
mechanism employed to remove the volatility arising from
asset and liability valuation movements and new business
strain from Life business earnings so as to more accurately
reflect the underlying performance of the Life business.
Pre-tax investment experience in 2019 comprised an asset and
policyholder liability experience loss of $70.2 million and a loss
of $33.3 million from Life’s new business strain. Life’s asset
portfolio experienced losses across equity and alternatives and
property which were partially offset by gains on Life’s fixed
income and infrastructure portfolios. The positive fixed income
movements, which were primarily due to the contraction in
domestic and offshore credit spreads, were partially offset by
the increase in the value of Life’s liabilities as a result of a
lower discount rate used to determine their fair value.
9 Life segment results
The Life segment includes CLC, Australia’s leading provider of
annuities and guaranteed retirement income products, and
Accurium Pty Limited. CLC has won the Association of
Financial Advisers/Plan for Life annuity provider of the year for
the past eleven consecutive years.
CLC is regulated by APRA, and its financial strength is rated by
Standard & Poor’s, with an ‘A’ credit rating and positive
outlook. CLC is strongly capitalised, with significant excess
capital above APRA’s minimum regulatory requirements.
Life normalised
results
Normalised COE
– Cash earnings
– Normalised capital
growth
Operating expenses
Normalised EBIT
2019
$m
2018
$m
670.1 669.6
515.0 539.1
Change
$m
0.5
(24.1)
Change
%
0.1
(4.5)
155.1 130.5
(106.5) (106.9)
563.6 562.7
24.6
0.4
0.9
18.9
0.4
0.2
Life normalised EBIT increased by $0.9 million (up 0.2%) due
to marginally higher normalised COE (up $0.5 million or
0.1%), which was combined with lower operating expenses
decreasing by $0.4 million (or 0.4%). The higher normalised
COE was as a result of higher investment assets, with Life
average investment assets increasing 8.6%, offset by reduced
cash earnings generated on those assets.
Life generated a normalised RoE (pre-tax) of 17.7%, down by
0.8 percentage points from the prior year as a result of a lower
margin combined with increased average net assets resulting
from increased CLC capital following the MS&AD share
placement in 2018.
Life annuity sales declined from the prior period (down
11.4%), with reduced fixed term sales (down 14.5%), reduced
other Life sales (down 35.2%) and reduced lifetime sales
(down 0.2%). Lifetime annuity sales in 2019 were impacted by
significant financial advice market disruption reducing financial
adviser productivity.
In September 2018, Life’s annuity products were made
available on BT’s Panorama platform. In addition, Life’s annuity
products also launched on HUB24’s platform in May 2019 and
on Netwealth’s platform in June 2019. The disruption in the
financial advice market has had the most impact on financial
advisers connected to the major hubs, while independent
financial advisers on platforms like HUB24 and Netwealth have
been growing their proportion of Life’s annuity sales when
compared to the prior period.
In November 2016, Life began issuing Australian dollar fixed
rate annuities with a 20-year term to support its reinsurance
agreement with MS Primary. Under the terms of the product,
the customer can choose an annuity payment period of five,
10 or 20 years, with a benefit payable upon death. 8% of
Life’s total annuity sales in 2019 are represented by sales with
MS Primary which has reduced compared to 2018 due to the
relative attractiveness of Australian dollar denominated
annuities when compared with US dollar annuities in the
Japanese market.
As a result of this, Challenger announced in March 2019 that
from 1 July 2019 it will commence a quota share reinsurance
of US dollar denominated annuities issued in the Japanese
market by MS Primary. The arrangement will provide CLC with
an annual amount of reinsurance across both Australian and
US dollar annuities of at least ¥50 billion (approximately
A$660 million as at 30 June 2019) each year for a minimum of
five years.
As part of the expansion of the reinsurance arrangement,
MS&AD also intends to increase its shareholding in Challenger
to over 15% and will seek representation on Challenger’s
Board subject to relevant regulatory approvals (expected in
early financial year 2020).
Change
$m
(456.0)
(1.6)
Change
%
(14.5)
(0.2)
853.3
2019
$m
2018
$m
Life sales
Fixed-term annuities 2,689.8 3,145.8
Lifetime annuities
854.9
Total Life annuity
sales
Other Life sales
Total Life sales
Annuity net flows
Other Life net flows
(457.6)
3,543.1 4,000.7
(548.0)
1,006.9 1,554.9
4,550.0 5,555.6 (1,005.6)
(706.9)
(614.6)
685.8 1,392.7
403.6
(211.0)
(11.4)
(35.2)
(18.1)
(50.8)
(Large)
Annuity net flows (new annuity sales less capital repayments)
decreased by 50.8% to $685.8 million. Based on the opening
Life annuity book for the 2019 financial year ($11,728.3
million), annuity net book growth for the period was 5.8%,
down from 13.5% in the prior period.
Other Life sales represents Challenger’s Guaranteed Index
Return (GIR) and Challenger Index Plus products (disclosed in
Note 9 External unit holders’ liabilities). Other Life sales
decreased by $548.0 million (down 35.2%) as a result of lower
new client sales during the period together with reduced
reinvestments of maturities.
Other Life net flows for the period were negative $211.0
million, decreasing by $614.6 million compared to $403.6
million in the prior period. Total Life net flows were $474.8
million, representing, total Life net book growth of 3.4% (30
June 2018: $1,796.3 million or 15.0% book growth).
15
Challenger Limited 2019 Annual Report
Operating and financial review
10 Funds Management segment results
Challenger’s Funds Management segment is one of Australia’s
fastest growing investment managers.
Fidante Partners’ multi-boutique platform comprises a number
of separately branded funds management businesses. The
model seeks to align the interests of investors, boutique
investment managers and Fidante Partners.
The Funds Management model is delivering superior
investment performance, with 93% of strategies exceeding
benchmark over the last five years.
FM normalised
results
Net income
– Fidante Partners
– CIP
Operating expenses
Normalised EBIT
2019
$m
149.9
86.7
63.2
(99.0)
50.9
2018
$m
151.2
92.9
58.3
(93.3)
57.9
Change
$m
(1.3)
(6.2)
4.9
(5.7)
(7.0)
Change
%
(0.9)
(6.7)
8.4
6.1
(12.1)
Challenger Investment Partners (CIP) develops and manages
assets under Challenger’s brand for CLC and third party
institutional investors.
Funds Management normalised EBIT decreased by 12.1% in
2019, with reduced net income combined with increased
expenses during the period.
Fidante Partners’ net income includes distribution fees,
administration fees and a share in the equity accounted profits
for the boutique fund managers in which it has an equity
interest.
Fidante Partners’ net income declined for the period primarily
as a result of performance fees (down $15.8 million), which
was partially offset by increased Fidante Partners’ income
relative to the prior period (up $9.6 million), mainly due to
higher transaction fees.
CIP’s net income increased due to higher net management
fees and transaction fees (up $4.9 million).
Funds Management’s normalised RoE (pre-tax) for the year
was 23.5%, down by 5.9 percentage points from the prior
year. This decrease comes largely as a result of reduced
performance fees earned during the year. RoE in Funds
Management continues to see the benefits of scale and
increased earnings flexibility.
FM FUM and flows
Total FUM
– Fidante Partners
– CIP
Net flows
– Fidante Partners
– CIP
2019
$bn
79.0
58.9
20.1
(2.4)
(3.6)
1.2
2018
$bn
78.0
59.6
18.4
5.3
3.9
1.4
Change
$bn
1.0
(0.7)
1.7
(7.7)
(7.5)
(0.2)
Change
%
1.3
(1.2)
9.3
(Large)
(Large)
(16.2)
Fidante Partners’ FUM decrease ($0.7 billion) was driven by net
outflows ($3.6 billion) and positive impact from investment
markets (up $2.4 billion).
CIP FUM growth (up $1.7 billion) is primarily a result of
additional fixed income flows (up $1.8 billion) offset by
reduced property flows (down $623.1 million), from both CLC
and third party investors and positive impact from investment
markets ($565.8 million).
11 Corporate and other segment results
The Corporate and other segment comprises central functions
such as the Group executive, finance, treasury, legal, human
resources, risk management and strategy.
The financial results also include interest received on Group
cash balances and any interest and borrowing costs associated
with Group debt facilities.
Corporate and other
normalised results
Net income
Operating expenses
Normalised EBIT
Interest and
borrowing costs
Normalised loss
before tax
2019
$m
1.0
(61.9)
(60.9)
2018
$m
1.0
(68.2)
(67.2)
Change
$m
-
6.3
6.3
Change
%
-
9.2
9.4
(5.3)
(6.1)
0.8
13.1
(66.2)
(73.3)
7.1
9.7
Normalised EBIT for the Corporate and other segment was
higher (up $7.1 million) as a result of lower operating
expenses.
12 Guidance for the 2020 financial year
Challenger is well positioned with strong product offerings,
positive retirement market demographics and highly efficient
operations. It is, however, facing some short term challenges
from financial advice market disruption and increased market
volatility.
For 2020, Challenger is targeting normalised net profit before
tax of between $500 million and $550 million. This profit
range reflects the lower normalised growth assumption for
Equity and other investments ($23.0 million), increased
expenditure in Distribution, Product and Marketing to support
growth initiatives (up to $15.0 million) and lower expected
interest rates reducing the return on shareholder capital.
The normalised cost to income ratio is also forecast to be
above the medium term range of 30 – 34% in 2020 as a result
of the increased spend to support growth initiatives in
Distribution, Product and Marketing.
Challenger Group RoE and dividend
Challenger has revised its RoE target, and is now targeting a
normalised RoE of RBA cash rate plus 14% (pre-tax). Reflecting
the resilience and capital strength of the business, the Board
expects to maintain the same annual dividend of 35.5 cents
per share in 20201. This will result in the normalised dividend
payout ratio being above the target payout ratio of 45 – 50%
of normalised profit.
1 Subject to market conditions and capital allocation priorities.
16
Five-year history
Challenger Limited 2019 Annual Report
Five-year history
Earnings ($m)
Normalised cash operating earnings
Net fee income
Other income
Total net income
Personnel expenses
Other expenses
Total expenses
Normalised EBIT
Interest and borrowing costs
Normalised profit before tax
Normalised tax
Normalised profit after tax
Investment experience after tax
Significant items after tax
Profit attributable to equity holders
Normalised cost to income ratio (%)
Normalised effective tax rate (%)
Earnings per share (EPS) (cents)
Basic EPS – normalised profit
Basic EPS – statutory profit
Diluted EPS – normalised profit
Diluted EPS – statutory profit
Capital management (%)
Normalised return on equity – pre-tax
Normalised return on equity – post tax
Statutory return on equity – post tax
Statement of financial position ($m)
Total assets
Total liabilities
Net assets1
Net assets2
Net assets2 – average3
Net tangible assets
Net assets per basic share ($)
Net tangible assets per basic share ($)
1 Including minority interests.
2 Excluding minority interests.
3 Calculated on a monthly basis.
2019
2018
2017
2016
2015
670.1
149.9
1.0
821.0
(185.3)
(82.1)
(267.4)
553.6
(5.3)
548.3
(152.2)
396.1
(88.3)
-
307.8
32.6%
27.8%
65.5
50.9
56.0
44.8
669.6
151.2
1.0
821.8
(187.8)
(80.6)
(268.4)
553.4
(6.1)
547.3
(141.2)
406.1
(76.0)
(7.6)
322.5
32.7%
25.8%
68.1
54.0
64.2
52.2
631.4
134.0
0.8
766.2
(179.3)
(76.6)
(255.9)
510.3
(5.3)
505.0
(120.1)
384.9
12.7
-
397.6
33.4%
23.8%
68.5
70.7
65.8
67.8
592.4
127.7
1.0
721.1
(172.8)
(76.8)
(249.6)
471.5
(4.1)
467.4
(105.7)
361.7
(56.1)
22.1
327.7
34.6%
22.6%
64.6
58.5
60.9
55.4
543.8
117.5
1.3
662.6
(154.8)
(69.4)
(224.2)
438.4
(3.8)
434.6
(100.6)
334.0
(35.0)
-
299.0
33.8%
23.1%
61.2
54.8
57.2
51.4
15.8%
11.4%
8.9%
16.5%
12.2%
9.7%
18.3%
14.0%
14.4%
17.8%
13.7%
12.5%
18.0%
13.9%
12.4%
27,457.5
23,834.7
3,622.8
3,600.3
3,462.1
3,019.1
5.94
4.98
25,300.5
21,814.7
3,485.8
3,485.4
3,323.3
2,892.5
5.79
4.81
23,026.7
20,125.4
2,901.3
2,888.1
2,753.8
2,299.7
5.14
4.09
21,256.6
18,572.6
2,684.0
2,680.9
2,630.7
2,097.0
4.80
3.75
18,531.6
15,893.0
2,638.6
2,543.2
2,410.4
1,993.8
4.60
3.60
17
Challenger Limited 2019 Annual Report
Five-year history
Five-year history (continued)
Underlying operating cash flow ($m)
Dividends per share (cents)
Dividend – interim
Dividend – final
Total dividend
Dividend payout ratio – normalised profit (%)
Dividend payout ratio – statutory profit (%)
Sales and annuity book net flows ($m)
Annuity sales
Other Life sales
Total Life sales
Life annuity net flows
Life annuity book
Life annuity net book growth (%)
Funds Management – net flows1
Assets under management ($m)
Life
Funds Management
Elimination of cross-holdings2
Total assets under management
Other
Headcount – closing full time employees
Weighted average number of ASX-listed basic shares on
issue (m)
Number of shares on issue – closing (m)
Share price – closing ($)
Market capitalisation at 30 June 2019 ($m)3
2019
236.9
2018
197.4
2017
299.9
2016
297.1
2015
287.9
17.5
18.0
35.5
54.2%
69.7%
3,543.1
1,006.9
4,550.0
685.8
12,870.2
5.8%
(2,438.4)
17.5
18.0
35.5
52.1%
65.7%
17.0
17.5
34.5
50.4%
48.8%
4,000.7
1,554.9
5,555.6
1,392.7
11,728.3
13.5%
5,301.2
4,011.2
941.2
4,952.4
900.4
10,322.2
9.4%
6,220.6
16.0
16.5
32.5
50.3%
55.6%
3,351.2
998.5
4,349.7
740.4
9,558.5
8.5%
(2,517.2)
14.5
15.5
30.0
49.0%
54.7%
2,753.1
944.0
3,697.1
738.2
8,692.6
9.4%
7,738.9
19,010
79,029
(16,269)
81,770
18,085
77,984
(14,926)
81,143
15,677
66,906
(12,595)
69,988
14,112
56,662
(10,723)
60,051
12,795
57,902
(10,908)
59,789
687
676
655
635
560
605.0
611.6
6.64
4,061.0
596.7
610.9
11.83
7,226.9
562.2
572.0
13.34
7,630.5
560.2
571.2
8.63
4,929.5
545.7
569.7
6.72
3,828.4
1 Includes the derecognition of $5.4 billion of funds under management as a result of the sale of Kapstream to Janus Capital in July 2015.
2 Life assets managed by Funds Management.
3 Calculated as share price multiplied by ordinary share capital.
18
Directors’ report
Challenger Limited 2019 Annual Report
Directors’ report
The Directors of Challenger Limited (the Company) submit their report, together with the financial report of the Company and its
controlled entities (the Group or Challenger), for the year ended 30 June 2019.
The information appearing on pages 1 to 18 forms part of the Directors’ report for the financial year ended 30 June 2019 and is
to be read in conjunction with the following information.
1 Directors
The names and details of the Directors of the Company holding office during the financial year ended 30 June 2019 and as at the
date of this report are listed below. Directors were in office for the entire period, unless otherwise stated.
Peter L Polson
(appointed 6 November 2003)
Independent Chair.
Chair of Nomination Committee.
Graham A Cubbin
(appointed 6 January 2004, retired 26 October 2018)
Independent Non-Executive Director.
Former Chair of Remuneration Committee.
Member of Group Risk Committee, Group Audit Committee
and Remuneration Committee.
Former member of Group Risk Committee, Group Audit
Committee and Nomination Committee.
Experience and qualifications:
Bachelor of Commerce (Witwatersrand University, South
Africa), Master of Business Leadership (University of South
Africa), Management Development Program (Harvard
Graduate School of Education).
Mr Polson’s experience spans international and domestic
markets in banking, insurance and funds management.
Mr Polson previously held the positions of Group Executive,
Investment and Insurance Services at Commonwealth Bank
and Chief Executive of Colonial First State Limited.
Directorships of other listed companies:
Chair of IDP Education Limited (listed 26 November 2015)
(appointed 21 March 2007).
Richard J Howes
(appointed 2 January 2019)
Managing Director and Chief Executive Officer.
Experience and qualifications:
Bachelor of Commerce (Hons) and Bachelor of Economics
(University of Queensland).
Mr Howes has previously held a number of senior executive roles
at Challenger since joining in 2003, including Chief Executive of
Distribution, Product and Marketing, Chief Executive of
Challenger’s Life business and Chief Investment Officer.
Mr Howes has over 25 years' financial services experience. Prior
to joining Challenger, he held senior roles at Zurich Capital
Markets, Macquarie Bank and Bankers Trust where his primary
responsibility was providing risk management solutions to major
companies and institutions globally.
Brian R Benari
(appointed 17 February 2012, retired 1 January 2019)
Former Managing Director and Chief Executive Officer.
Experience and qualifications:
Bachelor of Business (Curtin University, Perth).
A qualified Chartered Accountant, Mr Benari joined the
Company in March 2003 and was Chief Executive Officer for
seven years. Mr Benari has many years of finance industry
experience, both locally and abroad, and held senior executive
roles with institutions including JP Morgan, Bankers Trust,
Macquarie Bank and Zurich Capital Markets.
Experience and qualifications:
Bachelor of Economics (Hons) (Monash University), Fellow of
the Australian Institute of Company Directors.
Mr Cubbin was a senior executive with Consolidated Press
Holdings Limited (CPH) from 1990 until September 2005,
including Chief Financial Officer for 13 years. Prior to joining
CPH, Mr Cubbin held senior finance positions with a number
of major companies including Capita Financial Group and Ford
Motor Company.
Directorships of other listed companies:
Non-executive director of Bell Financial Group Ltd (appointed
12 September 2007), WPP AUNZ Ltd (formerly STW
Communications Group Ltd) (appointed 20 May 2008), White
Energy Company Limited (appointed 17 February 2010) and
McPherson’s Limited (appointed 28 September 2010 and
appointed Chair on 1 July 2015).
John M Green
(appointed 6 December 2017)
Independent Non-Executive Director.
Member of the Group Risk Committee, Group Audit
Committee, Remuneration Committee and Nomination
Committee.
Experience and qualifications:
Bachelor of Law and Bachelor of Jurisprudence (University of
New South Wales), Fellow of the Australian Institute of
Company Directors and Life Member and Senior Fellow of
FINSIA.
Mr Green was previously an executive director at Macquarie
Group and has also been a partner at two major law firms.
He is Deputy Chair of QBE Insurance Group Limited, director of
Cyber Security Cooperative Research Centre and also a novelist
and co-founder of book publisher Pantera Press.
Directorships of other listed companies:
Non-executive director of QBE Insurance Group Limited
(appointed 1 March 2010 and appointed Deputy Chair on 1
January 2015) and WorleyParsons Limited (from listing in
November 2002 to 25 October 2016).
19
Challenger Limited 2019 Annual Report
Directors’ report
1 Directors (continued)
Steven Gregg
(appointed 8 October 2012)
Independent Non-Executive Director.
Chair of Group Audit Committee.
Member of Group Risk Committee, Remuneration Committee
and Nomination Committee.
Experience and qualifications:
Bachelor of Commerce (University of New South Wales).
Mr Gregg has held a number of executive roles in
management consulting and investment banking. His more
recent senior executive roles included Partner and Senior
Adviser at McKinsey & Company and Global Head of
Investment Banking at ABN AMRO. His experience has
spanned both domestic and international arenas, because of
his work in both the USA and the UK.
Directorships of other listed companies:
Non-executive director of Tabcorp Holdings Limited (appointed
18 July 2012) and Caltex Australia Limited (appointed 9
October 2015 and appointed Chair on 18 August 2017).
JoAnne M Stephenson
(appointed 8 October 2012)
Independent Non-Executive Director.
Chair of Group Remuneration Committee.
Member of Group Audit Committee and Nomination
Committee.
Experience and qualifications:
Bachelor of Commerce and Bachelor of Laws (Honours)
(University of Queensland), member of the Institute of
Chartered Accountants in Australia and member of the
Australian Institute of Company Directors.
Ms Stephenson has extensive experience in financial services
both in Australia and in the United Kingdom. Ms Stephenson
was previously a partner with KPMG and has significant
experience in internal audit, risk management and consulting.
Directorships of other listed companies:
Non-executive director of Asaleo Care Limited (appointed
30 May 2014) and Japara Healthcare Ltd (appointed
1 September 2015) and Myer Holdings Limited (appointed
28 November 2016).
Duncan G West
(appointed 10 September 2018)
Independent Non-Executive Director.
Member of Group Risk Committee, Group Audit Committee
and Nomination Committee.
Experience and qualifications:
Bachelor of Science in Economics (University of Hull, UK),
Fellow of the Chartered Insurance Institute, member of the
Australian Institute of Company Directors and a Senior
Associate of the Australia and New Zealand Institute of
Insurance and Finance.
Mr West has over 30 years’ experience in financial services in
the UK and Australia, with the past 5 years as a non-executive
director. He has held a series of senior executive positions
including as CEO of Vero Insurance and CGU Insurance, and
as EGM of Insurance at MLC.
20
Directorships of other listed companies:
Non-executive director of Genworth Mortgage Insurance
Australia Limited (appointed on 1 September 2018).
Melanie V R Willis
(appointed 6 December 2017)
Independent Non-Executive Director.
Chair of Group Risk Committee.
Member of Group Audit Committee and Nomination
Committee.
Experience and qualifications:
Bachelor of Economics (University of Western Australia),
Master of Law, Tax (University of Melbourne) and a Fellow of
the Australian Institute of Company Directors.
Ms Willis has significant senior executive experience in
corporate finance, strategy and innovation and funds
management. Ms Willis previously held the position of Chief
Executive Officer of NRMA Investments and senior executive
roles at Deutsche Bank and Bankers Trust. She is also a
non-executive director of Chief Executive Women.
Directorships of other listed companies:
Non-executive director of Southern Cross Media Group Limited
(appointed 26 May 2016), Mantra Group Limited (appointed
29 September 2014 until its delisting in May 2018), Pepper
Group Limited (appointed 19 September 2014 until its
delisting in December 2017), Ardent Leisure Limited and
Ardent Leisure Management Limited (from 17 July 2015 to
8 September 2017).
Leon Zwier
(appointed 15 September 2006)
Independent Non-Executive Director.
Member of Nomination Committee.
Experience and qualifications:
Bachelor of Laws (University of Melbourne). Mr Zwier is a
partner at the law firm Arnold Bloch Leibler.
2 Company Secretary
Michael Vardanega (Bachelor of Commerce and Bachelor of
Laws) is the General Counsel and Chief Executive, Group
Strategy. He is a qualified solicitor and was appointed as
Company Secretary on 1 March 2011. Mr Vardanega’s
responsibilities at Challenger encompass the Group’s strategy,
legal, regulatory, corporate governance and company
secretarial functions. Mr Vardanega joined Challenger in 2006
from commercial law firm Ashurst, where he was a member of
the corporate advisory practice. He is admitted to practise as a
solicitor in New South Wales, and is a member of the Law
Council of Australia, the Association of Corporate Counsel and
a member of the Australian Institute of Company Directors.
Andrew Brown (Diploma in Law), a Fellow of the Governance
Institute of Australia and a member of the Australian Institute
of Company Directors. Mr Brown has over 21 years’
experience in the financial services industry and was appointed
to the position of Company Secretary on 25 October 2012.
Prior to joining the Company in 2003, Mr Brown held senior
compliance management positions at MLC.
Directors’ report
Challenger Limited 2019 Annual Report
3 Corporate governance summary
3.1 Roles and responsibilities of Board and
management
The role of the Board and delegations
The Board is accountable to shareholders for the activities and
performance of Challenger by overseeing the creation of
sustainable shareholder value within an appropriate
framework of risk and having regard for all stakeholder
interests.
The Board is responsible for setting Challenger’s vision,
which is to provide its customers with financial security for
retirement. This is a long-term vision and the Board sets
strategic priorities each year to work towards fulfilling
this vision.
Directors are actively involved in setting, approving and
regularly monitoring Challenger’s strategic priorities and
holding management accountable for progress. This process
includes an annual Board strategy offsite, regular Board
reporting and meetings and discussion and review with
management. Similarly, the Board ensures that rigorous
governance processes are operating effectively to guide the
decision making across the organisation.
The Board has identified its key functions, and full details are
set out in the Board Charter, which is available at:
› challenger.com.au
The duties include:
• establishment, promotion and maintenance of the strategic
direction of the Company;
• approval of business plans, budgets and financial policies;
• consideration of management recommendations on
strategic business matters;
• establishment, promotion and maintenance of proper
processes and controls to maintain the integrity of
accounting and financial records and reporting;
• fairly and responsibly rewarding executives, having regard to
the interests of shareholders, the performance of executives,
market conditions and the Company’s performance;
• adoption and oversight of implementation of appropriate
corporate governance practices;
• oversight of the establishment, promotion and maintenance
of effective risk management policies and processes;
• determination and adoption of Company’s dividend policy;
• review of the Board’s composition and performance;
• appointment, evaluation and remuneration of the Chief
Executive Officer (CEO) and approval of the appointment of
the Chief Financial Officer (CFO), the Chief Risk Officer
(CRO), the General Counsel and the Company Secretary;
and
• determination of the extent of the CEO’s delegated
authority.
The Board has established committees to assist in carrying out
its responsibilities and to consider certain issues and functions
in detail. The Board committees are discussed on page 22.
Management responsibility
The Board has delegated to the CEO the authority and powers
necessary to implement the strategies approved by the Board
and to manage the business affairs of Challenger within the
policies and specific delegation limits specified by the Board
from time to time. The CEO may further delegate within those
specific policies and delegation limits, but remains accountable
for all authority delegated to management.
3.2 Directors’ skills matrix
The Board has determined that its current members have an
appropriate collective mix of skills, experience, expertise and
diversity to:
• exercise independent judgement;
• have a proper understanding of, and competence to deal
with, the current and emerging issues of the business;
• encourage enhanced performance of the Company; and
• effectively review and challenge the performance of
management.
The Board’s competencies are assessed annually. The results of
the most recent assessment are shown in the table following.
Board members generally have a high level of competency
across the areas of expertise relevant to the business.
21
Challenger Limited 2019 Annual Report
Challenger Limited 2019 Annual Report
Directors’ report
Directors’ report
3 Corporate governance summary (continued)
3 Corporate governance summary (continued)
3 Corporate governance summary (continued)
competency 100%
Advanced
competency 87.5%
Average
competency 12.5%
Advanced
competency 87.5%
Average
competency 12.5%
Corporate Governance
Financial Acumen
Financial reporting literacy including
Leadership & Strategy
Effective communication and
influencing skills. Strategic thinking
capability and transactional expertise. 100 Advanced
Company corporate governance literacy. 87+
exposure to Accounting Standards. 87+
tax risk management. 100 Advanced
Challenger operates. 75+
Risk & Compliance
Financial services and fiduciary regulatory
awareness. Relevant compliance and
risk experience including legal and
Sectoral Exposure
Exposure to funds management and
life insurance sectors, and market
experience in jurisdictions in which
Advanced
competency 75%
Average
competency 25%
competency 100%
Advanced
competency 75%
Average
competency 25%
Advanced
competency 75%
Average
competency 25%
Marketing & Distribution
Experience in distribution, marketing
Public Policy
Experience in relevant public policy
areas and key Government
Investment & Credit Expertise
Credit risk management and investment
expertise including asset class literacy
and exposure (for example, property,
fixed income, equities, etc). 75+
and fostering key customer relationships. 75+
and regulator relationships. 100 Advanced
large organisations and innovation. 37+
structuring and sectoral conditions. 87+
People & Remuneration
Experience in building capable and highly
engaged teams and understanding
of current remuneration regulation,
Information Technology
Understanding of IT strategy,
the application of technology in
Advanced
competency 87.5%
Average
competency 12.5%
Advanced
competency 37.5%
Average
competency 62.5%
competency 100%
3.3 Board committees
3.3 Board committees
3.3 Board committees
To assist it in undertaking its duties, the Board has established
To assist it in undertaking its duties, the Board has established
To assist it in undertaking its duties, the Board has established
the following standing committees:
the following standing committees:
the following standing committees:
• the Group Risk Committee (GRC);
• the Group Risk Committee (GRC);
• the Group Risk Committee (GRC);
• the Group Audit Committee (GAC);
• the Group Audit Committee (GAC);
• the Group Audit Committee (GAC);
• the Remuneration Committee (RemCo); and
• the Remuneration Committee (RemCo); and
• the Remuneration Committee (RemCo); and
• the Nomination Committee (NomCo).
• the Nomination Committee (NomCo).
• the Nomination Committee (NomCo).
Each committee has its own charter, copies of which are
Each committee has its own charter, copies of which are
Each committee has its own charter, copies of which are
available at:
available at:
available at:
› challenger.com.au
› challenger.com.au
› challenger.com.au
Directors’ meetings
Directors’ meetings
Directors’ meetings
The charters specify the composition, responsibilities, duties,
The charters specify the composition, responsibilities, duties,
The charters specify the composition, responsibilities, duties,
reporting obligations, meeting arrangements, authority and
reporting obligations, meeting arrangements, authority and
reporting obligations, meeting arrangements, authority and
resources available to the committees and the provisions for
resources available to the committees and the provisions for
resources available to the committees and the provisions for
review of the charter.
review of the charter.
review of the charter.
Details of Directors’ membership of each committee
Details of Directors’ membership of each committee and those
Details of Directors’ membership of each committee and those
and those eligible members’ attendance at meetings
eligible members’ attendance at meetings throughout the
eligible members’ attendance at meetings throughout the
throughout the period from 1 July 2018 to 30 June 2019
period from 1 July 2018 to 30 June 2019 are set out below.
period from 1 July 2018 to 30 June 2019 are set out below.
are set out below.
Board
Board
Board
Group Risk
Group Risk
Group Risk
Committee
Committee
Committee
Group Audit
Group Audit
Group Audit
Committee
Committee
Committee
Remuneration
Remuneration
Remuneration
Committee
Committee
Committee
Nomination
Nomination
Nomination
Committee
Committee
Committee
Eligible to
Eligible to
Eligible to
attend
attend
attend
4
4
4
2
2
2
2
2
2
1
1
1
4
4
4
4
4
4
4
4
4
3
3
3
4
4
4
-
-
-
Eligible to
Eligible to
Eligible to
attend
attend
attend
4
4
4
2
2
2
2
2
2
1
1
1
4
4
4
4
4
4
4
4
4
3
3
3
4
4
4
-
-
-
Eligible to
Eligible to
Eligible to
attend
attend
attend
16
16
16
11
11
11
5
5
5
2
2
2
16
16
16
16
16
16
16
16
16
15
15
15
16
16
16
16
16
16
Attended
Attended
Attended
3
3
3
2
2
2
2
2
2
1
1
1
4
4
4
4
4
4
4
4
4
3
3
3
4
4
4
-
-
-
Director
Director
Director
P Polson
P Polson
P Polson
R Howes1,9
R Howes1,9
R Howes1,9
B Benari2,9
B Benari2,9
B Benari2,9
G Cubbin3
G Cubbin3
G Cubbin3
J M Green4
J M Green4
J M Green4
S Gregg5
S Gregg5
S Gregg5
J Stephenson6
J Stephenson6
J Stephenson6
D West7
D West7
D West7
M Willis8
M Willis8
M Willis8
L Zwier
L Zwier
L Zwier
Attended
Attended
Attended
16
16
16
11
11
11
5
5
5
2
2
2
15
15
15
16
16
16
15
15
15
14
14
14
15
15
15
11
11
11
1 R Howes commenced as Managing Director & Chief Executive Officer on 2 January 2019.
1 R Howes commenced as Managing Director & Chief Executive Officer on 2 January 2019.
2 B Benari transferred to a non-KMP role on 2 January 2019 and transitioned to retirement on 30 June 2019.
1 R Howes commenced as Managing Director & Chief Executive Officer on 2 January 2019.
2 B Benari transferred to a non-KMP role on 2 January 2019 and transitioned to retirement on 30 June 2019.
3 G Cubbin retired from his role as Non-Executive Director of Challenger on 26 October 2018.
2 B Benari transferred to a non-KMP role on 2 January 2019 and transitioned to retirement on 30 June 2019.
3 G Cubbin retired from his role as Non-Executive Director of Challenger on 26 October 2018.
4 J M Green joined the Remuneration Committee on 26 October 2018.
3 G Cubbin retired from his role as Non-Executive Director of Challenger on 26 October 2018.
4 J M Green joined the Remuneration Committee on 26 October 2018.
5 S Gregg was appointed Chair of the Group Audit Committee on 26 October 2018.
4 J M Green joined the Remuneration Committee on 26 October 2018.
5 S Gregg was appointed Chair of the Group Audit Committee on 26 October 2018.
6 J Stephenson was appointed Chair of the Remuneration Committee and retired as Chair of the Group Risk and Group Audit Committees on 26 October 2018.
5 S Gregg was appointed Chair of the Group Audit Committee on 26 October 2018.
7 D West was appointed a Director on 10 September 2018. D West joined the Nomination Committee on 10 September 2018 and the Group Risk and Group Audit
6 J Stephenson was appointed Chair of the Remuneration Committee and retired as Chair of the Group Risk and Group Audit Committees on 26 October 2018.
6 J Stephenson was appointed Chair of the Remuneration Committee and retired as Chair of the Group Risk and Group Audit Committees on 26 October 2018.
7 D West was appointed a Director on 10 September 2018. D West joined the Nomination Committee on 10 September 2018 and the Group Risk and Group Audit
7 D West was appointed a Director on 10 September 2018. D West joined the Nomination Committee on 10 September 2018 and the Group Risk and Group Audit
8 M Willis was appointed Chair of the Group Risk Committee on 26 October 2018.
9 The Managing Director and CEO attends the Group Risk Committee, Group Audit Committee, Remuneration Committee and Nomination Committee meetings at
8 M Willis was appointed Chair of the Group Risk Committee on 26 October 2018.
8 M Willis was appointed Chair of the Group Risk Committee on 26 October 2018.
9 The Managing Director and CEO attends the Group Risk Committee, Group Audit Committee, Remuneration Committee and Nomination Committee meetings at
9 The Managing Director and CEO attends the Group Risk Committee, Group Audit Committee, Remuneration Committee and Nomination Committee meetings at
Attended
Attended
Attended
4
4
4
2
2
2
2
2
2
1
1
1
4
4
4
4
4
4
4
4
4
3
3
3
4
4
4
-
-
-
Attended
Attended
Attended
8
8
8
3
3
3
3
3
3
4
4
4
4
4
4
7
7
7
4
4
4
-
-
-
-
-
-
-
-
-
Attended
Attended
Attended
4
4
4
2
2
2
0
0
0
1
1
1
4
4
4
4
4
4
4
4
4
3
3
3
4
4
4
1
1
1
the invitation of these committees. There are no management representatives appointed as members of any Board Committee.
Committees on 26 October 2018.
Committees on 26 October 2018.
Committees on 26 October 2018.
Eligible to
Eligible to
Eligible to
attend
attend
attend
8
8
8
3
3
3
3
3
3
4
4
4
4
4
4
8
8
8
4
4
4
-
-
-
-
-
-
-
-
-
Eligible to
Eligible to
Eligible to
attend
attend
attend
4
4
4
2
2
2
1
1
1
1
1
1
4
4
4
4
4
4
4
4
4
3
3
3
4
4
4
4
4
4
the invitation of these committees. There are no management representatives appointed as members of any Board Committee.
the invitation of these committees. There are no management representatives appointed as members of any Board Committee.
22
22
13
13
25
25
25
63
13
Directors’ report
Challenger Limited 2019 Annual Report
3 Corporate governance summary (continued)
3.4 Risk management framework
Challenger’s Board is responsible, in conjunction with senior
management, for the management of risks associated with the
business and implementing structures and policies to
adequately monitor and manage these risks.
The Board has established the Group Risk Committee (GRC)
and the Group Audit Committee (GAC) to assist in discharging
its risk management responsibilities. In particular, these
committees assist the Board in setting the appropriate risk
appetite for the business and for ensuring that there is a
strong risk management framework that is able to manage,
monitor and control the various risks to which the business is
exposed which includes consideration of financial, operational
conduct and social risks.
The Executive Risk Management Committee (ERMC) is an
executive committee chaired by the Chief Risk Officer which
assists the GRC, the GAC and the Board in the discharge of
their risk management obligations by implementing the
Board-approved risk management framework. On a day-to-day
basis, the Risk division, which is separate from the operating
segments of the business, has the responsibility for the
implementation of the framework, including the monitoring,
reporting and analysis of the various risks faced by the
business.
Challenger has a robust risk management framework which
supports its operating segments, and its risk appetite
distinguishes risks from which Challenger will seek to make an
economic return from those which it seeks to minimise and
which it does not consider will provide a return. The
management of these risks is fundamental to Challenger’s
business and to building long-term shareholder value.
Challenger is also prudentially supervised by APRA, which
prescribes certain prudential standards that must be met by
Challenger and its life insurance subsidiary, CLC.
In addition to having a separate risk management function,
Challenger recognises that a requirement for an effective risk
management framework is for there to be a strong risk culture
throughout the organisation, where risk is everyone’s
responsibility. The foundation of this risk culture is a set of
principles, the Challenger Principles, which staff are required
to adhere to and on which their yearly performance and
remuneration are judged. In addition to this, Challenger
regularly assesses its risk culture with a combination of
external audits and internal staff surveys to ensure that the
management of risk and day-to-day compliance remains
entrenched within the way in which Challenger operates.
Challenger’s risk appetite statement provides that, subject to
earning acceptable economic returns, it can retain exposure to
credit risk, property risk, equity risk and life insurance risk.
• Credit risk – is the risk of loss in the value of an asset due to
a counterparty failing to perform its contractual obligations
when they fall due;
• Property risk – is the potential impact of movements in the
market value of property investments on Challenger’s
income and includes leasing risk which may impact the cash
flows from these investments;
• Equity risk – is the potential impact of movements in the
market value of listed equity investments, unlisted equity
investments and investments in absolute return strategies.
Returns for unlisted equity and absolute return strategies are
generally uncorrelated to listed equity market returns.
Challenger holds equities as part of its investment portfolio
in order to provide diversification across the investment
portfolio; and
• Life insurance risk – represents both longevity risk and
mortality risk. Through selling lifetime annuities and
assuming wholesale reinsurance agreements, CLC takes
longevity risk, which is the risk that customers who have
bought a lifetime annuity live longer, in aggregate, than
expected. This is in contrast to mortality risk, which is the
risk that people die earlier than expected. CLC is exposed to
mortality risk on its wholesale mortality reinsurance business.
Challenger seeks to minimise or hedge the risks for which it
does not consider an appropriate return can be generated.
These risks include:
• Foreign exchange risk – is the risk of a change in asset values
and Challenger’s earnings as a result of movements in
foreign exchange rates;
• Interest rate risk – is the risk of fluctuations in Challenger’s
earnings arising from movements in interest rates;
• Inflation risk – is the risk of a change in asset values and
Challenger’s earnings as a result of movements in inflation
both in Australia and jurisdictions in which Challenger owns
assets;
• Operational risk – is the risk of loss resulting from
inadequate or failed internal processes, people and systems
or from external events; and
• Regulatory and compliance risk – is the risk of legal or
regulatory sanctions or loss as a result of Challenger’s failure
to comply with laws, regulations or regulatory policy
applying to its business.
Further details on Challenger’s approach to risk management
are included in both the 2019 Sustainability Report and
Section 5 of the financial report.
23
Challenger Limited 2019 Annual Report
Directors’ report
4 Remuneration report
Letter from the Chair
Dear Shareholders,
Financial year 2019 has been difficult and while we have made good progress in many areas of our business, our performance
has been impacted by the challenging operating environment. As shareholders would expect, our performance is reflected in the
remuneration outcomes for key management personnel (KMP), which are substantially lower this year than in 2018.
This year we have also undertaken an extensive review of our Remuneration Framework, taking into consideration Challenger’s
business strategy, stakeholder feedback, community expectations and market standards. As a result, we have made important
changes that will continue to drive long-term performance and strong risk management, ensure clear alignment with shareholder
interests and enhance disclosure and transparency.
2019 performance and remuneration
In 2019, we continued to make good progress implementing our strategy for long-term growth, expanding our distribution
channels, launching new products and building on our brand leadership. We have maintained a strong capital position, leading
employee engagement and a highly effective risk culture.
Unfortunately, investment market volatility and disruption in our sector have presented challenges for our business resulting in
performance outcomes below expectations.
Accordingly, the Board has reduced the variable reward pool for the year to the lowest level in five years. The KMP have borne
the bulk of the reduction with their short term incentives reduced by 36% compared to last year.
In our remuneration report this year we have simplified and enhanced our balanced scorecard to provide greater clarity about
how short term incentive outcomes have been determined. I encourage you to read this, and the full details on KMP
remuneration outcomes on pages 31.
CEO remuneration
As part of the CEO transition that occurred during the year, we have rebased the CEO’s remuneration package, including the
fixed remuneration and variable reward. The CEO’s fixed remuneration is not expected to increase in 2020 and his short term
incentive (STI) opportunity is capped at 200% of fixed pay. His STI for 2019 was 49% of the new maximum. We will also seek
approval for the CEO’s long term incentive (LTI) grant at the upcoming 2019 AGM.
Remuneration Framework Review
This year the Board has undertaken a comprehensive review of executive remuneration in response to feedback from stakeholders
and to ensure the structure remains fit-for-purpose in the delivery of our strategic objectives. As a result, we are making a
number of important changes in financial year 2019 including:
•
•
•
significantly extending vesting periods for short and long term incentives;
capping the maximum possible short term incentive for KMP; and
allocating a fixed amount of long term incentives on a face value, or maximum value, basis.
The new framework provides transparency on the maximum possible total reward, which is positioned appropriately to market
benchmarks and is strongly weighted to variable performance-based pay. This means a large proportion of executive reward is at
risk and issued in equity with long deferral, ensuring strong alignment with shareholder interests.
The changes to our framework are designed to drive long-term performance and support retention of our talented team, while
providing alignment and transparency for shareholders. I encourage you to read the full details about the significant changes
we’re making on page 27.
As always, throughout the year the Board has engaged in extensive consultation with shareholders, proxy advisers and other
stakeholders to understand and respond to their priorities. Since we undertook this work, stakeholder views have continued to
evolve and APRA has released a proposed new prudential standard for remuneration. We look forward to continuing our
engagement with all stakeholders as we work to ensure that our framework and outcomes consistently deliver on our
commitment to responsible and effective remuneration practices.
Yours sincerely
Peter Polson
Independent Chair
24
Directors’ report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4.1 Contents
Section
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
Key Management Personnel (KMP)
2019 at a glance
Performance and remuneration outcomes for 2019
Remuneration strategy and structure
Remuneration governance
Risk management
Key Management Personnel remuneration arrangements
Non-Executive Director disclosures
Summary of key terms and abbreviations used in the remuneration report
4.2 Key Management Personnel (KMP)
Challenger’s KMP for 2019 are detailed in the table below:
Page
25
26
28
32
36
38
39
44
47
Name
Richard Howes
Brian Benari
Angela Murphy
Chris Plater
Ian Saines
Andrew Tobin
Role
Managing Director & Chief Executive Officer,
Former Chief Executive, Distribution, Product & Marketing
Former Managing Director & Chief Executive Officer
Chief Executive, Distribution, Product & Marketing
Chief Executive & Chief Investment Officer, Life
Chief Executive, Funds Management
Chief Financial Officer
Term as KMP in 2019
From 2 January 2019
Until 1 January 2019
Until 1 January 2019
From 12 December 2018
Full year
Full year
Full year
Challenger’s Non-Executive Directors for 2019 are detailed in the table below:
Name
Peter Polson (Chair)
Graham Cubbin
John M Green
Steven Gregg
JoAnne Stephenson
Duncan West
Melanie Willis
Leon Zwier
Term as Non-Executive Director in 2019
Full year
Retired 26 October 2018
Full year
Full year
Full year
Appointed 10 September 2018
Full year
Full year
25
Challenger Limited 2019 Annual Report
Directors’ report
4 Remuneration report (continued)
4.3 2019 at a glance
Our vision and strategy
Key 2019 outcomes
While industry disruption and market volatility have impacted our performance in 2019, we have made good progress
implementing our strategy to position the business for future growth.
Financial
• Group normalised NPBT of $548.3 million (30 June 2018:
Strategic and operational
• Significantly expanded strategic partnership with MS&AD to
$547.3 million). This was below target reflecting challenging
investment markets and advice market disruption.
• Pre-tax normalised ROE 15.8%, below target due to higher
capital held and below target earnings.
• Strong capital position with 1.53 times APRA’s Prescribed
Capital Amount (PCA), towards the top of our target range
of 1.3 to 1.6 times.
• AUM $81.8 billion (30 June 2018: $81.1 billion) was below
target reflecting advice market disruption impacting flows,
with one profit-for-member superannuation fund
internalising its investment functions. Life annuities sales of
$3.5 billion and net book growth of 5.8%. Funds
Management net outflows of $2.4 billion, reflected solid
underlying growth offset by redemptions by one large
superannuation fund.
• Normalised cost to income ratio of 32.6%, within target
range of 30% to 34% and well below industry averages.
include US dollar annuities (commenced 1 July 2019).
• Expanded distribution reach with the launch of BT Panorama
platform in first half of 2019, and HUB24 and Netwealth in
second half of 2019.
• Fidante Partners launched the first ETF in the Active X series
in the first half of 2019 and is on track to launch additional
products in the first half of 2020.
• Added new boutique, Eiger Capital, in second half of 2019.
• New means test rules that support the use of lifetime
annuities finalised and effective on 1 July 2019.
• Recognised as the leader in retirement income by advisers
(95%, 36% above nearest competitor).
• Rated number one by financial advisers for overall adviser
satisfaction and in five other categories.
• Launched new brand campaign and supporting initiatives.
• Employee sustainable engagement score of 84% (above
Australian Companies Norm and Global Financial Services
Norm); risk culture score of 85% (above all norms).
Key reward outcomes
Variable reward
pool
Reduced to lowest level in past five years – 9.4% of normalised net profit before variable reward and
tax (target range 10%-15%).
Fixed remuneration
Incoming CEO fixed remuneration set 6% below outgoing CEO fixed remuneration.
The only change to KMP fixed remuneration was a $50,000 increase for the Chief Executive & Chief
Investment Officer, Life, made in September 2018. This was made after considering relevant
benchmarks, internal relativities, role scope and complexity.
Total KMP STIs down 36% on 2018.
The outgoing CEO, Mr Benari’s variable reward, was 50% less than 2018 on an annualised basis.
Current CEO, Mr Howes’ STI was 49% below the former CEO’s 2018 outcome on an annualised
basis and 49% of the new maximum.
LTIs issued in September 2014, March 2015 and September 2015 vested in September 2018 with
Challenger having recorded compound total shareholder returns of 17%, 25% and 26% per annum
respectively since issue, well above the hurdle of 8%-12% per annum for these LTI grants.
LTIs awarded in September 2015, September 2016 and June 2017 will not meet the performance
hurdle and so will not vest in September 2019. LTIs issued in 2017 to 2018 also face a significantly
reduced likelihood of vesting in future periods.
Short term
incentives (STI)
Long term
incentives (LTI)
26
Directors’ report
Directors’ report
Challenger Limited 2019 Annual Report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4 Remuneration report (continued)
4 Remuneration report (continued)
4.3 2019 at a glance (continued)
4.3 2019 at a glance (continued)
4.3 2019 at a glance (continued)
Changes to our KMP remuneration arrangements
Changes to our KMP remuneration arrangements
Changes to our KMP remuneration arrangements
In 2019, we conducted a comprehensive review of our KMP remuneration framework in response to stakeholder feedback and
In 2019, we conducted a comprehensive review of our KMP remuneration framework in response to stakeholder feedback and to
In 2019, we conducted a comprehensive review of our KMP remuneration framework in response to stakeholder feedback and to
to ensure it remains well aligned with Challenger’s strategic priorities. As a result, we have made a number of key changes, while
ensure it remains well aligned with Challenger’s strategic priorities. As a result, we have made a number of key changes, while
ensure it remains well aligned with Challenger’s strategic priorities. As a result, we have made a number of key changes, while
maintaining our high weighting to long-term equity-based reward that is at risk. The Board believes this approach drives strong
maintaining our high weighting to long-term equity-based reward that is at risk. The Board believes this approach drives strong
maintaining our high weighting to long-term equity-based reward that is at risk. The Board believes this approach drives strong
performance and prudent risk management, in the best interests of shareholders. These changes have been applied to the 2019
performance and prudent risk management, in the best interests of shareholders. These changes have been applied to the 2019
performance and prudent risk management, in the best interests of shareholders. These changes have been applied to the 2019
remuneration outcomes for our KMP.
remuneration outcomes for our KMP.
remuneration outcomes for our KMP.
What has changed?
What has changed?
What has changed?
STI maximum deferral period extended from
STI maximum deferral period extended
STI maximum deferral period extended from
two to four years.
from two to four years.
two to four years.
Why have we made the change?
Why have we made the change?
• The extended vesting period is consistent with Challenger’s business
• The extended vesting period is consistent with Challenger’s business
• The extended vesting period is consistent with Challenger’s business strategy and
the long-term promises we make to customers.
Why have we made the change?
Maximum STI award cap set at 200% of fixed
Maximum STI award cap set at 200% of fixed
Maximum STI award cap set at 200%
remuneration.
remuneration.
of fixed remuneration.
Removed three year Deferred Performance
Removed three year Deferred
Share Rights (DPSRs).
LTI deferral period extended, with the earliest
Performance Share Rights (DPSRs).
possible vesting date moving from three to four
LTI deferral period extended, with the earliest
LTI deferral period extended, with the
years.
possible vesting date moving from three to four
earliest possible vesting date moving
years.
from three to four years.
LTI awards to be allocated at Face Value in
Hurdled Performance Share Rights (HPSRs).
LTI awards to be allocated at Face Value in
LTI awards to be allocated at Face
Hurdled Performance Share Rights (HPSRs).
Value in Hurdled Performance Share
LTI awards set at 225% of Fixed remuneration
Rights (HPSRs).
for all KMP.
LTI awards set at 225% of Fixed remuneration
LTI awards set at 225% of Fixed
for all KMP.
remuneration for all KMP.
Dividends not paid on HPSRs.
Dividends not paid on HPSRs.
Dividends not paid on HPSRs.
regulatory change.
strategy and the long-term promises we make to customers.
strategy and the long-term promises we make to customers.
• Reflects changing stakeholder expectations and regulatory trends.
• Reflects changing stakeholder expectations and regulatory trends.
• Reflects changing stakeholder expectations and regulatory trends.
• Setting individual maximum STI awards provides transparency for external
• Setting individual maximum STI awards provides transparency for external
• Setting individual maximum STI awards provides transparency for external
stakeholders and executives about the reward opportunity.
stakeholders and executives about the reward opportunity.
• Simplifies alignment of remuneration components.
of fixed remuneration with a future performance hurdle.
management.
management.
emerging regulatory change.
emerging regulatory change.
stakeholders and executives about the reward opportunity.
• Simplifies alignment of remuneration components.
• Reflects strong commitment to long-term performance and risk
• Reflects strong commitment to long-term performance and risk
• Reflects strong commitment to long-term performance and risk management.
• Responds to stakeholder preference for longer vesting periods and
• Responds to stakeholder preference for longer vesting periods and emerging
• Responds to stakeholder preference for longer vesting periods and
• Reflects stakeholder preference for the use of face value.
• Aligns with the change in allocation methodology for LTI to a fixed
• Reflects stakeholder preference for the use of face value.
• Reflects stakeholder preference for the use of face value.
percentage of fixed remuneration with a future performance hurdle.
• Aligns with the change in allocation methodology for LTI to a fixed
• Aligns with the change in allocation methodology for LTI to a fixed percentage
• Reflects strong linkage of reward outcomes to longer term performance.
percentage of fixed remuneration with a future performance hurdle.
• Ensures a high proportion of reward will only be realised if shareholder
• Reflects strong linkage of reward outcomes to longer term performance.
• Reflects strong linkage of reward outcomes to longer term performance.
outcomes are achieved. The amount granted in the award year may
• Ensures a high proportion of reward will only be realised if shareholder
• Ensures a high proportion of reward will only be realised if shareholder outcomes
ultimately be worth zero and will only be worth the value stated if
outcomes are achieved. The amount granted in the award year may
are achieved. The amount granted in the award year may ultimately be worth zero
shareholder return hurdles are met.
ultimately be worth zero and will only be worth the value stated if
and will only be worth the value stated if shareholder return hurdles are met.
• LTI award level is broadly consistent with previous year’s awards.
shareholder return hurdles are met.
• Provides transparency on reward quantum.
• LTI award level is broadly consistent with previous year’s awards.
• Aligns with stakeholder feedback that dividends should not be paid on
• Provides transparency on reward quantum.
HPSRs as they are subject to future performance hurdles and as a result
• Aligns with stakeholder feedback that dividends should not be paid on
• Aligns with stakeholder feedback that dividends should not be paid on HPSRs as
may not vest.
HPSRs as they are subject to future performance hurdles and as a result
they are subject to future performance hurdles and as a result may not vest.
may not vest.
• LTI award level is broadly consistent with previous year’s awards.
• Provides transparency on reward quantum.
Timing of executive reward
Timing of executive reward
Under the new framework, executive reward is realised over an extended period supporting a focus on strong risk management
Timing of executive reward
Under the new framework, executive reward is realised over an extended period supporting a focus on strong risk management
and long-term performance.
and long-term performance.
Under the new framework, executive reward is realised over an extended period supporting a focus on strong risk management
and long-term performance.
1 July 2018
September 2019
September 2020
September 2021
September 2022
September 2022
September 2023
September 2023
30 June 2019
September 2020
September 2019
September 2021
30 June 2019
1 July 2018
Salary package
Salary package
1 Ju ly 2018
30 Ju ne 2019
Sep tember 2019
Septem ber 2020
Sep temb er 2021
September 2022
Sep temb er 2023
S alar y pa cka ge
Cash STI
Cash STI
Ca sh S TI
STI performance
assessment period
S TI pe r f orm a nce
a ssessm ent pe r iod
STI performance
assessment period
STI performance
assessment period
STI p erformance
assessment period
STI performance
assessment period
Deferred STI in
equity
D e f e r r e d S T I in
(Service
Deferred STI
e quit y
condition only)
in equity
(Se r v ice
(Service
condit ion only )
condition
only)
LTI (Service
condition &
LT I (Se r v ice
performance
condit ion &
hurdles)
pe r f or m a nce
LTI (Service
hur dle s)
condition &
performance
hurdles)
30% of grant vesting 1 year after allocation
30% of grant vesting 1 year after allocation
30% of grant vesting 1 year after allocation
30% of grant vesting 2 years after allocation
30% of grant vesting 2 years after allocation
30% of grant vesting 2 years after allocation
20% of grant vesting 3 years after allocation
20% of grant vesting 3 years after allocation
20% of grant vesting 3 years after allocation
20% of grant vesting 4 years after allocation
20% of grant vesting 4 years after allocation
20% of grant vesting 4 years after allocation
Vesting 4 years after allocation subject to satisfaction of absolute TSR
Vesting 4 years after allocation subject to satisfaction of absolute TSR
Vesting 4 years after allocation subject to satisfaction of absolute TSR
LTI performance assessment period (absolute TSR performance hurdle)
L TI perfo rman ce assessm ent perio d ( abso lute TSR p erformance h urd le)
LTI performance assessment period (absolute TSR performance hurdle)
27
27
Challenger Limited 2019 Annual Report
Directors’ report
4 Remuneration report (continued)
4.3 2019 at a glance (continued)
KMP changes
Retirement of
Mr Benari
Appointment of
Mr Howes
Appointment of
Ms Murphy
Retirement of
Mr Saines
• Mr Benari retired from the role of Managing Director & Chief Executive Officer on 1 January 2019 and this
represents the conclusion of his designation as KMP for the reporting period.
• Mr Benari was eligible to receive a variable remuneration award for 2019 that considers his employment in
the role of Managing Director & Chief Executive Officer up until 1 January 2019 and the work performed
and support provided during the balance of the financial year. The variable remuneration was delivered as a
mix of cash and deferred equity to ensure continued alignment of the reward outcomes with the
shareholder experience.
• Mr Benari’s termination of employment occurred after the conclusion of the financial year and accordingly
no termination payments were made during this period. Upon termination Mr Benari had 318,427 DPSRs
vest to him in accordance with the terms of the grant. In addition, unvested HPSRs granted to Mr Benari
between 2015 and 2018 remain on foot subject to the specified performance hurdles and time based
vesting conditions set at grant. No HPSRs will meet the performance hurdle in September 2019. The
remaining HPSRs also face a significantly reduced likelihood of vesting in future periods.
• Mr Howes was appointed to the the role of Managing Director & Chief Executive Officer on
2 January 2019.
• Mr Howes was designated as KMP for the full 2019 reporting period as his most recent prior role of Chief
Executive, Distribution, Product & Marketing was also designated as KMP.
The remuneration arrangements for Mr Howes are set considerably lower than his predecessor and are
summarised below:
• Fixed remuneration is $1,275,000 per annum (inclusive of statutory superannuation contributions and any
salary sacrifice items), which is reviewable annually.
• Eligible for discretionary annual short term incentives determined by the Board. The annual short term
incentive is capped at twice Mr Howes' fixed remuneration.
• Eligible to receive annual grants of longer term incentives in the form of equity. Equity is delivered in HPSRs
that are awarded at face value with the quantum set at 225% of fixed remuneration.
• Ms Murphy was appointed to the role of Chief Executive, Distribution, Product & Marketing on
12 December 2018 and was designated as KMP from the date of appointment.
• Mr Saines has expressed his intention to retire from Challenger at a future date in 2020 to be confirmed.
Given Mr Saines’ intention to retire, his 2019 LTI allocation has been moderated accordingly.
• Mr Saines was designated as KMP for the full 2019 reporting period.
4.4 Performance and remuneration outcomes for 2019
Following many years of strong growth, financial year 2019 was challenging, with external headwinds impacting the business.
While Challenger made good progress implementing its strategy for long-term growth, investment market volatility and sector
disruption resulted in performance outcomes below expectations. This section provides performance information including five
year trends and key financial and operational outcomes for the year.
For the year ended
Normalised NPAT1 ($m)
Normalised EPS (cents)
Closing share price ($)
Dividends per share (cents)
30 June
2015
334.0
61.2
6.72
30.0
30 June
2016
361.7
64.6
8.63
32.5
30 June
2017
384.9
68.5
13.34
34.5
30 June
2018
406.1
68.1
11.83
35.5
30 June
2019
396.1
65.5
6.64
35.5
1 Normalised NPAT excludes asset or liability valuation movements that are above or below expected long-term trends and significant items that may positively or
negatively impact financial results. Refer to the Operating and financial review section for further information.
28
Directors’ report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4.4 Performance and remuneration outcomes for 2019 (continued)
Total shareholders return (TSR)
Source: IRESS and Bloomberg
Challenger share price performance versus ASX 200
Source: Company data
60%
40%
20%
0%
-20%
-40%
-60%
1 year
TSR
2 year
TSR
3 year
TSR
Challenger
ASX 200 Fin Accum.
All Ords Accum.
ASX100 Accum.
4 year
TSR
5 year
TSR
ASX 200 Accum.
250
200
150
100
50
0
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Challenger
ASX200
Normalised NPAT
Increased by 19% since 2015 with 2019 impacted by lower equity distributions
Normalised Earnings Per Share (EPS)
Increased by 7% since 2015 with 2019 impacted by lower normalised NPAT and
and lower performance fees.
higher share count.
m
$
450
400
350
300
250
200
150
100
50
0
m
$
70
68
66
64
62
60
58
56
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Normalised NPAT
Normalised EPS
Normalised pre-tax Return on Equity (RoE)
Reflects earnings and shareholder capital held.
Group assets under management
Increased by 37% since 2015.
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
m
$
90
80
70
60
50
40
30
20
10
0
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Total group assets under management
29
Challenger Limited 2019 Annual Report
Directors’ report
4 Remuneration report (continued)
4.4 Performance and remuneration outcomes for 2019 (continued)
2019 balanced scorecard outcomes
Key Performance Indicators (KPIs) for Challenger are aligned to our vision and strategy to provide our customers with financial
security for retirement. The KPIs are underpinned by strong risk management practices that inform how we deliver on our
commitments to customers and shareholders with risk behaviour assessed as a gate-opener for individual participation in
Challenger’s variable remuneration plans.
Outcome
Partial
achievement
Full
achievement
Full
achievement
Measure
Financial
Weight
60%
Normalised NPBT
Pre-tax normalised ROE
(target - 18%)
PCA (target 1.3x– 1.6x)
AUM growth
People and culture
20%
Risk culture
Employee engagement
Performance
• Group normalised NPBT of $548.3 million (30 June 2018: $547.3
million). This was below target reflecting challenging investment
markets and advice market disruption.
• Pre-tax normalised ROE 15.8%, below target due to higher capital
held and below target earnings.
• Strong capital position 1.53 times APRA’s Prescribed Capital
Amount (PCA) at the top of our target range of 1.3 to 1.6 times.
• AUM $81.8 billion (30 June 2018: $81.1 billion) was below target
reflecting advice market disruption impacting flows, one profit for
member superannuation fund internalisation and challenging
investment markets.
‒ Life annuities sales of $3.5 billion and net book growth of
5.8% were below target reflecting advice market disruption.
‒ Funds Management net outflows of $2.4 billion reflected solid
underlying growth offset by redemptions by one large
superannuation fund.
• New record low normalised cost to income ratio of 32.6%, within
target range of 30% to 34% and well below industry averages.
• Risk culture score of 85% (above all norms).
• Satisfactory completion of external review of risk culture.
• Employee sustainable engagement score of 84% (above the
Australian Companies Norm and Global Financial Services Norm).
• Diversity and flexibility score of 94% (above all norms).
• Received 2018 WGEA Employer of Choice for Gender Equality
citation.
Customer and
strategic initiatives
Diversify distribution by
channel and geography
Expand product offering
Build understanding and
acceptance of the
importance of lifetime
income streams
20%
• Significantly expanded strategic partnership with MS&AD to include
US dollar annuities (commenced 1 July 2019). Challenger will
receive a minimum annuity reinsurance value of at least ¥50 billion
(currently $660m) per year for a minimum of five years. This
represents approximately 2.5 times the value received in 2019.
• Expanded distribution reach with the launch of BT Panorama
platform in first half of 2019, and HUB24 and Netwealth in second
half of 2019. Fidante Partners launched the first ETF in ActiveX
series in first half of 2019 and is on track to launch additional
products in the first half of 2020.
• Added new boutique, Eiger Capital, in second half of 2019.
• New means test rules that support the use of lifetime annuities
finalised and effective on 1 July 2019.
• Maintained thought leadership positioning and a high level of
public engagement on retirement income issues.
• Rated number one by financial advisers for overall adviser
satisfaction and in five other categories.
• Recognised as the leader in retirement income by advisers
(95%, 36% above nearest competitor).
• Launched new brand campaign and supporting initiatives.
Total
100%
Partial
achievement
30
Directors’ report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4.4 Performance and remuneration outcomes for 2019 (continued)
2019 Awarded KMP remuneration outcomes
Challenger’s remuneration strategy is focused on the alignment between performance, prudent risk management and reward
outcomes. Consequently achievement against KPIs for Challenger is a key determinant of remuneration outcomes. Accordingly,
awarded remuneration has decreased significantly for the financial year in the table below.
•
•
•
The outgoing CEO’s variable reward for 2019 was 50% lower than in 2018 on an annualised basis.
The new CEO’s STI for 2019 was 49% lower than the previous CEO’s 2018 STI and 49% of the new maximum.
Total KMP STIs for 2019 were 36% lower than in 2018.
Awarded remuneration represents the value of remuneration that has been awarded for the financial year as determined by the
Board and includes fixed remuneration, cash STI and deferred and hurdled share awards. The actual value realised will depend on
future performance outcomes, ensuring strong alignment with shareholder interests. HPSRs awarded in this year will only deliver
value to executives in the future if shareholder return hurdles are achieved.
In 2019, Challenger has changed the allocation methodology for HPSR awards from a fair to face value allocation methodology.
This responds to feedback from stakeholders who have expressed a preference for the use of face value. The future value of
HPSRs that may be realised by executives is uncertain and depends on outcomes against hurdles in the future. The face value of
the award will only be realised if the highest performance threshold is achieved. Both the face value and the fair value of the
HPSR awards have been shown in the table below for completeness.
KMP
R Howes6
B Benari7
A Murphy8
C Plater
I Saines
A Tobin
Total
Salary1
$
Year
975,009
2019
731,753
2018
2019
673,510
2018 1,320,102
323,721
2019
-
2018
722,922
2019
673,074
2018
810,605
2019
844,020
2018
688,674
2019
679,204
2018
2019 4,194,441
2018 4,248,153
Deferred
STI
(1-4 yrs)2
$
625,000
510,000
Other3
$
Super-
annuation
$
20,531
20,049
10,340
20,049
11,406
-
20,531
20,049
20,531
20,049
20,531
20,049
Total
Cash STI
$
$
625,000
71,450 2,316,990
712,500 1,065,000 118,750 2,648,052
510,000
56,930 1,760,780
887,500 1,562,500 201,692 3,991,843
634,590
145,833
-
-
58,369 1,789,822
494,000
78,709 2,296,832
612,500
43,677 1,619,813
372,500
82,473 2,094,042
450,000
46,707 1,605,912
425,000
77,890 1,949,643
462,500
103,870 2,572,333 2,572,333 284,930 9,727,907
100,245 3,125,000 4,947,500 559,514 12,980,412
145,833
-
494,000
912,500
372,500
697,500
425,000
710,000
7,797
-
Future hurdled awards
Face
Value
HPSRs4
$
Fair
Value
HPSRs5
$
2,868,750 1,176,188
822,500
1,968,170
-
-
3,768,846 1,575,000
307,500
750,000
-
-
691,875
1,687,500
700,000
1,675,038
558,010
1,361,000
577,500
1,381,906
645,750
1,575,000
577,500
1,381,906
8,242,250 3,379,323
10,175,866 4,252,500
1 Includes the cost of death, total permanent disability and salary continuance insurances.
2 2019 DPSRs will be formally granted in September 2019 and vest 30% one year after grant, 30% two years after grant, 20% three years after grant and 20% four
years after grant. 2018 DPSR awards included one and two year deferred STI and three year DPSRs.
3 Values represent distributions from the CPP Trust.
4 The 2019 face value HPSR award has been determined as 225% of fixed remuneration as at 30 June 2019 for all KMP except Mr Saines who is retiring at a future
date in 2020. The number of HPSRs will be formally granted in September 2019 with the face value of each HPSR determined by the five-day volume weighted
average price (VWAP) prior to the grant date. The 2018 face value for each HPSR granted was determined using the five-day VWAP prior to grant date.
5 The HPSRs awarded in 2019 will be formally granted in September 2019. It is not possible to determine the fair value of these awards until the grant date and so an
estimate of fair value has been determined as 41% of the face value. This estimate is based on the the average fair value relative to the face value of 4 year HPSRs
awarded over the past three years. The 2018 HPSR values were awarded on a fair value basis.
6 Mr Howes was appointed Managing Director & Chief Executive Officer on 2 January 2019.
7 Mr Benari transferred to a non-KMP role on 2 January 2019 as transition to retirement. The 2019 disclosure is pro rata for the period in which he was a KMP.
8 Ms Murphy transferred to a KMP role on 12 December 2018. The 2019 disclosure is pro rata for the period in which she was a KMP.
31
Challenger Limited 2019 Annual Report
Directors’ report
4 Remuneration report (continued)
4.5 Remuneration strategy and structure
Challenger’s remuneration strategy is focused on the alignment between performance, prudent risk management and reward
outcomes. It is designed to support the attraction, retention and reward of the high performing talent required to deliver strong
customer outcomes and sustained returns to shareholders. The remuneration strategy is underpinned by the guiding principles
outlined below:
Market-competitive
• Positioned to attract and retain KMP
and employees with the necessary
capabilities and experience to deliver
Challenger’s business strategy.
• Remuneration structure and quantum
benchmarked to the external market
using remuneration surveys and
publicly disclosed data.
• KMP remuneration benchmark data
independently reviewed by
Challenger’s remuneration adviser
(KPMG).
Performance-based and equitable
• High weighting to performance-based
reward to drive strong customer outcomes
and long-term growth for Challenger and
its shareholders.
• Remuneration outcomes differentiated
according to individual contribution to
Challenger’s performance.
• Demonstration of Challenger Principles
directly linked to remuneration outcomes.
• Rigorous annual calibration of
performance and reward
recommendations to ensure internal
equity, fairness and transparency.
Aligned with shareholders and
underpinned by sound risk
management
• Significant proportion of STI subject
to deferral into shares, aligning
medium to longer term reward
outcomes with the shareholder
experience.
• Long-term share-based awards, with
vesting subject to satisfaction of
both a shareholder return
performance measure and time-
based vesting conditions.
• All deferred share-based awards are
subject to forfeiture provisions.
• Remuneration processes and
governance in place to ensure that
remuneration arrangements
encourage prudent risk-
management.
• Risk behaviour is a gate-opener for
individual participation in
Challenger’s variable remuneration
plans.
32
Directors’ report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4.5 Remuneration strategy and structure (continued)
Remuneration components
In 2019, the Board undertook a comprehensive review of executive remuneration in response to feedback from stakeholders and
to ensure the structure remains fit-for-purpose in the delivery of our strategic objectives. The changes to our framework are
designed to drive long-term performance, prudent risk management and talent retention, while providing strong alignment and
transparency for shareholders. These changes have been applied to the 2019 remuneration outcomes for our KMP.
d
e
x
i
F
l
e
b
a
i
r
a
V
Component
Fixed
remuneration
Overview
Base salary, salary-sacrificed benefits and applicable fringe
benefits tax.
Employer superannuation contributions.
Cash STI
Annual ‘at risk’ remuneration, rewarding Challenger,
division and individual performance.
Deferred STI -
share awards
deferred for
up to four
years
50% of STI awards for KMP are deferred into DPSRs, with
vesting over four years as per the schedule below:
At the end of year
1
% of grant vesting
30%
2
3
4
30%
20%
20%
Link to remuneration strategy
Positioned around the market median
using appropriate benchmarks, reflecting
size and complexity of role,
responsibilities, experience and skills.
Remuneration outcomes determined
based on performance and contribution
against annual KPIs which include
financial measures, people and culture
measures, customer and strategic
objectives and application of and
adherence to the risk management
framework.
Balances risk management and
governance considerations along with
supporting shareholder alignment
through the deferral of a significant
portion of STI into shares over the
medium to longer term.
Hurdled share
awards
deferred for up
to five years
Subject to forfeiture provisions under the Challenger
Performance Plan (CPP).
Longer-term ‘at risk’ remuneration.
Awarded as HPSRs vesting up to five years. Awards consist
of a single HPSR tranche, that is subject to a cumulative
absolute TSR hurdle tested four years or five years from the
date of grant. Any unvested awards lapse at the end of the
fifth anniversary following grant.
Subject to forfeiture provisions under the CPP Trust.
Balances risk management and
governance considerations along with
supporting shareholder alignment over
the long term. Aligns executives’
interests with Challenger’s long-term
success, sustained shareholder returns
and the customer experience.
Fixed remuneration
When determining fixed remuneration for KMP, the Board
considers market pay benchmarks for roles with:
• similar responsibilities and complexity; and
• roles requiring similar experience and skills.
Variable remuneration
Variable remuneration takes two forms: short term incentives,
in the form of DPSRs; and long term incentives, in the form of
HPSRs. Both short term and long term variable remuneration
outcomes are determined based on performance. The face
value (at the time of the award) of short term incentives can
be a maximum of 200% of fixed remuneration. The face value
(at the time of the award) of long term incentives can be a
maximum of 225% of fixed remuneration. The performance
period for short term incentives is the financial year prior to
the award date with performance assessed against a balanced
scorecard. The performance period for long term incentives is
the four to five year period following the award date with
performance assessed in terms of total shareholder return
against hurdles.
Short term incentive
KMP STI awards are determined by the Board and can vary
from zero to 200% of fixed remuneration. STI outcomes are
assessed considering the performance of Challenger, the
performance of the individual and market pay benchmarks. In
evaluating individual performance, the Board uses a balanced
scorecard with specific objectives for each KMP. Annual
contribution is assessed against these objectives, and
behaviour in line with the Challenger Principles of Integrity;
Compliance; Commercial Ownership; Working Together; and
Creative Customer Solutions.
To ensure STI award quantum is appropriate and not excessive,
the Board sets an overall budget for variable reward based on
company performance (set out on page 37).
33
Challenger Limited 2019 Annual Report
Directors’ report
4 Remuneration report (continued)
4.5 Remuneration strategy and structure (continued)
Deferred Performance Share Rights (DPSRs)
The Board believes deferring a portion of STI into equity
provides strong alignment with shareholder interests and
supports retention.
At Challenger, deferred STI awards are delivered as DPSRs
under the Challenger Performance Plan (CPP). DPSRs represent
the right to receive a fully-paid ordinary Challenger share for
nil consideration subject to continued employment at the time
of vesting. The number of DPSRs granted is determined based
on the five-day volume weighted average price (VWAP) of
shares prior to grant date.
In 2019 the Board extended the maximum deferral period for
STI from two to four years. This extended deferral will apply to
awards granted from 1 July 2019 onwards.
Long term incentive
LTIs are awarded annually to KMP to support a continued
focus on long-term performance outcomes. Executives will
only realise value from LTIs if total shareholder returns exceed
the hurdles set, ensuring a direct link between executive
reward and shareholder outcomes.
Following its executive remuneration framework review, the
Board decided from 2019 onwards to set the LTI awards for all
KMP at 225% of fixed remuneration at face value. The
selection of this LTI award value reflects Challenger’s strong
commitment to long-term performance whereby executives
will only realise value if the shareholder return performance
hurdle is achieved. The application of a common proportionate
LTI allocation methodology for all KMP:
• reflects their shared stewardship of Challenger;
• provides proportionate linkage of reward outcomes to
Challenger’s longer term success;
• recognises that the performance period for long term
incentives is the four to five year period following the award;
and
• provides greater transparency to both external stakeholders
and the KMP on potential reward quantum.
Hurdled Performance Share Rights (HPSRs)
LTIs are awarded in the form of HPSRs. HPSRs represent the
right to receive a fully-paid ordinary Challenger share for nil
consideration subject to continued employment and
Challenger satisfying the absolute TSR performance target.
In 2019, Challenger has changed the allocation methodology
for HPSR awards from a fair to face value allocation
methodology. This responds to feedback from stakeholders
who have expressed a preference for the use of face value.
The future value of HPSRs that may be realised by executives is
uncertain and depends on outcomes against hurdles in the
future. The face value of the award will only be realised if the
highest performance threshold is achieved.
LTI Performance measurement
The Board considers TSR an effective measure of shareholder
outcomes. In August 2010, the Board approved the
34
implementation of absolute TSR as the measure of long-term
performance. The Board believes that an absolute rather than
a relative TSR performance measure is appropriate because:
• there are no other listed companies in the Australian market
with a retirement income business which are directly
comparable to Challenger;
• key stakeholders, shareholders and proxy advisers have
indicated that a broader index is generally not considered an
appropriate peer group, as the outcome can result in a
misalignment between KMP and employee remuneration
and creation of shareholder value; and
• if the absolute TSR threshold performance target is set at a
level above average market returns over the long term, HPSR
vesting will be directly linked to the superior returns
delivered to shareholders.
The Board continues to consider the appropriateness of a
second LTI performance measure.
Consistent with market practice, 50% of HPSR awards vest at
an agreed performance threshold (compounded annually),
with full vesting occurring at an agreed higher performance
threshold (compounded annually).
Each year, the Board reviews the performance threshold set for
long-term performance, in order to ensure that it is
appropriately challenging for KMP, provides a retention
incentive and represents a compelling outcome for
shareholders.
As a result of this review, for the 2019 HPSR awards, the
Board has determined to retain the same thresholds that were
introduced in 2016. This means 50% vest at threshold
performance of 7% absolute TSR compounded annually
and fully vest when absolute TSR of 10% compounded
annually is achieved. The Board believes these thresholds are
challenging in the current low growth and low interest rate
environment and represent a relatively strong TSR for
shareholders.
Absolute TSR compounded annually
Awards pre
September 2016
Less than 8% p.a.
Awards from
September 2016
Less than 7% p.a. 0%
% of HPSRs
that vest
8% to 12% p.a.
7% to 10% p.a.
12% p.a. and
above
10% p.a. and
above
Straight-line vesting
between 50% and
100%
100%
It should be noted that HPSR awards made prior to September
2016 will continue to be assessed against the higher
performance thresholds of 8% to 12% compounded annually.
Over four years, 7% annual compound growth represents
total shareholder return of 31%, and 10% compound growth
represents a total shareholder return of 46%.
Directors’ report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4.5 Remuneration strategy and structure (continued)
Absolute TSR compounded annually (continued)
Trust distributions
The start and end price for absolute TSR performance testing is
calculated using a 90-day VWAP leading up to the relevant
performance start or end date. A 90-day VWAP eliminates the
potential for short-term price volatility to impact vesting
outcomes.
LTI Vesting periods
As noted above, from 1 July 2019 onwards the initial date for
performance testing and vesting for LTI awards, issued as
HPSRs has been extended from three to four years from the
date of grant. Accordingly, subject to continued employment
and meeting the absolute TSR performance target, the entire
award will be eligible to commence vesting on the fourth
anniversary. Previously, two thirds of an award was eligible to
commence vesting on the third anniversary, and the final third
on the fourth anniversary following grant.
Where the absolute TSR performance targets are not satisfied
for an award at four years, a higher test is applied in year five
(requiring total shareholder returns above the annual
thresholds compounded over five years). Any unvested awards
lapse at the end of the fifth anniversary following grant.
Challenger’s approach differs from the common market
practice of three or four-year cliff vesting, reflecting our
commitment to driving a focus on long-term performance with
strong risk management.
Challenger Performance Plan (CPP) Trust
The CPP Trust is an employee share trust established to satisfy
Challenger’s employee equity obligations arising from DPSRs
and HPSRs.
Challenger shares held by the CPP Trust generate dividend
income. The CPP Trust does not receive dividends from
forward share purchase agreements.
The Trustee of the CPP Trust has absolute discretion to
determine whether any net income earned from shares held by
the CPP Trust is distributed to beneficiaries. Any undistributed
income at the end of the year is taxed at the maximum
marginal tax rate (which exceeds the company tax rate) and
carries no franking credits.
Distributions are generally made by the Trustee annually. In
2019, the distribution was allocated to DPSRs and an approved
charity. The distribution to DPSRs was equal to Challenger’s
dividend per share. The remaining income from the CPP Trust
was allocated to the charity.
In 2019, in response to external stakeholder feedback, the
Board determined that unvested HPSRs are not eligible to
receive an income distribution from the CPP Trust.
Any income distributed to KMP from the CPP Trust is taken
into account by the Remuneration Committee and the Board
when considering remuneration recommendations. CPP Trust
distributions to KMP are disclosed within the remuneration
tables.
Tax Exempt Share Plan
The Board believes that greater employee ownership increases
alignment with shareholders and accordingly encourages
employee share ownership.
The Tax Exempt Share Plan provides permanent employees a
means to acquire Challenger shares at no cost, and to
participate in the future growth and performance of
Challenger. Eligible employees are offered $1,000 worth of
fully-paid Challenger ordinary shares on an annual basis,
subject to a three-year minimum holding period.
35
Challenger Limited 2019 Annual Report
Directors’ report
4 Remuneration report (continued)
4.6 Remuneration governance
Challenger’s remuneration governance structures, outlined in the table below, provide strong oversight of remuneration practices
and policies. Detailed information concerning the scope of the Board and the Remuneration Committee’s responsibilities can be
found under the corporate governance section of Challenger’s website.
Board
• The Board is responsible for ensuring effective remuneration governance and related risk management
Remuneration
Committee
Independent
remuneration
advisers
practices.
• The Board approves remuneration principles and structures, and ensures that they are competitive and
equitable and that they support the long-term interests of Challenger.
• The Board receives recommendations from the Remuneration Committee and approves these remuneration
recommendations where appropriate.
• The Board convenes a Remuneration Committee comprising at least three independent Directors to assist the
Board in discharging its responsibilities.
• The Remuneration Committee meets at least five times during the year, with additional meetings scheduled
as required. For the year ended 30 June 2019, eight meetings were held.
• The Remuneration Committee determines and recommends to the Board various principles and policies
(including remuneration, recruitment, retention, termination and diversity), Managing Director & CEO and
KMP remuneration, incentives, superannuation and life insurance arrangements and the Directors’
remuneration framework.
• The Board, independent of management, appoints an adviser to the Remuneration Committee.
• In 2019, the Board continued its engagement of KPMG. This engagement is based on a defined set of
protocols. The Board is satisfied with KPMG’s remuneration structure and quantum related advice and that
such advice is free from undue influence.
• For 2019, KPMG attended all of the Board Remuneration Committee meetings and provided advice with
respect to KMP remuneration arrangements. Fees paid or payable to KPMG in respect of these activities were
$148,415 (inclusive of GST). KPMG provided internal audit, tax, accounting, actuarial and transaction services
and general remuneration factual information in 2019. Fees paid or payable to KPMG in respect of these
activities were $1,500,138 (inclusive of GST).
• Mercer was retained in 2019 to independently value DPSRs and HPSRs and test HPSR vesting outcomes.
2. Financial services publicly disclosed data:
Data is comprised of publicly disclosed KMP remuneration
data for select financial services companies. This peer
group supports consideration of roles with comparable
skills to Challenger’s KMP.
In July 2019, the Board considered remuneration benchmark
data as a key input when determining 2019 remuneration
outcomes for KMP and is confident that awarded
remuneration reflects performance and is positioned
and structured at a market-competitive level reflective
of the markets in which Challenger competes for talent,
and the specialist nature of the skills and experience of
Challenger KMP.
Remuneration governance arrangements promote compliance
with the provisions of the ASX Listing Rules, the ASX
Corporate Governance Council’s Corporate Governance
Principles and Recommendations, the Corporations Act 2001
and, in respect of CLC and Challenger Retirement and
Investment Services Limited, the principles contained in the
Australian Prudential Regulation Authority Prudential
governance standards CPS 510 and SPS 510 respectively.
Remuneration benchmarking
Challenger’s remuneration strategy is supported by a strong
focus on benchmarking remuneration against the external
market, in particular for KMP, to roles with comparable
financial services, banking, insurance and capital markets skills.
Annually, the Board approves the peer groups to be used
when benchmarking KMP remuneration and in 2019 approved
the following peer groups:
1. Financial Industry Remuneration Group survey:
This peer group supports consideration of roles with
comparable financial services, banking, insurance and
capital markets skills to Challenger’s KMP.
36
Directors’ report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4.6 Remuneration governance (continued)
Variable remuneration governance
The Board determines a pool for total variable remuneration
(cash STI and share-based) annually, and targets a funding
range of between 10% and 15% of normalised net profit
before variable reward and tax (NPBVRT). Combined cash STI
and share-based awards from 2014 through 2019 are shown
in the graph below:
20%
15%
10%
5%
0%
2015
2016
2017
2018
2019
Total variable reward as % of NPBVRT
Target maximum funding of NPBVRT
Target minimum funding of NPBVRT
While working within the targeted range, the Board considers
several financial and non-financial factors when determining
the size of the pool. Examples of factors that the Board
considers include overall business results, external
remuneration levels and movements, progress on short and
long-term strategic objectives, the cost and amount of capital
employed, factors beyond management’s control, and
management of risk.
For 2019, the Board approved a variable remuneration pool of
9.4% of NPBVRT (total actual variable remuneration was
10.3% in 2018). The Board considers that the 2019 variable
remuneration pool reflects a reasonable and equitable
distribution between shareholders and employees and provides
a clear line of sight to, and a strong relationship between,
performance and remuneration outcomes.
Minimum shareholding guidelines
The Board reviews KMP and Non-Executive Director minimum
shareholding guidelines annually in order to ensure alignment
with shareholders and market practice. The 2019 review
determined that no changes were required to the guidelines at
this time. Challenger’s minimum shareholding guidelines do
not count unvested deferred equity towards minimum
holdings; however, for completeness the shareholding
disclosures in Section 4.8 Key Management Personnel
remuneration arrangements also show unvested DPSR equity
awards.
Minimum shareholding requirements are detailed in the
following table:
Group
Non-Executive
Directors (NEDs)
Managing Director
and CEO
Other KMP
Implied value1
Requirement
One times base fees Chair: $525,500
NEDs: $179,000
$2,550,000
Two times fixed
remuneration
One times fixed
remuneration
$600,000 to
$850,000
1 Based on fees and remuneration at 30 June 2019.
A five-year transitional period in which to acquire the required
shareholding applies for Non-Executive Directors and KMP. The
Board reviews minimum shareholding guidelines on an annual
basis and retains discretion to allow Non-Executive Directors
and KMP to vary from this guideline. Where fees are paid to
the employer of the Non-Executive Director, the minimum
shareholding guidelines do not apply.
The shareholdings of Non-Executive Directors and KMP at
30 June 2019 are set out in Section 4.8 Key Management
Personnel remuneration arrangements and 4.9 Non-Executive
Director disclosures.
Employee share trading policy
Employees, including Directors and KMP, must comply with
Challenger’s employee share trading policy and are required to
obtain pre-approval from the Company if they wish to trade in
Challenger shares. KMP and employees are prohibited from
trading during specified prohibited periods, including prior to
the release of Challenger’s financial results.
37
Challenger Limited 2019 Annual Report
Directors’ report
All employees are assessed against the Challenger Principles
and behaviours as part of the annual performance review
process, and this outcome contributes to the overall
performance rating and remuneration outcomes. Satisfactory
assessment of risk behaviour is treated as a gate-opener for
cash STI and share-based awards.
The Remuneration Committee and the Board consider
potential risk implications of performance targets when setting
performance measures for variable remuneration plans.
The Board also places significant focus on risk culture and
monitors and assesses Challenger’s risk culture. In 2019,
this included:
• an assessment was carried out of responses to a company-
wide engagement survey, which included specific risk
culture questions plus other relevant questions.
• as part of its internal audit program, KPMG provided an
assessment of risk culture arising from interviews and
control findings.
• Ernst & Young undertook a separate review of Challenger’s
risk culture through a series of interviews and focus groups.
• a range of key risk indicator metrics are monitored and
assessed throughout the year.
Variable reward forfeiture provisions
Under the terms of the CPP, both DPSRs and HPSRs may be
reduced or forfeited should the Board determine that a KMP
or employee:
• has committed an act of dishonesty;
• is ineligible to hold their office for the purposes of Part 2D.6
Disqualification from managing corporations of the
Corporations Act 2001; or
• is found to have acted in a manner that the Board considers
to be gross misconduct or is dismissed with cause.
In addition, the Board may resolve that an award of DPSRs or
HPSRs should be reduced or forfeited in order to:
• protect financial soundness; or
• respond to unexpected or unintended consequences that
were significant and unforeseen by the Board (such as
material risk management breaches, unexpected financial
losses, reputational damage or regulatory non-compliance).
4 Remuneration report (continued)
4.6 Remuneration governance (continued)
KMP and employees are prohibited from hedging their
unvested equity awards, as this would not be consistent with
Challenger’s remuneration strategy or appropriate governance
outcomes and is contrary to the intention of equity-based
remuneration arrangements. Should a KMP or employee
be found to have breached this requirement, it would be
regarded as serious misconduct and may be grounds for
dismissal.
Challenger prohibits KMP and employees from taking out
margin loans on Challenger shares, with any exceptions to this
rule requiring Board approval. There have been no requests for
exceptions to this policy for the year ended 30 June 2019 (no
requests in 2018).
Employee share ownership
Employee share ownership levels by way of unvested equity
are formally reviewed by the Board on a regular basis. As at
30 June 2019, 76% of permanent employees hold unvested
Challenger equity (73% in 2018). This constitutes 2%
employee ownership of Challenger (2% in 2018).
4.7 Risk management
The Board seeks to align remuneration with effective risk
management, the generation of appropriate risk-based returns
and Challenger’s risk profile.
The Board has agreed a risk management framework which
sets out the Board’s tolerance to risk exposures and the
management of risk in general. Challenger’s risk profile is
continuously monitored and managed against agreed risk
limits. Any divergence from set limits is resolved within
Challenger through a series of escalations and delegated
authorities culminating with the Board. All business activities
are carried out in accordance with this risk management
framework, regardless of potential remuneration outcomes.
During the year, the Risk Committee provides reports to the
Remuneration Committee and the Board summarising risk
management and risk outcomes, including any breaches of the
risk management framework or other compliance policies. The
Remuneration Committee and the Board consider these
reports when finalising remuneration pools and individual
allocations.
All employees are required to comply with Challenger’s
policies and other risk management and regulatory
requirements as they apply to their role and business area.
Breaches of compliance with these policies and other
requirements are taken seriously and may result in disciplinary
action and termination of employment. In addition, risk
management, including any breaches, is considered when
determining cash STI and share-based awards each year.
38
Directors’ report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4.8 Key Management Personnel remuneration arrangements
This audited remuneration report describes Challenger’s KMP and Non-Executive Director remuneration arrangements as required
by the Corporations Act 2001.
Statutory remuneration
Statutory remuneration represents the accounting expense of remuneration in the financial year. It includes fixed remuneration,
cash STI awards, the fair value amortisation expense of deferred share awards granted, distributions from the CPP Trust, long
service leave entitlements and insurance.
Short-term employee benefits
Long-term employee benefits
KMP
R Howes4
B Benari5
A Murphy6
C Plater
I Saines
A Tobin
Total
Year
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Salary1
$
975,009
731,753
673,510
1,320,102
323,721
-
722,922
673,074
810,605
844,020
688,674
679,204
4,194,441
4,248,153
Super-
annuation
$
20,531
20,049
10,340
20,049
11,406
-
20,531
20,049
20,531
20,049
20,531
20,049
103,870
100,245
Cash STI
$
625,000
712,500
510,000
887,500
145,833
-
494,000
612,500
372,500
450,000
425,000
462,500
2,572,333
3,125,000
Other2
$
88,910
130,814
64,367
243,011
15,840
-
70,873
97,879
54,899
90,386
59,924
82,583
354,813
644,673
Share-based
payments3
$
1,929,641
1,905,451
1,600,128
3,116,202
206,528
-
1,497,129
1,332,347
1,220,782
1,228,781
1,268,220
1,233,211
7,722,428
8,815,992
Total
$
3,639,091
3,500,567
2,858,345
5,586,864
703,328
-
2,805,455
2,735,849
2,479,317
2,633,236
2,462,349
2,477,547
14,947,885
16,934,063
1 Includes the cost of death, total permanent disability and salary continuance insurances.
2 Values represent distributions from the CPP Trust and long service leave accruals.
3 Calculated on the basis outlined in Note 27 Employee entitlements and reflects the fair value of the benefit derived at the date at which they were granted. Fair
value is determined using an option pricing model and is undertaken by an independent third party. The HPSRs included in share-based payments are subject to
market-based performance conditions; consequently, no adjustment to the fair valuation following grant date is permitted to be made for the likelihood of
performance conditions not being met. As a result, the value of the share-based payments included in the table may not necessarily have vested during the
financial year.
4 Mr Howes was appointed Managing Director & Chief Executive Officer on 2 January 2019.
5 Mr Benari transferred to a non-KMP role on 2 January 2019 as transition to retirement. The 2019 disclosure is pro rata for the period in which he was KMP.
6 Ms Murphy transferred to a KMP role on 12 December 2018. The 2019 disclosure is pro rata for the period in which she was KMP.
39
Challenger Limited 2019 Annual Report
Directors’ report
4 Remuneration report (continued)
4.8 Key Management Personnel remuneration arrangements (continued)
Split of statutory remuneration components
The splits of KMP statutory remuneration are set out below:
KMP
R Howes1
B Benari2
A Murphy3
C Plater
I Saines
A Tobin
Year Fixed remuneration
28%
2019
22%
2018
24%
2019
24%
2018
47%
2019
-
2018
26%
2019
25%
2018
33%
2019
33%
2018
28%
2019
28%
2018
Cash STI
17%
20%
18%
16%
21%
-
18%
22%
15%
17%
17%
19%
Share-based
payments
53%
54%
56%
56%
29%
-
53%
49%
49%
47%
52%
50%
Other
2%
4%
2%
4%
3%
-
3%
4%
3%
3%
3%
3%
Total
100%
100%
100%
100%
100%
-
100%
100%
100%
100%
100%
100%
1 Mr Howes was appointed Managing Director & Chief Executive Officer on 2 January 2019.
2 Mr Benari transferred to a non-KMP role on 2 January 2019 as transition to retirement. The 2019 disclosure is pro rata for the period in which he was KMP.
3 Ms Murphy transferred to a KMP role on 12 December 2018. The 2019 disclosure is pro rata for the period in which she was KMP.
Share Rights granted
Deferred Performance Share Rights
The number of DPSRs granted is determined based on the five-day volume weighted average price (VWAP) of shares prior to
grant date. This is the face value allocation price that determines the number of DPSRs granted.
DPSRs granted to KMP during the year ended 30 June 2019 are detailed below:
Awarded
DPSR value
from 2018
$
1,065,000
1,562,500
912,500
697,500
710,000
Face value
allocation
price
$
10.3679
10.3679
10.3679
10.3679
10.3679
Total
number
of DPSRs
granted
102,719
150,704
88,011
67,273
68,479
Date of
grant
11/9/18
11/9/18
11/9/18
11/9/18
11/9/18
KMP1
R Howes
B Benari
C Plater
I Saines
A Tobin
Vesting
Tranche 1
1 September 2019
Tranche 2
1 September 2020
Tranche 3
1 September 2021
Number2
34,360
42,800
29,538
21,701
22,304
Number2
34,360
42,800
29,538
21,701
22,304
Number2
33,999
65,104
28,935
23,871
23,871
1 Ms Murphy transferred to a KMP role on 12 December 2018; grant and vesting disclosures prior to that are not required to be disclosed.
2 The number of DPSRs granted is determined by dividing the dollar value of the award by the face value allocation price which is determined based on the VWAP in
the five days prior to grant. The fair value of each tranche was $10.22 for Tranche 1, $9.94 for Tranche 2 and $9.66 for Tranche 3. The fair value is independently
calculated and is used to determine the accounting value, which is amortised over future vesting periods. The fair value differs to the face value allocation price, as
the DPSRs do not carry a dividend entitlement, and reflects the deferred nature of the award.
Hurdled Performance Share Rights
From September 2019, HPSRs are awarded as a percentage of fixed remuneration using face value. It’s important to note that
while DPSRs deliver the face value of a share at vesting (subject to continued employment), HPSRs only deliver the face value of a
share at vesting subject to attaining the applicable absolute TSR hurdle. HPSRs deliver no value at vesting if absolute TSR is below
the performance threshold of 7% compounded annually, and full vesting will only occur if absolute TSR is at or above 10%
compounded annually.
40
Directors’ report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4.8 Key Management Personnel remuneration arrangements (continued)
Share Rights granted (continued)
Hurdled Performance Share Rights (continued)
The table below includes a representation of the awarded face value of the granted HPSRs based on the five-day VWAP of shares
prior to grant date as well as the fair value which takes into account the likelihood of vesting and is in line with accounting
standards.
HPSRs granted to KMP during the year ended 30 June 2019 are detailed below:
Vesting
Tranche 1
1 September 2021
Tranche 2
1 September 2022
Awarded
HPSR
fair value
from 2018
$
822,500
1,575,000
700,000
577,500
577,500
TSR start
price2
$ Grant date
11/9/18
11/9/18
11/9/18
11/9/18
11/9/18
11.7192
11.7192
11.7192
11.7192
11.7192
Fair value
allocation
price
Fair value
allocation
price
$ Number3
120,248
230,263
102,339
84,429
84,429
4.56
4.56
4.56
4.56
4.56
$ Number3
69,585
133,248
59,221
48,858
48,858
3.94
3.94
3.94
3.94
3.94
Awarded
HPSR
Total
face value4
number of
from 2018
HPSRs
$
granted
189,833 1,968,170
363,511 3,768,846
161,560 1,675,038
133,287 1,381,906
133,287 1,381,906
KMP1
R Howes
B Benari
C Plater
I Saines
A Tobin
1 Ms Murphy transferred to a KMP role on 12 December 2018; grant and vesting of awards prior to that are not required to be disclosed.
2 The TSR start price is the VWAP of shares traded in the 90 calendar days immediately preceding the grant date.
3 The number of HPSRs granted is determined by dividing the dollar value of the award by the fair value of the relevant tranche. The fair value is independently
calculated and was determined by the Board as the best estimate of the awarded financial value at the grant date. The fair value is also used to determine the
accounting value which is amortised over future vesting periods. The fair value differs to the TSR start price as the HPSR vesting events are subject to achieving future
TSR hurdles, do not carry a dividend entitlement and reflects the deferred nature of the award.
4 The face value unit price has been determined using the five-day volume weighted average price ($10.3679) prior to the grant date. The 2019 awarded HPSRs will be
issued in September 2019.
Share Rights vested
The following tables show the short and long-term incentives that vested during the year ended 30 June 2019.
Deferred Performance Share Rights
DPSRs which vested to KMP during the year ended 30 June 2019 are detailed below:
KMP1
R Howes
B Benari
C Plater
I Saines
A Tobin
Date of grant
13/9/15
12/9/16
11/9/17
13/9/15
12/9/16
11/9/17
13/9/15
12/9/16
11/9/17
13/9/15
12/9/16
11/9/17
13/9/15
12/9/16
11/9/17
Number
41,133
38,001
31,596
78,690
43,430
36,635
16,095
33,930
27,519
41,133
17,643
17,326
28,614
24,429
19,365
Face value at grant
$
287,495
349,993
387,500
549,996
399,995
449,299
112,494
312,499
337,499
287,495
162,494
212,490
199,995
224,994
237,496
1 Ms Murphy transferred to a KMP role on 12 December 2018; grant and vesting of awards prior to that are not required to be disclosed.
Vesting date
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
41
Challenger Limited 2019 Annual Report
Directors’ report
4 Remuneration report (continued)
4.8 Key Management Personnel remuneration arrangements (continued)
Hurdled Performance Share Rights
HPSR grants awarded and considered by shareholders in prior periods and which vested to KMP during the year ended
30 June 2019 are detailed below, together with TSR performance outcomes.
Total shareholder return outcomes for all HPSRs vested during the year range between 17% and 26% per annum and are
significantly above the internal performance hurdles and external market benchmarks over these timeframes. As a result of this
TSR performance, all eligible HPSRs vested during the year.
It should be noted that due to a deterioration in TSR performance across 2019, no HPSRs will vest in September 2019.
Grant details
Grant
Date
16/9/14
13/9/15
16/9/14
13/9/15
16/9/14
13/9/15
4/3/15
13/9/15
16/9/14
13/9/15
Fair value at
grant2
$
727,713
862,499
1,355,054
1,649,999
302,126
337,500
749,996
862,499
476,777
599,998
Number
225,066
277,073
419,089
530,053
93,441
108,420
204,383
277,073
147,457
192,746
Vesting
Date
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
1/9/18
Vesting details
Number
vested
75,022
175,840
139,697
336,391
31,147
68,807
74,850
175,840
49,153
122,324
TSR
outcome
per annum
17%
26%
17%
26%
17%
26%
25%
26%
17%
26%
Number vested
or lapsed in prior
years
150,044
-
279,392
-
62,294
-
129,533
-
98,304
-
Number yet to
vest or lapse
-
101,233
-
193,662
-
39,613
-
101,233
-
70,422
KMP1
R Howes
B Benari
C Plater
I Saines
A Tobin
1 Ms Murphy transferred to a KMP role on 12 December 2018; grant and vesting of awards prior to that are not required to be disclosed.
2 The fair value is independently calculated and has been determined by the Board as the best estimate of the awarded financial value at the grant date.
Share Rights held
Performance Share Rights held
Details of KMP DPSRs and HPSRs held as at 30 June 2019 are set out below:
KMP
R Howes
B Benari
A Murphy1
C Plater
I Saines
A Tobin
Instrument
DPSRs
HPSRs
DPSRs
HPSRs
DPSRs
HPSRs
DPSRs
HPSRs
DPSRs
HPSRs
DPSRs
HPSRs
Number held at
1 July 2018
209,278
739,899
326,478
1,427,235
-
-
153,953
422,130
131,863
571,256
135,503
494,393
Number granted as
remuneration
102,719
189,833
150,704
363,511
-
-
88,011
161,560
67,273
133,287
68,479
133,287
Number vested
(110,730)
(250,862)
(158,755)
(476,088)
-
-
(77,544)
(99,954)
(76,102)
(250,690)
(72,408)
(171,477)
Number held at 30
June 2019
201,267
678,870
318,427
1,314,658
39,536
131,998
164,420
483,736
123,034
453,853
131,574
456,203
1 Ms Murphy transferred to a KMP role on 12 December 2018; grant and vesting of awards prior to that are not required to be disclosed.
42
Directors’ report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4.8 Key Management Personnel remuneration arrangements (continued)
Key Management Personnel and their affiliates’ shareholdings in Challenger Limited
Details of KMP and their affiliates’ shareholdings in Challenger Limited as at 30 June 2019 are detailed below, along with the
number of unvested DPSRs. The CEO and other KMP are required to have a minimum shareholding equal to two times, and one
times, their fixed remuneration respectively. From the date of appointment, KMP have a five-year transition period to reach the
minimum shareholding. Mr Howes and Mr Tobin, hold substantially more than the minimum requirement as at 30 June 2019 and
all other current KMP remain within their transition period.
KMP
R Howes2
B Benari3
A Murphy4
C Plater
I Saines
A Tobin
Total
Opening
balance
100,000
100,000
-
1,000,000
-
-
27,347
3,385
171,498
12,161
320,880
298,341
619,725
1,413,887
Number of
vested DPSRs
and HPSRs
361,592
474,282
-
746,991
-
-
177,498
236,067
326,792
159,337
243,885
287,539
1,109,767
1,904,216
Year
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Number of
shares sold
-
(474,282)
-
(746,991)
-
-
(150,000)
(212,105)
(498,290)
-
(200,000)
(265,000)
(848,290)
(1,698,378)
Closing
balance of
shares
461,592
100,000
-
1,000,000
-
-
54,845
27,347
-
171,498
364,765
320,880
881,202
1,619,725
Number of
unvested
DPSRs
201,267
209,278
-
326,478
39,536
-
164,420
153,953
123,034
131,863
131,574
135,503
658,831
957,075
Shareholding as a multiple
of fixed remuneration1
Fully-owned
shares
3.1
1.6
-
8.9
-
-
0.5
0.5
-
2.4
3.5
5.5
Shares and
DPSRs
4.4
4.9
-
11.8
0.5
-
2.0
3.1
1.0
4.2
4.7
7.8
1 Shareholding multiple based on 30 June 2019 closing share price of $6.64 (30 June 2018: $11.83).
2 Mr Howes was appointed Managing Director & Chief Executive Officer on 2 January 2019
3 Mr Benari transferred to a non-KMP role on 2 January 2019 as transition to retirement.
4 Ms Murphy transferred to a KMP role on 12 December 2018 and has a five year transition period in which to acquire the required shareholding.
Richard Howes – Managing Director & CEO
Mr Howes was appointed Managing Director & CEO effective 2 January 2019. All equity awards for the Managing Director &
CEO are satisfied by the purchase of shares on market. The following table summarises the notice periods and payments which
apply to Mr Howes upon termination.
Notice period
Payment in lieu of notice
Bad leaver
termination1
Employee initiated: 6 months
Employer initiated (Poor
performance): 12 months
The Board may elect to make
a payment of salary package
in lieu of notice
Good leaver
termination2
Employer initiated
(Misconduct): None
Employee initiated: 6 months
Employee initiated (Material
Change3): 1 month
Employer initiated: 12 months
None
The Board may elect to make
a payment of salary package
in lieu of notice
Eligibility for
STI
Treatment of
unvested
performance rights
No
Lapse
Continued vesting4
Eligible for a
pro rata STI
payable at
the usual
payment
date
1 Bad leaver termination will occur where employment is terminated by Challenger for poor performance, misconduct or resignation without the prior approval of the
Board.
2 Good leaver termination will occur if employment ends in any circumstances that do not constitute a bad leaver termination.
3 Material Change means where there is a substantial diminution of Mr Howes’ duties, status, responsibilities and/or authority arising without his agreement.
4 Unvested Performance rights will remain on foot subject to the specified time based vesting conditions and/or performance hurdles and to the rules of the CPP.
43
Challenger Limited 2019 Annual Report
Directors’ report
4 Remuneration report (continued)
4.8 Key Management Personnel remuneration arrangements (continued)
Key Management Personnel (excluding Managing Director & CEO) employment agreements and notice periods
KMP do not have fixed terms of employment. The notice period for Challenger and the KMP is 26 weeks unless terminated for
cause.
Upon termination, if the KMP is considered a good leaver (such as cessation of employment due to redundancy), they will be
entitled to a pro rata STI award. Board discretion applies in relation to unvested awards under the CPP issued for awards prior to
30 June 2019. Awards issued under the CPP from 1 July 2019 onwards are subject to specific good leaver conditions specified at
the time of grant.
Loans and other transactions
There were no loans made to Directors or key executives as at 30 June 2019 (30 June 2018: nil). From time to time, Directors of
the Company or their Director related entities may purchase products from the Company. These purchases are on the same arm’s
length terms and conditions as those offered to other employees or customers.
4.9 Non-Executive Director disclosures
Fee pool
The maximum aggregate amount of annual fees is approved
by shareholders in accordance with the requirements of the
Corporations Act 2001.
The current fee pool of $2,500,000 was approved by
shareholders in 2016.
Fee framework and review
Challenger aims to attract and retain suitably skilled and
experienced Non-Executive Directors to serve on the Board and
to reward them appropriately for their time and expertise.
Non-Executive Directors are remunerated by way of fees paid
in recognition of membership of the Board and its committees.
Additional fees are paid to the Chair of the Board and sub-
committee members to reflect added responsibilities.
The Board is committed to periodically reviewing the fee
framework in order to ensure that fees remain appropriate
Board/Committee
Board1
Group Risk
Group Audit
Remuneration
against the external market and support the attraction and
retention of high quality Non-Executive Directors.
On recommendation from the Remuneration Committee, the
Board approves the fee structure within the bounds of the
overall maximum fee pool.
The fee structure is benchmarked annually to align with the
market and to attract, retain and appropriately reward quality
independent directors. Based on the results of the
benchmarking, fees for the Chair of the Group Risk
Committee and the Group Audit Committee increased. All
other Board fees remain unchanged for the year ended 30
June 2019.
The following table summarises the fees applicable to
membership and chairmanship of the Board and its sub-
committees, inclusive of services provided at a subsidiary board
level, for the year ended 30 June 2019. All amounts are
inclusive of superannuation, where applicable.
2019 fee structure
2018 fee structure
Chair fee2
$
525,500
47,000
47,000
47,000
Member fee
$
179,000
14,000
14,000
23,500
Chair fee2
$
525,500
30,000
30,000
47,000
Member fee
$
179,000
14,000
14,000
23,500
1 Board fees include Nomination Committee fees.
2 The Board Chair fees reported in the table are inclusive of committee fees paid to the Board Chair.
The fee framework includes services provided at a subsidiary board level.
44
Directors’ report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4.9 Non-Executive Director disclosures (continued)
Non-Executive Director fees for the year ended 30 June 2019
The following table summarises Non-Executive Director fees for the year ended 30 June 2019.
Non-Executive Director
P Polson
G Cubbin1,2
J M Green3
S Gregg
J Grunzweig1,4
B Shanahan5
J Stephenson
D West1,6
M Willis3
L Zwier1
Total
Year
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Director fees
$
504,969
505,451
86,638
267,750
203,660
95,543
236,631
186,834
-
77,534
-
69,254
245,280
238,951
146,569
-
210,198
95,543
179,000
179,000
1,812,945
1,715,860
Superannuation
$
20,531
20,049
-
-
19,348
9,077
20,398
17,749
-
-
-
6,579
20,531
20,049
-
-
19,772
9,077
-
-
100,580
82,580
Total
$
525,500
525,500
86,638
267,750
223,008
104,620
257,029
204,583
-
77,534
-
75,833
265,811
259,000
146,569
-
229,970
104,620
179,000
179,000
1,913,525
1,798,440
1 Mr Cubbin, Mr Grunzweig, Mr West and Mr Zwier provide services through companies. Fees exclude GST.
2 Mr Cubbin retired from the Board on 26 October 2018. The 2019 remuneration reflects fees earned on a pro-rata basis.
3 Mr Green and Ms Willis were appointed as Directors on 6 December 2017. The 2018 remuneration reflects fees earned on a pro-rata basis.
4 Mr Grunzweig retired from the Board on 6 December 2017. The 2018 remuneration reflects fees earned on a pro-rata basis.
5 Ms Shanahan retired from the Board on 26 October 2017. The 2018 remuneration reflects fees earned on a pro-rata basis.
6 Mr West was appointed as a director on 10 September 2018. The 2019 remuneration reflects fees earned on a pro-rata basis.
Superannuation
Non-Executive Directors receive superannuation contributions where required by Superannuation Guarantee legislation.
Equity participation
Non-Executive Directors do not receive equity as part of their remuneration and do not participate in any incentive arrangements.
45
Challenger Limited 2019 Annual Report
Directors’ report
4 Remuneration report (continued)
4.9 Non-Executive Director disclosures (continued)
Non-Executive Director shareholdings in Challenger Limited at 30 June 2019
Details of the Non-Executive Directors’ and their affiliates’ shareholdings in Challenger Limited are set out below:
Non-Executive Director
P Polson
G Cubbin1,2
J M Green
S Gregg3
J Grunzweig4
B Shanahan4
J Stephenson3
D West
M Willis
L Zwier
Total
Year
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Shares held at the
beginning of the year
122,000
122,000
97,878
97,797
-
-
14,000
10,000
-
250
-
252,112
15,000
13,000
-
-
149,892
-
7,360
7,360
406,130
502,519
Movements
-
-
(97,878)
81
10,000
-
-
4,000
-
(250)
-
(252,112)
-
2,000
18,957
-
-
149,892
-
-
(68,921)
(96,389)
Shares held at the end of
the year
122,000
122,000
-
97,878
10,000
-
14,000
14,000
-
-
-
-
15,000
15,000
18,957
-
149,892
149,892
7,360
7,360
337,209
406,130
1 An affiliate of Mr Cubbin received as an employee 6,653 performance share rights during the year.
2 Mr Cubbin retired from the Board on 26 October 2018, so his holding disclosure is removed under ‘movements’.
3 Due to significant share price movement during 2019, Mr Gregg and Ms Stephenson’s shareholding do not currently satisfy the minimum shareholding requirements.
4 Ms Shanahan retired from the Board on 26 October 2017 and Mr Grunzweig retired from the Board on 6 December 2017 and so the holding disclosures for each
director have been removed under ‘movements’.
Total remuneration of KMP and Non-Executive Directors
Short-term
benefits
$
Post-
employment
benefits
$
Share-based
payments
$
Other
benefits
$
Termination
benefits
$
KMP and Non-Executive Directors
Non-Executive Directors
2019
2018
KMP
2019
2018
1,812,945
1,715,860
100,580
82,580
-
-
-
-
6,766,774
7,373,153
103,870
100,245
7,722,428
8,815,992
354,813
644,673
All KMP and Non-Executive Directors
2019
2018
8,579,719
9,089,013
204,450
182,825
7,722,428
8,815,992
354,813
644,673
46
Total
$
1,913,525
1,798,440
14,947,885
16,934,063
16,861,410
18,732,503
-
-
-
-
-
-
Directors’ report
Challenger Limited 2019 Annual Report
4 Remuneration report (continued)
4.10 Summary of key terms and abbreviations used in the remuneration report
Key term
Awarded
remuneration
Board
CPP
CPP Trust
DPSR
Face value
Fair value
HPSR
KMP
LTI
Description
Represents the value of remuneration that has been awarded for the financial year. This includes fixed
remuneration, cash STI and deferred share awards.
The Board of Directors of Challenger Limited and the main body responsible for the implementation of
effective remuneration governance and related risk management practices at Challenger.
Challenger Performance Plan. Deferred equity awards are issued under the CPP.
Challenger Performance Plan Trust. The CPP Trust was established in 2006 for the purpose of acquiring,
holding and transferring shares to employees upon the vesting of their equity awards.
Deferred Performance Share Right. Deferred STI awards are delivered as DPSRs under the CPP. DPSRs
represent the right to receive a fully-paid ordinary Challenger share for zero consideration subject to
continued employment at the time of vesting. DPSRs do not provide an entitlement to vote or a right to
dividends; however, employees with unvested DPSRs may receive a distribution of income from the CPP
Trust. The Board has discretion to amend or withdraw DPSRs at any point.
The number of DPSRs granted to KMP is determined based on the face value of the shares using a five-day
Volume Weighted Average Price (VWAP) prior to the grant date. The number of Hurdled Performance Share
Rights granted to KMP from 1 July 2019 is determined based on the face value of the shares using a five-
day Volume Weighted Average Price (VWAP) prior to the grant date.
The number of HPSRs awarded to KMP prior to 1 July 2019 was calculated by reference to the fair value.
The fair value for HPSRs is calculated on the basis outlined in Note 27 Employee entitlements and reflects
the fair value of the benefit derived at the date at which they were granted. An independent third party
determines the fair value using an option pricing model and discounted cash flow methodology, as
appropriate.
Hurdled Performance Share Right. HPSR awards are delivered under the CPP and are linked to the long-term
performance of Challenger. HPSRs represent the right to receive a fully-paid ordinary Challenger share for
zero consideration subject to continued employment and satisfying the absolute TSR performance targets.
HPSRs do not provide an entitlement to vote or a right to dividends. HPSR awards are provided to KMP as
their responsibilities provide them with the opportunity to materially influence long-term performance,
strategy and shareholder value. The Board has discretion to amend or withdraw HPSRs at any point.
Key Management Personnel. Persons having authority and responsibility for planning, directing and
controlling the activities of an entity, directly or indirectly, including any Director (whether executive or
otherwise) as defined in AASB 124 Related Party Disclosures.
Long term incentive. LTIs are awarded annually to KMP to support a continued focus on long-term
performance outcomes. Executives will only realise value from LTIs if total shareholder returns exceed the
hurdles set, ensuring a direct link between executive reward and shareholder outcomes.
Normalised NPAT Normalised net profit after tax. Excludes asset or liability valuation movements that are above or below
Normalised RoE
(pre-tax)
Normalised
NPBVRT
Remuneration
Committee
Statutory
remuneration
STI
TSR
Variable
remuneration
VWAP
expected long-term trends and significant items that may positively or negatively impact financial results.
Refer to the Operating and financial review section for further information.
Normalised return on equity (pre-tax). Normalised profit before tax divided by average net assets.
Normalised net profit before variable reward and tax. Excludes any asset or liability valuation movements
that are above or below expected long-term trends and any significant items that may positively or
negatively impact the financial results, and excludes STI expense, employee share award expense and tax.
The Board convenes a Remuneration Committee comprising independent Non-Executive Directors and
which is a delegated committee of the Board to assist the Board in discharging its responsibilities.
Represents the accounting expense of remuneration for the financial year. This includes fixed remuneration,
cash STI awards, the fair value amortisation expense of share-based awards granted up to balance sheet
date, distributions from the CPP Trust, long service leave entitlements and insurance.
Short-term incentive. STIs are used to reward KMP and employees for significant contributions to
Challenger’s results over the course of the financial year. Individual STI awards are allocated on the basis of
annual contribution and with reference to market benchmarks. The Board has discretion to amend or
withdraw the STI at any point. STIs may be awarded in the form of cash and/or DPSRs.
Total shareholder return. TSR represents the change in share price plus dividends received over a given
timeframe. Challenger uses absolute TSR as the measure of performance for HPSRs.
Consists of cash STI and share-based awards (DPSRs and HPSRs).
Volume weighted average price. Ratio of the value of shares traded to total volume traded over a particular
time horizon. A five-day VWAP is used to calculate the number of DPSRs per dollar of deferred STI. A five-
day VWAP is used to calculate the number of HPSRs per dollar of LTI. A 90-day VWAP is also used for
absolute TSR performance testing (start and end price) for HPSR awards.
47
Challenger Limited 2019 Annual Report
Directors’ report
5 Indemnification and insurance of
8 Significant events after the
Directors and officers
balance date
In accordance with its Constitution, and where permitted
under relevant legislation or regulation, the Company
indemnifies the Directors and officers against all liabilities to
another person that may arise from their position as Directors
or officers of the Company and its subsidiaries, except where
the liability arises out of conduct that is fraudulent, dishonest,
criminal, malicious or a reckless act, error or omission.
In accordance with the provisions of the Corporations Act
2001, the Company has insured the Directors and officers
against liabilities incurred in their role as Directors and officers
of the Company. The terms of the insurance policy, including
the premium, are subject to confidentiality clauses and
therefore the Company is prohibited from disclosing the
nature of the liabilities covered and the premium paid.
6 Indemnification of auditor
To the extent permitted by law, the Company has agreed to
indemnify its auditor, Ernst & Young, as part of the terms of its
audit engagement agreement. The primary purpose of the
indemnity is to indemnify Ernst & Young for any loss that it
may suffer as a result of a false representation given by
Challenger management where a claim is made against Ernst
& Young by a third party.
There is a caveat if Ernst & Young’s loss results from its own
negligence or wrongful or wilful acts or omissions. No
payment has been made to indemnify Ernst & Young during or
since the financial year.
7 Environmental regulation and
performance
Some members of the Group act as a trustee or responsible
entity for a number of trusts that own assets both in Australia
and overseas. Some of these assets are subject to
environmental regulations under Commonwealth, state and
offshore legislation. The Directors are satisfied that adequate
systems are in place for the management of the Group’s
environmental responsibilities and compliance with various
legislative, regulatory and licence requirements. Further, the
Directors are not aware of any breaches of these requirements,
and to the best of their knowledge all activities have been
undertaken in compliance with environmental requirements.
At the date of this financial report, no matter or circumstance
has arisen that has affected, or may significantly affect, the
Group’s operations, the results of those operations or the
Group’s state of affairs in future financial years which has not
already been reflected in this report.
9 Rounding
The amounts contained in this report and the financial report
have been rounded to the nearest $100,000, unless otherwise
stated, under the option available to the Group under
Australian Securities and Investments Commission (ASIC)
Corporations Instrument 2016/191.
10 Non-audit services
The Audit Committee has reviewed details of the amounts
paid or payable for non-audit services provided to Challenger
during the year ended 30 June 2019 by the Company’s
auditor, Ernst & Young.
The Directors are satisfied that the provision of those non-
audit services by the auditor is compatible with the general
standard of independence for auditors imposed by the
Corporations Act 2001 and did not compromise the auditor
independence requirements of the Corporations Act 2001 for
the following reasons:
• all non-audit services were approved in accordance with the
Auditor Independence Policy that outlines the approval
process that must occur for all non-audit services and which
involves the Challenger CEO, CFO or delegate, depending
on size and circumstances; and
• no non-audit services were carried out which were
specifically excluded by the Auditor Independence Policy.
For details of fees for non-audit services paid to the auditors,
refer to Note 28 Remuneration of auditor of the financial
report.
48
Directors’ report
Challenger Limited 2019 Annual Report
11 Authorisation
Signed in accordance with a resolution of the Directors of Challenger Limited:
P Polson
Independent Chair
Sydney
12 August 2019
R Howes
Managing Director & Chief Executive Officer
Sydney
12 August 2019
12 Auditor’s independence declaration
The Directors received the following declaration from the auditor of Challenger Limited:
Ernst & Young
200 George Street
Sydney NSW 2000 Australia
GPO Box 2646 Sydney NSW 2001
Tel: +61 2 9248 5555
Fax: +61 2 9248 5959
ey.com/au
Auditor’s independence declaration to the Directors of Challenger Limited
As lead auditor for the audit of Challenger Limited for the financial year ended 30 June 2019, I declare to the best of my
knowledge and belief, there have been:
a. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
b. no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of Challenger Limited and the entities it controlled during the financial year.
Ernst & Young
T Johnson
Partner
Sydney
12 August 2019
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
49
Challenger Limited 2019 Annual Report
Sustainability
Sustainability
At Challenger, being sustainable is about addressing
environmental, social and governance (ESG) opportunities and
risks that have the potential to affect its vision to provide
financial security for customers.
Challenger’s sustainability strategy supports the delivery of its
business strategy and highlights its commitment to:
• responsible business practices that focus on our customers,
employees, shareholders and the environment;
• taking action on issues affecting the ability of retirees to
achieve financial security; and
• helping our customers and communities to be strong and
financially resilient.
Challenger’s 2019 Sustainability Report reflects its approach to
sustainability and is available from the company website:
› challenger.com.au
This report focuses on the first full year of implementation of
Challenger’s new sustainability strategy and highlights
progress made against each of its priority areas.
This year, Challenger engaged with internal and external
stakeholders to identify material areas of importance to both
the business and its stakeholders. Responding to the material
matters identified, supports the achievement of the UN
Sustainable Development Goals (SDGs).
Complementing this, is a continuing focus on employee
engagement, diversity and inclusion, risk management and
managing Challenger’s impact on the environment.
Material matters
Trust and confidence
Maintaining stakeholder trust and confidence is critical to
Challenger’s ability to deliver for its customers, shareholders,
employees and the broader community. Earning public trust
requires Challenger to set and maintain high standards of
conduct, provide open, transparent and continuous disclosure,
to ensure the security of its customers’ information, and to
contribute to industry-wide sustainability commitments.
Long-term risk management
How Challenger manages risk in the long term is central to
providing secure and stable income to its customers. To match
the long-dated annuities sold, Challenger invests in a
diversified portfolio of assets. Taking a long-term view also
involves investing responsibly and anticipating current and
long-term impacts such as climate change.
People and culture
A strong risk culture and highly engaged workforce is critical
to success. Challenger seeks to provide an engaged and
enabled workforce that embraces diverse thinking and has
positive labour practices. Focusing on diversity, wellbeing,
leadership and talent are important elements of this.
Changing operating environment
Challenger works within a complex operating landscapes. This
includes working closely with distribution and product
partners, fund managers and financial advisers, all of which
have been impacted by a changing regulatory and market
environment.
Retirement policy setting
As a retirement income provider, Challenger plays a key role in
contributing to fiscally responsible solutions that help fund an
ageing population.
There is broad agreement across industry and government that
the retirement phase of the superannuation system is
underdeveloped and that reform is needed. Challenger is
engaging broadly to contribute to this fundamental public
policy process.
Great customer experiences
Challenger is committed to providing great customer
experiences and to providing its customers with financial
security for retirement. To deliver this, Challenger invests in
customer research; provides education for advisers and
customers on how annuities help provide a sustainable
retirement income; designs products to meet customers’
needs; and provides trusted products and services.
Supporting the community
Financial services play a key role in communities – affecting
environmental and social change. Through its giving and
volunteering programs and plans for future community
activities, Challenger aims to connect with and support the
communities in which it operates.
Providing a great workplace
Challenger aspires to create an environment where employees
are highly engaged and its teams can thrive.
Challenger’s 2019 sustainable engagement score was 84%; a
level of engagement well above both the Australian National
and Global Financial Services norms. Challenger recognises
that strong employee engagement achieves higher employee
retention, attracts talent and can lead to better customer and
shareholder outcomes.
Challenger also understands that having healthy employees
benefits both business and the broader community. The
Wellbeing@Challenger program seeks to support its employees
inside and outside of work. The goals of the program are:
• Health – promoting physical and mental wellbeing by
providing access to health experts and creating awareness;
• Life – providing flexibility for employees to manage the
demands of both work and their personal lives;
• Financial – supporting employees with financial tools to
enable them to achieve sustained financial security;
• Community – providing opportunities for employees to
support and engage with the community; and
• Work – maintaining a safe and connected environment
where employees can work effectively to achieve their goals.
50
Sustainability
Challenger Limited 2019 Annual Report
Challenger considers sustainability to be an important part of
its broader risk management framework and has in place a
range of policies and practices to ensure that sustainability
risks are carefully considered when making key business
decisions.
More detailed information about Challenger’s risk
management approach is provided in the 2019 Sustainability
Report.
Managing Challenger’s impact on the environment
Challenger is committed to reducing the impacts it operations
have on the environment. Through its sustainability strategy,
Challenger focuses on programs that deliver improved
environmental impacts.
This year, Challenger added resourcing to the investments
business to enhance its focus on environmental, social and
governance risks across its investment decision making
practices.
In terms of understanding the impact of emissions from its
direct operations, Challenger has continued its commitment to
improved transparency. It engaged with an external party to
compile a scope 1, 2 and 3 greenhouse gas emissions profile,
which was audited by a third party. All emissions associated
with its direct operations were offset, contributing to climate
protection projects worldwide.
Employees at Challenger are passionate about supporting the
community and environment. The Sustainability Action Group
was launched in 2017 and continues to innovate ways for
Challenger to improve its environmental impacts and engage
in community initiatives.
Challenger’s full commitment to sustainability is outlined in the
2019 Sustainability Report, which can be viewed at:
› challenger.com.au/sustainabilityreport2019
Sustainability (continued)
Diversity and inclusion
Creating a diverse and inclusive workplace is key to
Challenger’s strategic approach to its employees. Challenger
seeks to create an inclusive workforce and values the capability
and experience that diversity brings to the organisation. It also
believes that to provide the best services and outcomes for its
customers, it must attract and retain talented people.
Challenger’s Diversity Policy outlines its commitment to treat
employees fairly, equally and with respect when employment
and career decisions are made. Challenger sets measurable
objectives for continuous monitoring to ensure that the policy
remains effective.
Challenger believes that gender equality is essential in creating
a truly diverse and inclusive workplace and is committed to
achieving gender equality. The Board has oversight of diversity,
and the Leadership Team is accountable for promoting and
fostering an environment with equal access to opportunities
and growth. Gender diversity targets are monitored by both
groups on a monthly basis and on a quarterly basis by all
managers using a diversity scorecard.
For the second year, Challenger has been awarded an
Employer of Choice for Gender Equality (EOCGE) citation by
the Workplace Gender Equality Agency (WGEA). This citation
provides valuable public recognition of Challenger’s
commitment to gender equality and reflects the growing
commitment to workplace gender equality in Australia.
Complementing this, in 2019 Challenger became a partner of
Future IM/Pact, an industry initiative aimed at attracting more
talented women into the investment management industry.
Challenger is also in the second year of its Women Leading
@Challenger program. Using a strengths-based approach, this
program aims to accelerate the development of female talent
across the organisation.
Risk is everyone’s business
Effective risk management is fundamental to Challenger’s
business and to building shareholder value. At Challenger, risk
is everybody’s business.
The Board’s Risk Appetite Statement outlines the level of risk
that is acceptable to the business to achieve its strategic
objectives. Guiding its broader suite of policies, the statement
provides clear boundaries on acceptable risk-taking activities
across the organisation.
As a participant in the financial services industry, Challenger is
impacted by a wide range of risks, including investment and
pricing risk; licence and regulatory risk; funding and liquidity
risk; strategic, business and reputation risk; climate change
risk; and operational risk.
The Board is committed to ensuring effective risk
management. The Leadership Team is accountable for
managing identified key risks and is required to manage risk as
part of business objectives with risk management integrated
across business processes.
51
Challenger Limited 2019 Annual Report
Sustainability
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52
Challenger Limited 2019 Annual Report
Financial statements
Statement of comprehensive income
Statement of financial position
Statement of changes in equity
Statement of cash flows
Notes to the financial statements
Section 1: Basis of preparation and overarching significant accounting policies
Section 2: Key numbers
Note 1 Revenue
Note 2 Expenses
Note 3 Segment information
Note 4 Income tax
Section 3: Operating assets and liabilities
Note 5 Financial assets – fair value through profit and loss
Note 6 Investment and development property
Note 7 Special Purpose Vehicles
Note 8 Life contract liabilities
Note 9 External unit holders’ liabilities
Note 10 Derivative financial instruments
Note 11 Notes to statement of cash flows
Section 4: Capital structure and financing costs
Note 12 Contributed equity
Note 13 Interest bearing financial liabilities
Note 14 Reserves and retained earnings
Note 15 Finance costs
Note 16 Dividends paid and proposed
Note 17 Earnings per share
Section 5: Risk management
Note 18 Financial risk management
Note 19 Fair values of financial assets and liabilities
Note 20 Collateral arrangements
Section 6: Group structure
Note 21 Parent entity
Note 22 Controlled entities
Note 23 Investment in associates
Note 24 Related parties
Section 7: Other items
Note 25 Goodwill and other intangible assets
Note 26 Contingent liabilities, contingent assets and credit commitments
Note 27 Employee entitlements
Note 28 Remuneration of auditor
Note 29 Subsequent events
Signed reports
Directors’ declaration
Independent auditor’s report
Investor information
Additional information
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Inside back cover
ContThis financial report covers Challenger Limited (the Company) and its controlled entities (the Group or Challenger).
53
Challenger Limited 2019 Annual Report
Statement of comprehensive income
For the year ended 30 June
Revenue
Expenses
Finance costs
Share of profits of associates
Profit before income tax
Income tax expense
Profit for the year after income tax
Profit attributable to shareholders of Challenger Limited
Profit attributable to non-controlling interests
Profit for the year after income tax
Other comprehensive income
Items that may be reclassified to profit and loss, net of tax
Translation of foreign entities
Hedge of net investment in foreign entities
Cash flow hedges – SPV1
Other comprehensive income for the year
Total comprehensive income for the year after tax
Comprehensive income attributable to shareholders of Challenger Limited
Comprehensive income attributable to non-controlling interests
Total comprehensive income for the year after tax
Earnings per share attributable to ordinary shareholders of
Challenger Limited
Basic
Diluted
1 SPV = Special Purpose Vehicles.
The statement of comprehensive income should be read in conjunction with the accompanying notes.
Note
1
2
15
23
4
14
14
14
17
17
2019
$m
2,372.6
(1,571.4)
(385.6)
22.2
437.8
(127.1)
310.7
307.8
2.9
310.7
35.4
(34.7)
(0.2)
0.5
311.2
308.3
2.9
311.2
Cents
50.9
44.8
2018
$m
2,190.5
(1,536.6)
(265.5)
30.0
418.4
(94.6)
323.8
322.5
1.3
323.8
18.5
(16.6)
0.5
2.4
326.2
324.9
1.3
326.2
Cents
54.0
52.2
54
Statement of financial position
As at 30 June
Assets
Cash and cash equivalents
Cash and cash equivalents – SPV
Receivables
Current tax assets
Derivative assets
Financial assets – fair value through profit and loss
Investment property held for sale
Investment and development property
Mortgage assets – SPV
Finance leases
Property, plant and equipment
Investment in associates
Other assets
Goodwill
Deferred tax assets
Other intangible assets
Total assets of shareholders of Challenger Limited and
non-controlling interests
Liabilities
Payables
Current tax liability
Derivative liabilities
Interest bearing financial liabilities
Interest bearing financial liabilities – SPV
External unit holders’ liabilities
Provisions
Deferred tax liabilities
Life contract liabilities
Total liabilities of shareholders of Challenger Limited and
non-controlling interests
Net assets of shareholders of Challenger Limited and
non-controlling interests
Equity
Contributed equity
Reserves
Retained earnings
Total equity of shareholders of Challenger Limited
Non-controlling interests
Total equity of shareholders of Challenger Limited and
non-controlling interests
The statement of financial position should be read in conjunction with the accompanying notes.
Challenger Limited 2019 Annual Report
Note
2019
$m
2018
$m
11
7
4
10
5
6
6
7
23
25
4
25
4
10
13
7
9
4
8
12
14
14
725.4
66.5
580.0
2.7
762.5
19,929.6
166.5
3,562.7
860.6
49.5
28.6
58.1
76.6
557.3
7.0
23.9
741.7
97.3
436.5
-
421.1
17,591.6
452.2
3,583.7
1,044.5
50.8
161.4
62.4
50.6
571.6
13.8
21.3
27,457.5
25,300.5
1,168.2
-
569.2
6,313.1
763.4
1,966.2
19.2
165.2
12,870.2
642.1
0.9
453.0
5,773.1
959.8
2,135.0
20.6
101.9
11,728.3
23,834.7
21,814.7
3,622.8
3,485.8
2,093.7
(52.4)
1,559.0
3,600.3
22.5
2,051.7
(33.3)
1,467.0
3,485.4
0.4
3,622.8
3,485.8
55
Challenger Limited 2019 Annual Report
Statement of changes in equity
Attributable to shareholders of Challenger Limited
For the year ended
30 June 2018
Balance at 1 July 2017
Profit for the year
Other comprehensive income
for the year
Total comprehensive income
for the year
Other equity movements
Ordinary shares issued
Treasury shares purchased
Treasury shares vested
Deferred Treasury share
purchases
Settled forward purchases of
Treasury shares
Share-based payment
expense net of tax less
releases
Dividends paid
Other movements
Balance at 30 June 2018
and 1 July 2018
For the year ended
30 June 2019
Profit for the year
Other comprehensive income
for the year
Total comprehensive
income for the year
Other equity movements
Ordinary shares issued
Treasury shares purchased
Treasury shares vested
Deferred Treasury share
purchases
Settled forward purchases of
Treasury shares
Share-based payment
expense net of tax less
releases
Dividends paid
Other movements
Balance at 30 June 2019
Contributed
equity
$m
1,554.5
-
Note
14
Share-
based
payment
reserve
$m
(23.2)
-
Cash flow
hedge
reserve
–SPV
$m
(0.2)
-
Foreign
currency
translation
reserve
$m
(5.2)
-
Adjusted
controlling
interest
reserve
$m
Total
shareholder
Retained
equity
earnings
$m
$m
12.1 1,350.1 2,888.1
322.5
322.5
-
Non-
controlling
interests
$m
Total
equity
$m
13.2 2,901.3
323.8
1.3
-
-
506.6
(49.4)
48.5
(47.4)
38.9
-
-
-
-
-
-
-
-
-
-
(19.8)
-
-
0.5
1.9
-
-
2.4
-
2.4
0.5
1.9
- 322.5
324.9
1.3
326.2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
506.6
(49.4)
48.5
(47.4)
38.9
-
-
0.6
-
(205.6)
-
(19.8)
(205.6)
0.6
-
-
-
-
-
-
-
(14.1)
506.6
(49.4)
48.5
(47.4)
38.9
(19.8)
(205.6)
(13.5)
2,051.7
(43.0)
0.3
(3.3)
12.7 1,467.0 3,485.4
0.4 3,485.8
-
-
-
6.8
(32.8)
42.7
(7.5)
32.8
-
-
-
-
-
-
-
-
-
-
(0.2)
0.7
-
-
307.8
307.8
2.9
310.7
-
0.5
-
0.5
(0.2)
0.7
-
307.8
308.3
2.9
311.2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6.8
(32.8)
42.7
(7.5)
32.8
-
-
-
-
-
6.8
(32.8)
42.7
(7.5)
32.8
-
-
-
2,093.7
(14.7)
-
-
(57.7)
-
-
-
0.1
-
-
-
(2.6)
-
(215.8)
(14.7)
-
(215.8)
-
(4.9)
(4.9)
-
7.8 1,559.0 3,600.3
(14.7)
-
(215.8)
-
19.2
14.3
22.5 3,622.8
12
12
12
12
12
14
16
14
12
12
12
12
12
14
16
The statement of changes in equity should be read in conjunction with the accompanying notes.
56
Statement of cash flows
For the year ended 30 June
Operating activities
Receipts from customers
Annuity and premium receipts
Annuity and claim payments
Payments to reinsurer
Receipts from external unit holders
Payments to external unit holders
Payments to vendors and employees
Dividends received
Interest received
Interest paid
Income tax paid
Net cash inflows from operating activities
Investing activities
Payments on net purchases of investments
Net proceeds from sale of controlled entities
Net mortgage loan repayments
Payments for net purchases of property, plant and equipment
Payments for purchase of associate interest
Net cash outflows from investing activities
Financing activities
Proceeds from issue of ordinary shares
Net proceeds from borrowings – interest bearing financial liabilities
Payments for Treasury shares
Net dividends paid
Net cash inflows from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
The statement of cash flows should be read in conjunction with the accompanying notes.
Challenger Limited 2019 Annual Report
Note
8
8
8
11
13
2019
$m
2018
$m
673.8
3,565.4
(3,246.0)
(58.7)
1,006.9
(1,388.8)
(600.3)
105.6
804.2
(154.4)
(55.4)
652.3
(1,096.2)
255.9
145.0
(59.9)
(5.1)
(760.3)
6.8
317.4
(47.5)
(215.8)
60.9
(47.1)
839.0
791.9
652.4
4,017.3
(2,969.4)
(6.1)
1,554.9
(1,215.1)
(594.7)
94.8
770.7
(129.9)
(197.5)
1,977.4
(2,460.1)
-
213.1
(69.9)
(3.3)
(2,320.2)
506.6
280.4
(36.7)
(205.6)
544.7
201.9
637.1
839.0
57
Challenger Limited 2019 Annual Report
Section 1: Basis of preparation and overarching significant
accounting policies
Challenger Limited (the Company or the parent entity) is a
company limited by shares, incorporated and domiciled in
Australia, whose shares are publicly traded on the Australian
Securities Exchange (ASX).
period for which they are held. In addition, there are also
changes to hedge accounting requirements, including changes
to hedge effectiveness testing, treatment of hedging costs, risk
components that can be hedged and associated disclosures.
The financial report for Challenger Limited and its controlled
entities (the Group or Challenger) for the year ended
30 June 2019 was authorised for issue in accordance with
a resolution of the Directors of the Company on
12 August 2019.
(i)
Basis of preparation and statement
of compliance
This is a general purpose financial report that has been
prepared in accordance, and complies, with the requirements
of the Corporations Act 2001, Australian Accounting
Standards and other authoritative pronouncements of the
Australian Accounting Standards Board (AASB) and
International Financial Reporting Standards (IFRS) as issued by
the International Accounting Standards Board (IASB).
Challenger Limited is a for-profit entity for the purposes of
preparing financial statements.
Unless otherwise stated, amounts in this financial report are
presented in Australian dollars and have been prepared on an
historical cost basis. The assets and liabilities disclosed in the
statement of financial position are grouped by nature and
listed in an order that reflects their relative liquidity. In the
disclosure, the current/non-current split is between items
expected to be settled within 12 months (current) and
those expected to be settled in greater than 12 months
(non-current).
(ii) New and revised accounting
standards and policies
Except for the matters referred to below, the accounting
policies and methods of computation are the same as those
adopted in the annual report for the prior comparative period.
Where applicable, comparative figures have been updated to
reflect any changes in the current period.
New accounting standards and amendments that
are effective in the current financial year
There were a number of amendments to existing accounting
standards that were effective from 1 July 2018 but do not
have a material impact on the financial statements.
AASB 9 Financial Instruments
AASB 9 Financial Instruments replaces AASB 139 Financial
Instruments: Recognition and Measurement and is effective for
the Group from 1 July 2018.
The standard makes changes to the classification of financial
assets for the purpose of determining their measurement
basis, as well as the recognition of changes in fair values. The
standard replaces the incurred loss model of AASB 139 with a
new expected loss model which can result in the acceleration
of impairment recognition on financial instruments.
The standard requires entities to account for expected credit
losses on financial instruments at the point at which the
financial instruments are first recognised and to estimate the
expected loss applicable to those financial instruments over the
The Group has performed an assessment and concluded that
no material adjustments were required as a result of complying
with the new requirements. This is because the majority of the
Group’s assets are already measured at fair value through
profit and loss as required by AASB 1038 Life Insurance
Contracts and as permitted under both AASB 139 and AASB 9.
The impact to the Group from the adoption of the expected
credit loss model on the Mortgage assets – SPV is minimal
because the historical provisioning methodology of the Group
is materially consistent with the provision estimated under the
expected credit loss model.
AASB 15 Revenue from Contracts with Customers
The new revenue standard establishes a single, comprehensive
framework for revenue recognition and is effective for the
Group from 1 July 2018 and replaces the previous revenue
standards AASB 118 Revenue and AASB 111 Construction
Contracts. The standard does not apply to leases, financial
instruments or insurance contracts. The core principle of AASB
15 is that an entity recognises revenue to depict the transfer of
promised goods and services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods and services.
The Group has performed an assessment on existing revenue
streams and concluded that no material adjustments were
required as a result of complying with the new requirements.
The majority of Funds Management fee revenue is accrued
when earned and the adoption of AASB 15 does not have a
significant impact on the accounting policies or the amounts
recognised. Life revenue is mainly derived from income on
financial instruments and life insurance contract premiums
which are not within the scope of the standard.
Accounting standards and interpretations issued
but not yet effective
AASB 16 Leases
This standard amends the accounting for leases and replaces
AASB 117 Leases. The standard removes the distinction
between operating and finance leases and requires lessees to
bring all leases onto the statement of financial position. The
standard will be effective for the Group from 1 July 2019 and
the Group has not early adopted.
The majority of leases from the lessee’s perspective within the
scope of AASB 16 are expected to be recognised as a ‘right-of-
use’ asset on the Group’s statement of financial position
together with a related lease liability being recognised subject
to the relevant contracts remaining in force at transition.
Lessor accounting remains largely unchanged.
The Group has elected to apply the partial retrospective
approach. At 1 July 2019, the Group is expected to recognise
approximately $40.0 million as a ‘right-of-use’ asset in addition
to an existing $22.0 million of fixed assets (net of accumulated
depreciation) on the statement of financial position, together
with a related lease liability of $75.0 million. This is subject to
the relevant contracts remaining in force at transition.
58
(ii) New and revised accounting
standards and policies (continued)
AASB 17 Insurance Contracts
AASB 17 Insurance Contracts replaces AASB 4 Insurance
Contracts, AASB 1038 Life Insurance Contracts and AASB
1023 General Insurance Contracts and is effective for
Challenger from 1 July 2022. AASB 17 Insurance Contracts
establishes globally consistent principles for the recognition,
measurement, presentation and disclosure of life insurance
contracts issued. Life investment contracts are currently
measured under the financial instruments standard and will
continue to be measured in the same way on adoption of its
replacement standard, AASB 9 Financial Instruments.
AASB 17 introduces changes to the profit emergence profiles
of life insurance contracts but does not affect the underlying
economics or cash flows of the contracts. The impacts on
capital requirements and income tax are unknown, pending
regulatory responses from APRA and the Australian Taxation
Office (ATO) respectively.
The main changes anticipated for the Group under AASB 17
are set out below:
• insurance contract portfolios will be disaggregated to more
granular levels and will be required not only by risk type but
also by issue year and profitability;
• although conceptually similar, the Contractual Service
Margin uses a different basis to recognise profit to the
current Margin on Services approach and therefore the
profit signature is likely to change for portfolios with positive
profit margins;
• a new risk adjustment for non-financial risk will be
introduced which reflects the compensation that the Group
requires for bearing the uncertainty in relation to the
amount and timing of cash flows. The confidence level used
to determine the risk adjustment will need to be disclosed;
• an accounting policy choice will be available to recognise all
insurance finance income and expenses (e.g. discount rate
changes) in the statement of comprehensive income; and
• additional disclosures will be more extensive, requiring
increased granularity and more analysis of movements.
The Group has conducted a business impact assessment and
key recommendations will be implemented ahead of the
standard being introduced.
The standard is expected to impact the Group’s profit and loss,
however, it is not yet practicable to determine the quantum.
AASB Interpretation 23 Uncertainty over Income Tax
Treatment
The Interpretation addresses the accounting for income taxes
when tax treatments involve uncertainty that affects the
application of AASB 112 Income Taxes and does not apply to
taxes or levies outside the scope of AASB 112, nor does it
specifically include requirements relating to interest and
penalties associated with uncertain tax treatments. The
Interpretation specifically addresses the following:
• whether an entity considers uncertain tax treatments
separately;
• the assumptions an entity makes about the examination of
tax treatments by taxation authorities;
• how an entity determines taxable profit (tax loss), tax bases,
unused tax losses, unused tax credits and tax rates; and
Challenger Limited 2019 Annual Report
• how an entity considers changes in facts and circumstances.
An entity has to determine whether to consider each uncertain
tax treatment separately or together with one or more other
uncertain tax treatments. The approach that better predicts
the resolution of the uncertainty should be followed. The
interpretation is effective for annual reporting periods
beginning on or after 1 July 2019. The Group will apply the
interpretation from its effective date. No material impact is
expected.
Existing standards and interpretations not yet effective
Other amendments to existing standards or interpretations
that are not yet effective are not expected to result in a
material impact to the Group’s financial statements.
(iii) Comparatives
Where necessary, comparative figures have been reclassified
to conform to any changes in presentation made in this
financial report.
(iv) Rounding of amounts
Unless otherwise stated, amounts contained in this report and
the financial report have been rounded to the nearest
$100,000 under the option available to the Group under ASIC
Corporations Instrument 2016/191.
(v)
Both the presentation currency and the functional currency of
the Company and its controlled Australian entities are
Australian dollars. A number of foreign controlled entities have
a functional currency other than Australian dollars.
Foreign currency
Transactions in foreign currency are translated into the
functional currency at the foreign exchange rate ruling at the
date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are retranslated into
Australian dollars at the foreign exchange rate at the
statement of financial position date.
Non-monetary assets and liabilities that are measured in terms
of historical cost in a foreign currency are translated using the
exchange rate as at the date of the transaction. Non-monetary
items measured at fair value in a foreign currency are
translated to the functional currency using the exchange rates
at the date when the fair value was determined.
Derivatives are used to hedge the foreign exchange risk
relating to certain transactions. Refer to Note 10 Derivative
financial instruments.
Foreign controlled entities
On consolidation, the assets and liabilities of foreign
subsidiaries whose functional currency differs from the
presentation currency are translated into Australian dollars at
the rate of exchange at the statement of financial position
date. Exchange differences arising on the retranslation are
taken directly to the foreign currency translation reserve in
equity.
59
Challenger Limited 2019 Annual Report
Foreign controlled entities (continued)
The change in fair value of derivative financial instruments
designated as a hedge of the net investment in a foreign
controlled entity is also recognised in the foreign currency
translation reserve.
On disposal of a foreign controlled entity, the deferred
cumulative amount recognised in equity relating to that
particular foreign operation is recognised in the statement of
comprehensive income.
(vi) Finance leases
Where Challenger acts as a lessor, leases are classified at their
inception as either operating or finance leases based on the
economic substance of the agreement so as to reflect the risks
and benefits incidental to ownership. Contracts to lease assets
and hire purchase agreements are classified as finance leases
for accounting purposes if they transfer substantially all the
risks and rewards of ownership of the asset to the customer or
an unrelated third party. Assets held under a finance lease are
recognised at the beginning of the lease term at an amount
equal to the net investment in the lease which comprises the
gross investment in the lease discounted at the interest rate
implicit in the lease. The collectability of lease receivables is
assessed on an ongoing basis and a provision for expected
credit loss is made using inputs such as historical rates of
arrears and the current delinquency position of the portfolio.
Bad debts are written off as incurred.
(vii) Property, plant and equipment
Items of property, plant and equipment are stated at cost, or
deemed cost, less accumulated depreciation and impairment
losses. Depreciation is calculated on a straight line basis to
realise the net cost of each class of these assets over its
expected useful life. Estimates of remaining useful lives are
made on a regular basis for all assets, with annual
reassessments for major items. The expected useful life of
property, plant and equipment is three to five years.
Infrastructure property, plant and equipment
Infrastructure property, plant and equipment are stated at cost
and amortised on a straight line basis over their expected
useful life. This is done on an asset by asset basis with
amortisation commencing when the asset is available for use.
The expected useful life of current infrastructure property,
plant and equipment is 20 years.
The carrying values of property, plant and equipment and
infrastructure fixed assets are reviewed for impairment when
events or changes in circumstances indicate the carrying value
may not be recoverable. Impairment losses are recognised in
the Statement of Comprehensive income.
Any impairment losses recognised in prior periods are reversed
through the Statement of Comprehensive income if there has
been a change in the estimated useful life used to determine
the asset’s recoverable amount since the last impairment loss
was recognised. The increased carrying amount of an asset
attributable to a reversal of an impairment loss would not
exceed the carrying amount that would have been determined
(net of amortisation or depreciation) had no impairment loss
been recognised for the asset in prior years.
(viii) Provisions
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it is
probable that an outflow of resources embodying economic
60
benefits will be required to settle the obligation and a reliable
estimate can be made of the amount of the obligation. A
provision for restructuring is recognised when the Group has
approved a detailed and formal restructuring plan, and the
restructuring has either commenced or has been announced
publicly. Future operating costs are not provided for.
When the Group expects some or all of a provision to be
reimbursed, for example, under an insurance contract, the
reimbursement is recognised as a separate asset only when the
reimbursement is virtually certain. The expense relating to any
provision is presented in the statement of comprehensive
income net of any reimbursement.
Provisions are measured at the present value of management’s
best estimate of the expenditure required to settle the
obligation at the statement of financial position date. If the
effect of the time value of money is material, provisions are
discounted using a current pre-tax rate that reflects the time
value of money and the risks specific to the liability. The
increase in the provision resulting from the passage of time is
recognised in finance costs.
(ix) Goods and services tax (GST)
Revenue, expenses and assets are recognised net of the
applicable amount of GST, except where the amount of the
GST incurred is not recoverable from the taxation authority. In
these circumstances, the GST is recognised as part of the cost
of the acquisition of the asset or as part of the expense.
Receivables and payables are stated with the applicable
amount of GST included. The net amount of GST recoverable
from, or payable to, the ATO is included as an asset or liability
in the statement of financial position.
Receivables
Cash flows are included in the statement of cash flows on a
gross (GST inclusive) basis. The GST components of cash flows
arising from investing and financing activities which are
recoverable from, or payable to, the ATO are classified as
operating cash flows.
(x)
Receivables are recognised at amortised cost using the
effective interest method, less any allowance for expected
credit losses. The entity has applied a simplified approach to
measuring expected credit losses, which uses a lifetime
expected loss allowance. To measure the expected credit
losses, receivables have been grouped based on days overdue.
(xi) Payables
Payables represent unsecured non-derivative, non-interest
bearing financial liabilities in respect of goods and services
provided to the Group prior to the end of the financial year.
They include accruals, trade and other creditors and are
recognised at amortised cost, which approximates fair value.
(xii) Significant accounting judgements,
estimates and assumptions
The carrying values of amounts recognised on the statement
of financial position are often based on estimates and
assumptions of future events. The key estimates and
assumptions that have a significant risk of causing a material
adjustment to the recognised amounts within the next annual
reporting period are disclosed individually within each of the
relevant notes to the financial statements.
Challenger Limited 2019 Annual Report
Section 2: Key numbers
This section presents the results and performance of the Group for the year and provides additional information about
those line items on the statement of comprehensive income that the Directors consider most relevant in the context of
understanding the financial components of the Group’s operations.
Note 1 Revenue
Investment revenue
Fixed income securities and cash
Interest revenue1
Net realised and unrealised gains on fixed income securities
Investment property and property securities
Property rental revenue
Dividend revenue
Net realised and unrealised gains on investment property and property securities
Revenue from sale of development properties
Equity and infrastructure investments
Dividend revenue
Net realised and unrealised gains/(losses) on equity investments
Net realised and unrealised gains/(losses) on infrastructure investments
Other
Net realised and unrealised gains on foreign exchange translation and hedges
Net realised and unrealised losses on interest rate derivatives
Net realised and unrealised losses on equity swap derivatives
Net realised and unrealised gains/(losses) on credit default swap derivatives
Fee revenue
Management and performance fee revenue
Transaction fee revenue
Other revenue
Life insurance contract premiums and related revenue
Change in life insurance contract liabilities
Change in life investment contract liabilities
Change in reinsurance contract liabilities
Total revenue
30 June
2019
$m
30 June
2018
$m
890.9
714.0
318.6
8.0
60.7
-
51.4
0.7
128.1
26.5
(186.8)
(25.3)
13.1
176.2
47.6
839.1
64.1
330.5
21.6
159.8
26.2
58.5
(32.9)
(5.9)
29.4
(56.3)
(3.3)
(8.2)
167.7
39.2
1,143.5
(916.5)
(98.3)
20.2
2,372.6
1,452.7
(939.9)
48.1
0.1
2,190.5
1 Interest revenue earned for items measured at amortised cost using the effective interest method $57.1 million (30 June 2018: $70.7 million) and interest revenue
earned for items measured at fair value through profit and loss $833.8 million (30 June 2018: $768.4 million).
Accounting policy
Revenue is recognised at an amount that reflects the
consideration to which the Group expects to be entitled in
exchange for transferring services to a customer. Revenues and
expenses are recognised on an accrual basis. The following
specific policies are applied:
• Interest revenue is recognised as it accrues using an effective
interest rate method, taking into account the effective yield
of the financial asset. The effective interest rate is the rate
that discounts estimated future cash flows through the
expected life of a financial instrument or where appropriate
a shorter period.
• Interest revenue on finance leases is recognised on a basis
that reflects a constant periodic return on the net
investment in the finance lease.
• Gains or losses arising from changes in the fair value of
financial instruments classified as fair value through profit
and loss are recognised as revenue in the statement of
comprehensive income when the change in value is
recognised in the statement of financial position.
• Property rental revenue is accounted for on a straight line
basis over the lease term. Contingent rental income is
recognised as income in the period in which it is earned.
61
Challenger Limited 2019 Annual Report
Note 1 Revenue (continued)
Accounting policy (continued)
• Lease incentives granted are recognised as an integral part
of the total rental income. Operating lease rental income
is recognised on a straight line basis over the life of
the contract.
• Dividend revenue from listed equity shares and listed
property securities is recognised as income on the date the
share is quoted ex-dividend. Dividend revenue from unlisted
equity shares and unlisted property securities is recognised
when the dividend is declared.
• Management fees are invoiced quarterly based on a
percentage of the funds under management (FUM).
The fees relate specifically to the services provided in that
quarter, and are distinct from services provided in other
quarters.
• Performance fees are based on returns in excess of a
specified benchmark market return, over the contract
Note 2 Expenses
Life insurance contract claims and expenses
Cost of life insurance contract liabilities
Cost of life investment contract liabilities
Reinsurance contracts
Investment property related expenses1
Development properties cost of sales
Management fee expense
Distribution expenses
Employee expenses
Employee share-based payments and superannuation
Occupancy expense – operating lease
Depreciation and amortisation expense
Technology and communications
Professional fees
Impairment loss on equity accounted associates
Other expenses
Total expenses
period. Performance fees are typically received at the end of
the performance period specified in the contract.
The Company recognises revenue from performance fees
over the contract period, but only to the extent that it is
highly probable that a significant reversal of revenue will not
occur in subsequent periods.
• Transaction fee revenue is accrued when the transaction is
executed.
• Changes in life insurance and investment contract liabilities
arising from discount rates, inflation rates and other
assumptions are recognised as revenue, with other
movements being included in Note 2 Expenses. Refer
to Note 8 Life contract liabilities for more details on the
accounting policy of life contract liabilities.
30 June
2019
$m
634.0
179.9
214.2
2.0
109.5
0.1
107.5
47.8
156.8
30.1
12.2
15.3
25.2
18.4
-
18.4
1,571.4
30 June
2018
$m
499.2
191.3
232.5
2.3
113.8
26.5
109.6
49.9
163.5
31.8
11.8
16.0
24.0
21.0
1.9
41.5
1,536.6
1 Investment property related expenses relate to rental income generating investment properties.
Accounting policy
Expenses are recognised on an accrual basis. The following
specific policies are applied:
• Rental expenses incurred under an investment property
operating lease are recognised on a straight line basis over
the term of the lease.
• Investment property expenditure, including rates, taxes,
insurance and other costs associated with the upkeep of a
building, are brought to account on an accrual basis. Repair
costs are expensed when incurred. Other amounts that
improve the condition of the investment are capitalised into
the carrying value of the asset.
• Life insurance contract claims and expenses are recognised
when the liability to the policyholder under the contract has
been established.
62
• Cost of life insurance and life investment contract liabilities
recognised as an expense consists of the interest expense on
the liability and any loss on the initial recognition of new
business less the release of liability in respect of expenses
incurred in the current period. The interest expense on the
liability represents the unwind of the discount on the
opening liability over the period, whereas the impacts of
changes in the discount rate applied for the current
valuation are included in the change in life contract liabilities
disclosed in Note 1 Revenue.
Refer to Note 8 Life contract liabilities for more details on the
accounting policy of life contract liabilities.
Note 3 Segment information
The reporting segments1 of the Group have been identified as follows:
Challenger Limited 2019 Annual Report
For the year ended
30 June
Net income
Operating expenses
Normalised EBIT
Interest and borrowing
costs
Normalised net
profit/(loss)
before tax
Tax on normalised
profit
Normalised net profit
after tax
Investment experience
after tax
Significant items
after tax
Profit attributable to
the shareholders of
Challenger Ltd
Other statutory
segment information
Revenue from external
customers3
Interest revenue
Interest expense
Intersegment revenue
Depreciation and
amortisation
Life
2019
$m
670.1
(106.5)
563.6
Funds
Management
2018
$m
669.6
(106.9)
562.7
2019
$m
149.9
(99.0)
50.9
2018
$m
151.2
(93.3)
57.9
Total reporting
segments
2019
$m
820.0
(205.5)
614.5
2018
$m
820.8
(200.2)
620.6
Corporate and
other2
2019
$m
1.0
(61.9)
(60.9)
2018
$m
1.0
(68.2)
(67.2)
Total
2019
$m
821.0
(267.4)
553.6
2018
$m
821.8
(268.4)
553.4
-
-
-
-
-
-
(5.3)
(6.1)
(5.3)
(6.1)
563.6
562.7
50.9
57.9
614.5
620.6
(66.2)
(73.3)
548.3
547.3
(152.2)
(141.2)
396.1
406.1
(88.3)
(76.0)
-
(7.6)
307.8
322.5
1,305.5 1,183.4
838.0
(223.3)
(40.8)
889.9
(343.7)
(46.4)
176.2
-
-
46.4
167.7 1,481.7 1,351.1
838.0
889.9
(223.9)
(343.7)
-
-
-
(0.6)
40.8
-
1.0
(41.9)
-
0.3 1,481.7 1,351.4
839.1
890.9
1.1
(265.5)
(385.6)
(41.6)
-
-
-
(5.7)
(5.7)
(0.6)
(0.3)
(6.3)
(6.0)
(9.0)
(10.0)
(15.3)
(16.0)
As at 30 June
Segment assets
Segment liabilities
Net assets
attributable to
shareholders
19,712.8 18,594.6
(16,393.9) (15,389.7)
253.3
(27.3)
245.2 19,966.1 18,839.8 7,468.9 6,460.3 27,435.0 25,300.1
(34.5) (16,421.2) (15,424.2) (7,413.5) (6,390.5) (23,834.7) (21,814.7)
3,318.9 3,204.9
226.0
210.7 3,544.9 3,415.6
55.4
69.8 3,600.3 3,485.4
1 Refer below for definitions of the terms used in the management view of segments.
2 Corporate and other includes corporate companies, corporate SPV, non-controlling interests and Group eliminations.
3 Funds management revenue from external customers is predominantly management fees.
Definitions
Operating segments
The following segments are identified on the basis of internal
reporting to key management personnel, including the Chief
Executive Officer (the chief operating decision maker) of the
Group, and comprise component parts of the Group that are
regularly reviewed by senior management in order to allocate
resources and assess performance:
Life
The Life segment principally includes the annuity and life
insurance business carried out by CLC and Accurium Pty
Limited (provision of self-managed superannuation fund
actuarial certificates). CLC offers fixed rate retirement and
superannuation products that are designed for Australian
investors who are seeking a low-risk, fixed term or lifetime
investment and reliable income. CLC also offers fixed term and
lifetime investments to investors in Japan through its
reinsurance arrangement with MSP. CLC invests in assets
providing long-term income streams for customers.
Funds Management
Funds Management earns fees from its Fidante Partners and
Challenger Investment Partners operations, providing an end-
to-end funds management business. Funds Management has
equity investments in a number of the Fidante Partners
boutique fund managers and, through the Challenger
Investment Partners business, offers a range of managed
investments across fixed income and property.
63
Challenger Limited 2019 Annual Report
Note 3 Segment information (continued)
Definitions (continued)
Corporate and other
The corporate segment, which is not considered an operating
segment of the Group, is used to reconcile the total segment
results back to the consolidated results and consists of other
income and costs that fall outside the day-to-day operations of
the reportable segments. These include the costs of the Group
CEO and CFO, shared services across the Group, long-term
incentive costs, Directors’ fees, corporate borrowings and
associated borrowing costs and shareholder registry services.
To reconcile to Group results, the Corporate and other
segment also includes eliminations and non-core activities
of the Group.
Transactions between segments
All transactions and transfers between segments are generally
determined on an arm’s length basis and are included within
the relevant categories of income and expense. These
transactions eliminate on consolidation.
Normalised vs. statutory results
Net income and operating expenses differ from revenue and
expenses as disclosed in the statement of comprehensive
income as certain direct costs (including distribution expenses,
property expenses and management fees) included in expenses
are netted off against revenues in deriving the management
view of net income above. Net income consists of the
following sub-categories of management views of revenue:
• Normalised cash operating earnings (Life segment).
• Net income (Funds Management segment).
• Other income (Corporate and other segment).
In addition, the revenues, expenses and finance costs from
Special Purpose Vehicles (SPV) are separately disclosed in the
statutory view but are netted off in net income.
Revenue also includes investment gains and losses which are
excluded from the management view as they form part of
investment experience (refer below).
Normalised cash operating earnings
This is calculated as cash earnings plus normalised capital
growth (refer below). Cash earnings represents the sum of
investment yield (being the management view of revenue from
investment assets, such as net rental income, dividends and
interest), interest expense, distribution expenses and fees.
Normalised EBIT
Normalised earnings before interest and tax (EBIT) comprises
net income less operating expenses, as defined above. It
excludes investment experience, corporate interest and
borrowing costs, significant items and tax.
Interest and borrowing costs differ from finance costs as
disclosed in the statement of comprehensive income for similar
reasons to revenue and expenses, with the major difference
arising from the netting of SPV finance costs against SPV
revenue in net income in the management view.
64
Tax on normalised profit
Represents the consolidated statutory tax expense or benefit
for the period, less tax attributable to non-controlling interests
and investment experience.
Investment experience after tax
The Group is required by accounting standards to value
applicable assets and liabilities supporting the life insurance
business at fair value. This can give rise to fluctuating valuation
movements being recognised in the statement of
comprehensive income, particularly during periods of market
volatility. As the Group is generally a long-term holder of
assets, due to assets being held to match the term of life
contract liabilities, the Group takes a long-term view of the
expected capital growth of the portfolio rather than focusing
on short-term volatility. Investment experience is a mechanism
employed to isolate the volatility arising from asset and liability
valuation within the results so as to more accurately reflect the
underlying performance of the Group.
Investment experience is calculated as the difference between
the actual investment gains/losses (both realised and
unrealised) and the normalised capital growth (refer below)
plus life contract valuation changes and new business strain.
Investment experience after tax is investment experience net of
tax at the prevailing income tax rate.
Normalised capital growth
This is determined by multiplying the normalised capital
growth rate for each asset class by the average investment
assets for the period. The normalised growth rates represent
the Group’s medium to long-term capital growth expectations
for each asset class over the investment cycle.
The normalised growth rates for the year are +4.5% for equity
and other investments, +4.0% for infrastructure, +2.0% for
property and -0.35% for cash and fixed income and are
consistent with the rates applied in the prior year. The rates
have been set with reference to medium to long-term market
growth rates and are reviewed to ensure consistency with
prevailing market conditions. The normalised growth rate for
equity and other investments has been revised to +3.5% for
the year beginning 1 July 2019.
Life contract valuation assumption changes represent the
impact of changes in macroeconomic variables, including bond
yields and inflation factors, expense assumptions and other
factors applied in the valuation of life contract liabilities. It also
includes the attribution of the corresponding interest rate,
foreign exchange and inflation derivatives used for hedging.
New business strain is a non-cash valuation adjustment
recognised when annuity rates on new business are higher
than the risk-free rate used to fair value life contracts.
Maintenance expense allowances over the expected future
term of the new business are also included in the life contract
valuation. New business strain reported in the period
represents the valuation loss on new sales generated in the
current period net of the reversal of new business strain of
prior period sales.
Note 3 Segment information (continued)
Definitions (continued)
Significant items after tax
The Group presents additional non-IFRS financial information
to the market to provide meaningful insights into the financial
condition of the business. Due consideration has been given to
ensure that disclosure of Challenger’s normalised profit
framework is explained, reconciled and calculated consistently
period-on-period. Within this framework, Challenger defines
significant items as non-recurring or abnormal income or
expense items. There have been no non-recurring or abnormal
items classified as significant items for the period ended
30 June 2019 in accordance with the definition.
Challenger Limited 2019 Annual Report
Major customers
No individual customer amounted to greater than 10% of the
Group’s revenue.
Geographical areas
The Group operates predominantly in Australia; hence, no
geographical split is provided to the chief operating
decision maker.
30 June
2019
$m
30 June
2018
$m
Reconciliation of management to statutory view of after-tax profit
Operating segments normalised net profit before tax
Corporate and other normalised net loss before tax
Normalised net profit before tax (management view of pre-tax profit)
Tax on normalised profit
Normalised net profit after tax
Investment experience after tax
Significant items after tax
Profit attributable to the shareholders of Challenger Limited
Profit attributable to non-controlling interests excluded from management view
Statutory view of profit after tax
Reconciliation of management view of revenue to statutory revenue
Operating segments
Corporate and other
Net income (management view of revenue)
Expenses and finance costs offset against revenue
SPV expenses and finance costs offset against SPV income
Distribution expenses offset against related income
Change in life contract liabilities and reinsurance contracts recognised in expenses
Property related expenses offset against property income
Interest and loan amortisation costs
Management fee expenses
Adjustment for non-controlling interests and other items
Difference between management view of investment experience and
statutory recognition
Actual capital growth
Normalised capital growth
Life contract valuation experience
New business strain
Statutory revenue (refer Note 1 Revenue)
614.5
(66.2)
548.3
(152.2)
396.1
(88.3)
-
307.8
2.9
310.7
820.0
1.0
821.0
23.1
47.8
1,030.1
109.5
320.5
107.5
16.6
79.1
(155.1)
5.8
(33.3)
2,372.6
620.6
(73.3)
547.3
(141.2)
406.1
(76.0)
(7.6)
322.5
1.3
323.8
820.8
1.0
821.8
28.1
49.9
925.3
113.8
195.4
109.6
50.5
61.0
(130.5)
24.5
(58.9)
2,190.5
65
Challenger Limited 2019 Annual Report
Note 4 Income tax
Reconciliation of income tax expense
Profit before income tax
Prima facie income tax based on the Australian company tax rate of 30%
Tax effect of amounts not assessable/deductible in calculating taxable income:
– Challenger Capital Notes distributions
– non-assessable and non-deductible items
– tax rate differentials
– tax adjustment in respect of non-controlling interests
– other items
Income tax expense
Underlying effective tax rate1
30 June
2019
$m
437.8
(131.3)
(9.9)
12.4
4.5
0.9
(3.7)
(127.1)
29.2%
1 The calculation of the underlying effective tax rate excludes the non-controlling interests’ profit of $2.9 million (30 June 2018: $1.3 million).
Analysis of income tax expense
Current income tax expense for the year
Current income tax benefit prior year adjustment
Deferred income tax expense
Deferred income tax (expense)/benefit prior year adjustment
Income tax expense
Income tax expense on translation of foreign entities
Income tax benefit on hedge of net investment in foreign operations
Income tax benefit/(expense) from other comprehensive income
30 June
2019
$m
(65.6)
4.9
(57.8)
(8.6)
(127.1)
(14.3)
14.9
0.6
30 June
2018
$m
418.4
(125.5)
(9.7)
30.1
7.8
0.4
2.3
(94.6)
22.7%
30 June
2018
$m
(99.6)
5.0
(2.3)
2.3
(94.6)
(9.0)
7.1
(1.9)
Analysis of deferred tax
Deferred tax assets
Accruals and provisions
Employee entitlements
Losses
Other
Total deferred tax assets
Set off of deferred tax assets
Net deferred tax assets recognised in statement of
financial position
Deferred tax liabilities
Unrealised foreign exchange movements
Unrealised net gains on investments
Other
Total deferred tax liabilities
Set off of deferred tax liabilities
Net deferred tax liabilities recognised in statement of
financial position
Deferred income tax expense recognised in statement of
comprehensive income
Statement of financial
position
Statement of
comprehensive income
30 June
2019
$m
30 June
2018
$m
30 June
2019
$m
30 June
2018
$m
39.1
4.0
11.3
9.7
64.1
(57.1)
28.2
3.8
25.3
11.2
68.5
(54.7)
7.0
13.8
(19.0)
(183.1)
(20.2)
(222.3)
57.1
0.3
(142.4)
(14.5)
(156.6)
54.7
(165.2)
(101.9)
10.9
0.1
(14.0)
(2.8)
(5.8)
(20.0)
(35.0)
(5.6)
(60.6)
(0.4)
0.1
3.9
(13.5)
(9.9)
12.8
(2.6)
(0.3)
9.9
(66.4)
-
66
Note 4 Income tax (continued)
Tax Transparency Code Disclosures
Australia and overseas tax expense
Total Australia
Total overseas
Income tax expense
Analysis of current tax (asset)/liability
Opening balance
Current income tax expense for the year
Current income tax prior year adjustment
Tax in equity
Income tax paid
Other
Closing balance
Unrecognised deferred tax balances
Non-tax consolidated group revenue losses – tax effected
Tax consolidated group capital losses – tax effected
Accounting policy
Income tax expense
Income tax expense for the year comprises current and
deferred tax. Income tax is recognised in the statement of
comprehensive income except to the extent that it relates to
items recognised directly in equity.
Current tax assets and liabilities
Current tax assets and liabilities for the current and prior
periods are the amounts expected to be recovered from or
paid to the taxation authorities based on the respective
period’s taxable income. The tax rates and tax laws used to
compute the amounts are those that are enacted or
substantively enacted as at the statement of financial position
date.
Deferred income tax assets and liabilities
Deferred income tax is provided on temporary differences at
the statement of financial position date between the tax bases
of assets and liabilities and their carrying amounts for financial
reporting purposes.
Deferred income tax assets and liabilities are recognised for
deductible or taxable temporary differences and are measured
at the tax rates that are expected to apply to the year the asset
is realised or the liability is settled, based on the tax rates (and
tax laws) that have been enacted or substantially enacted as at
the statement of financial position date. Deferred income tax
assets and liabilities have been offset where they relate to
income tax levied by the same taxation authority on either the
Challenger Limited 2019 Annual Report
30 June
2019
$m
(117.6)
(9.5)
(127.1)
30 June
2018
$m
(91.5)
(3.1)
(94.6)
30 June
2019
$m
0.9
65.6
(4.9)
(5.5)
(55.4)
(3.4)
(2.7)
30 June
2019
$m
2.9
54.8
Change
$m
(26.1)
(6.4)
(32.5)
30 June
2018
$m
107.6
99.6
(5.0)
(2.9)
(197.5)
(0.9)
0.9
30 June
2018
$m
19.3
55.8
same taxable entity or different taxable entities within the
same taxable group who have a legal right and an intention to
settle on a net basis.
Tax consolidation
Challenger Limited and its 100% owned Australian resident
subsidiaries have formed a tax consolidated group with effect
from 1 July 2002 and are therefore taxed as a single entity
from that date. Challenger Limited is the head entity of the tax
consolidated group.
Tax effect accounting by members of the tax group
Members of the tax consolidated group have applied tax
funding principles under which Challenger Limited and each of
the members of the tax consolidated group agree to pay or
receive tax equivalent amounts to or from the head entity,
based on the current tax liability or current tax asset of the
member. Such amounts are reflected in the amounts
receivable from or payable to each member and the head
entity. The group allocation approach is applied in determining
the appropriate amount of current tax liability or current tax
asset to allocate to members of the tax consolidated group.
Key estimates and assumptions
Deferred tax assets are recognised for deductible temporary
differences and unused tax losses only if it is probable that
future taxable amounts will be available to utilise those
temporary differences and losses.
67
Challenger Limited 2019 Annual Report
Section 3: Operating assets and liabilities
This section discloses information relating to the assets and liabilities underlying the Group’s financial performance and
the key sources of funding for those assets. It further presents the derivative financial instruments employed to hedge the
Group’s financial risk exposures, and consolidated information relating to the cash flows of the Group.
Note 5 Financial assets – fair value through profit and loss
30 June
2019
$m
5,486.8
7,798.5
4,044.4
272.8
17,602.5
96.1
1,236.1
1,332.2
542.5
324.6
867.1
127.8
127.8
19,929.6
9,985.2
9,944.4
19,929.6
30 June
2018
$m
6,003.9
5,602.4
3,466.8
208.6
15,281.7
69.7
1,073.6
1,143.3
479.6
304.3
783.9
382.7
382.7
17,591.6
7,628.1
9,963.5
17,591.6
Key estimates and assumptions
Unlisted investment valuations
Investments held at fair value through profit and loss for which
there is no active market or external valuation available are
valued making as much use of available and supportable
market data as possible and keeping judgemental inputs to a
minimum, either by:
• reference to the current market value of another instrument
that is substantially the same;
• using recent arm’s length market transactions;
• option pricing models refined to reflect the issuer’s specific
circumstances;
• discounted cash flow analysis; or
• other methods consistent with market best practice.
Refer to Note 18 Financial risk management for further
disclosure.
Domestic sovereign bonds and semi-government bonds
Floating rate notes and corporate bonds
Residential mortgage and asset-backed securities
Non-SPV mortgage assets
Fixed income securities
Shares in listed and unlisted corporations
Unit trusts, managed funds and other
Equity securities
Units in listed and unlisted infrastructure trusts
Other infrastructure investments
Infrastructure investments
Indirect property investments in listed and unlisted trusts
Property securities
Total financial assets – fair value through profit and loss
Current
Non-current
Accounting policy
The Group categorises its financial assets as financial assets –
fair value through profit and loss (being initially designated as
such). Assets designated as fair value through profit and loss
consist of fixed income, equity, infrastructure, and property
securities. They are carried at fair value with unrealised gains
and losses being recognised through the statement of
comprehensive income.
Purchases and sales of financial assets are recognised on the
date on which the Group commits to purchase or sell the asset
and when all risks and rewards of ownership have been
substantially transferred. Financial assets are then
derecognised when the right to receive cash flows from the
asset has expired.
The fair value of financial assets that are actively traded in
organised financial markets are determined by reference to
quoted market bid prices at the close of business on the
statement of financial position date. Assets backing life
contract liabilities of the statutory fund are required to be
designated at fair value through profit and loss in accordance
with AASB 1038 Life Insurance Contracts when permitted by
other Australian Accounting Standards.
68
Note 6 Investment and development property
Investment property held for sale1
Investment property in use
Investment property under development
Total investment property
Development property held for resale2
Total investment and development property3
Challenger Limited 2019 Annual Report
30 June
2019
$m
166.5
3,384.3
178.4
3,729.2
-
3,729.2
30 June
2018
$m
452.2
3,328.6
254.4
4,035.2
0.7
4,035.9
1 Held for sale properties: Next Hotel, Aulnay sous Bois and TRE Data Centre (30 June 2018: 35 Clarence Street and 53 Albert Street).
2 Development property held for resale is held at the lower of cost or net realisable value.
3 Investment property held for sale and development property held for resale are considered current. All other investment property is considered non-current.
Investment
property held for
sale
Investment property
in use
30 June
2019
$m
452.2
30 June
2018
$m
30 June
30 June
2018
2019
$m
$m
96.0 3,328.6 3,359.4
Investment property
under development
30 June
30 June
2018
2019
$m
$m
144.1
254.4
Development
property held for
resale
30 June
2019
$m
0.7
30 June
2018
$m
29.4
-
(236.2)
-
(89.3)
-
(443.6)
184.0
-
(60.0) 445.3
60.0
(445.3)
10.5
-
-
-
(57.3)
85.2
169.1
33.5
166.5 452.2 3,384.3 3,328.6
239.3
102.3
39.5
58.2
-
0.2
-
-
1.8
-
-
(249.8)
164.6
7.4
-
178.4
2.1
-
-
62.0
49.2
(3.0)
-
254.4
-
(0.7)
-
(25.6)
-
-
-
-
-
-
-
(4.7)
1.3
0.3
-
0.7
Reconciliation of carrying amounts
Balance at the beginning of the year
Movements for the year
– acquisitions1
– disposals
– net transfers to/(from) investment
property held for sale
– transfers to/(from) investment property
under development
– capital expenditure
– net revaluation gain/(loss)
– foreign exchange gain
Balance at the end of the year
1 Investment property acquisitions: Acquisition of 839 Collins EXO Car Park $1.8 million during the period (30 June 2018: 14 Childers Street, ACT $97.1 million,
North Rocks, NSW (additional land parcel) $2.1 million and TR Mall Ryugasaki, Japan $86.9 million).
Accounting policy
Investment and development property is initially recognised at
cost, including transaction costs. Subsequent to initial
recognition, investment and development property is
recognised at fair value.
Investment property is classified as held for sale if its carrying
value will be recovered principally through a sale transaction
rather than through continuing use. This condition is met only
when management is committed to the sale, and the sale is
highly probable to occur in the next 12 months. Investment
property held for sale is carried at fair value, being the latest
valuation available, or agreed sale price.
Gains or losses arising from changes in the fair values of
investment properties are included in the statement of
comprehensive income in the period in which they arise.
Investment properties are derecognised when they have either
been disposed of or when the investment property is
permanently withdrawn from use and no future benefit is
expected from its disposal. Any gain or loss on the retirement
or disposal of an investment property is recognised in the
statement of comprehensive income in the year of retirement
or disposal.
Where properties are debt financed, that finance is provided
either by secured mortgages or by funding that contains a
number of negative undertakings (including undertakings not
to create or allow encumbrances, and undertakings not to
incur financial indebtedness which ranks in priority to
existing debt).
Investment property under development
When redevelopment of an existing investment property
commences, it continues to be classified and measured as
investment property when the asset is being redeveloped for
continued future use as an investment property.
Investment property under construction is held at cost until an
estimate of the fair value can be reliably determined.
69
Challenger Limited 2019 Annual Report
Note 6 Investment and development property (continued)
Accounting policy (continued)
Development property held for resale
Development properties held for the purpose of resale are
stated at the lower of cost and net realisable value. Net
realisable value is the estimated selling price in the ordinary
course of business on completion, less estimated costs of
completion and selling costs.
Cost includes cost of acquisition, development costs, holding
costs and directly attributable interest on borrowed funds
where the development is a qualifying asset. Capitalisation of
borrowing costs ceases during extended periods in which
active development is interrupted. When a development is
completed and ceases to be a qualifying asset, borrowing costs
and other costs are expensed as incurred.
Key estimates and assumptions
Independent valuations for all investment properties are
conducted at least annually by suitably qualified valuers, and
the Directors make reference to these independent valuations
when determining fair value.
Each independent valuer is appointed in line with the valuation
policy, which requires that valuers are authorised to practise
under the law of the relevant jurisdiction where the valuation
takes place and have at least five years of continuous
experience in the valuation of property of a similar type to
the property being valued and on the basis that they are
engaged for no longer than two consecutive years on an
individual property.
The valuer must have no pecuniary interest that could conflict
with the valuation of the property, must be suitably
indemnified, and must comply with the Australian Property
Institute (API) Code of Ethics and Rules of Conduct (or foreign
equivalent). An internal valuation is undertaken for all
investment properties every six months unless they have been
independently valued during the current reporting period. In
certain circumstances an independent valuation might be
obtained.
Fair value for the purposes of the valuation is market value as
defined by the International Assets Valuation Standards
Committee. In determining market value, valuers examine
available market evidence and apply this analysis to both the
traditional market capitalisation approach and the discounted
cash flow approach (using market-determined risk-adjusted
discount rates). Valuers are required to provide valuation
methodology and calculations for fair value including reference
to annual net market income, comparable capitalisation rates,
and property-specific adjustments. The values of investment
property do not reflect anticipated enhancement from future
capital expenditure.
70
Challenger Limited 2019 Annual Report
Note 6 Investment and development property (continued)
Analysis of investment property
as at 30 June
Investment property in use and held
for sale
Australia
14 Childers Street, ACT
21 O'Sullivan Circuit, NT
31 O'Sullivan Circuit, NT
31 Queen Street, VIC
35 Clarence Street, NSW
53 Albert Street, QLD
82 Northbourne Avenue, ACT
215 Adelaide Street, QLD
565 Bourke Street, VIC
839 Collins Street, VIC
ABS Building, ACT
The Barracks, QLD
Bunbury Forum, WA
Channel Court, TAS
Cosgrave Industrial Park, Enfield, NSW
County Court, VIC
DIBP (formerly DIAC) Building, ACT
Discovery House, ACT
Executive Building, TAS
Gateway, NT
Golden Grove, SA
Karratha, WA
Kings Langley, NSW
Lennox, NSW
Makerston House, QLD
Next Hotel, QLD
TRE Data Centre, ACT
Total Australia
Acquisition
date1
Carrying
value
2019
$m
Cap
rate
20193
%
Total
cost2
$m
Last external
valuation
date
Carrying
value
2018
$m
Cap
rate
20183
%
01-Dec-17
27-Jan-16
27-Jan-16
31-Mar-11
15-Jan-15
12-Dec-14
01-Jun-17
31-Jul-15
28-Jan-15
22-Dec-16
01-Jan-00
31-Oct-14
03-Oct-13
21-Aug-15
31-Dec-08
30-Jun-00
01-Dec-01
28-Apr-98
30-Mar-01
1-Jul-15
31-Jul-14
28-Jun-13
29-Jul-01
27-Jul-13
14-Dec-00
25-Mar-15
14-Apr-10
97.3
47.7
29.2
-
147.1
-
60.9
249.7
102.1
212.0
149.0
-
155.1
83.4
92.3
217.6
108.4
97.4
34.5
121.1
156.1
55.0
16.2
28.6
-
143.7
13.9
92.5
36.7
26.5
-
220.0
-
55.4
245.5
142.0
232.5
219.2
-
90.0
80.0
122.0
323.9
156.7
148.5
45.3
118.5
171.4
49.0
23.9
31.5
-
145.3
10.5
2,418.3 2,786.8
6.50
8.00
8.25
-
5.13
-
6.00
6.00
5.00
4.88
5.75
-
6.75
7.00
5.50
n/a
5.50
5.63
7.00
5.85
5.75
7.25
6.25
6.50
-
6.11
-
30-Jun-19
31-Dec-18
31-Dec-18
-
30-Jun-19
-
31-Dec-18
30-Jun-19
30-Jun-19
30-Jun-19
31-Dec-18
-
30-Jun-19
30-Jun-19
30-Jun-19
31-Dec-18
31-Dec-18
31-Dec-18
31-Dec-18
31-Dec-18
31-Dec-18
30-Jun-19
30-Jun-19
30-Jun-19
-
30-Jun-19
30-Jun-19
92.2
39.3
25.9
164.5
216.0
236.2
57.5
231.5
107.0
-
177.0
151.5
125.0
82.5
110.1
306.7
149.0
131.0
43.0
107.6
159.8
53.0
23.9
36.3
70.7
132.0
-
3,029.2
6.75
8.00
8.25
5.25
5.13
5.88
6.00
6.25
5.50
-
5.75
6.25
6.50
7.00
6.07
6.13
5.50
5.63
7.50
5.75
6.00
7.00
6.25
6.00
7.38
6.17
-
1 Acquisition date represents the date of initial acquisition or consolidation of the investment vehicle holding the asset.
2 Total cost represents the original acquisition cost plus additions less full and partial disposals since acquisition date.
3 The capitalisation rate is the rate at which net market income is capitalised to determine the value of the property. The rate is determined with regard to
market evidence.
71
Challenger Limited 2019 Annual Report
Note 6 Investment and development property (continued)
Carrying
value
2019
$m
Cap
rate
20193
%
Last external
valuation
date
Carrying
value
2018
$m
Cap
rate
20183
%
Acquisition
date1
31-Dec-08
31-Dec-08
31-Dec-08
31-Dec-08
31-Dec-08
Analysis of investment property
as at 30 June (continued)
Europe
Rue Charles Nicolle, Villeneuve les Beziers
Avenue de Savigny, Aulnay sous Bois
105 Route d’Orleans, Sully sur Loire
140 Rue Marcel Paul, Gennevilliers
ZAC Papillon, Parcay-Meslay
Japan
Aeon Kushiro
Carino Chitosedai
Carino Tokiwadai
DeoDeo Kure
Fitta Natalie Hatsukaichi
Izumiya Hakubaicho
Kansai Super Saigo
Kojima Nishiarai
Life Asakusa
Life Higashi Nakano
Life Nagata
MaxValu Tarumi
Seiyu Miyagino
TR Mall Ryugasaki
Valor Takinomizu
Valor Toda
Yaoko Sakato Chiyoda
Total international
Total investment property in use and held for sale4
31-Jan-10
31-Jan-10
31-Jan-10
31-Jan-10
28-Aug-15
31-Jan-10
31-Jan-10
31-Jan-10
31-Jan-10
31-Jan-10
31-Jan-10
28-Aug-15
31-Jan-10
30-Mar-18
31-Jan-10
31-Jan-10
31-Jan-10
Total
cost
$m2
-
20.3
-
-
-
-
10.7
-
-
-
30.5
118.4
77.0
32.2
11.4
68.8
13.1
12.2
27.8
32.9
25.2
16.9
9.8
86.7
26.9
42.5
19.6
672.2
37.8
138.9
85.3
34.4
14.7
79.8
14.4
16.1
38.0
40.9
30.0
20.0
11.8
98.4
25.5
45.9
21.4
764.0
3,076.6 3,540.3
-
6.53
-
-
-
5.40
4.50
4.60
5.50
5.90
4.80
5.50
4.40
4.30
4.40
4.20
5.70
5.20
5.70
5.80
5.20
4.80
-
30-Jun-19
-
-
-
14.1
12.5
9.5
10.8
8.1
30-Jun-19
31-Dec-18
30-Jun-19
30-Jun-19
31-Dec-18
31-Dec-18
31-Dec-18
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
31-Dec-18
30-Jun-19
31-Dec-18
31-Dec-18
30-Jun-19
31-Dec-18
34.8
129.6
81.0
30.7
13.9
71.8
13.4
14.9
34.6
36.7
28.2
18.9
10.7
89.9
24.7
44.6
18.2
751.6
3,780.8
Investment property under development
Australia
839 Collins Street, VIC5
Gateway, NT5
North Rocks, NSW
TRE Data Centre, ACT5
Maitland, NSW
Total investment property under development
Development property held for resale
Australia
Maitland, NSW
Total development property
22-Dec-16
01-Jul-15
18-Sep-15
14-Apr-10
6-Dec-06
-
-
180.2
-
5.4
185.6
-
-
173.7
-
4.7
178.4
-
-
6.50
-
-
-
-
30-Jun-19
-
-
74.9
15.0
146.1
13.5
4.9
254.4
06-Dec-06
-
-
-
-
-
-
-
0.7
0.7
1 Acquisition date represents the date of initial acquisition or consolidation of the investment vehicle holding the asset.
2 Total cost represents the original acquisition cost plus additions less full and partial disposals since acquisition date.
3 The capitalisation rate is the rate at which net market income is capitalised to determine the value of the property. The rate is determined with regard to
market evidence.
4 At 30 June 2019, the investment property portfolio occupancy rate for Australia was 92.6% (30 June 2018: 92.5%) with a weighted average lease expiry of
6.1 years (30 June 2018: 5.4 years), Europe 100.0% (30 June 2018: 100.0%) with a weighted average lease expiry of 0.1 years (30 June 2018: 1.2 years) and Japan
100% (30 June 2018: 100%) with a weighted average lease expiry of 10.3 years (30 June 2018: 11.1 years).
5 Transferred to investment property in use and held for sale.
72
7.00
6.50
8.00
7.25
7.25
5.40
4.60
4.60
5.50
5.80
4.90
5.50
4.30
4.40
4.50
4.90
5.70
5.30
5.60
5.70
5.40
4.90
-
-
-
-
-
-
-
Note 7 Special Purpose Vehicles
Consolidated
Cash and cash equivalents
Mortgage assets1
Derivative assets
Total assets
Payables
Derivative liabilities
Interest bearing financial liabilities1
Total liabilities
Net assets
Cash flow hedge reserve
Total equity attributable to residual income unit holders
Challenger Limited 2019 Annual Report
30 June
2019
$m
66.5
860.6
0.5
927.6
163.7
0.3
763.4
927.4
0.2
0.2
0.2
30 June
2018
$m
97.3
1,044.5
0.5
1,142.3
182.0
0.2
959.8
1,142.0
0.3
0.3
0.3
1 $209.7 million (30 June 2018: $257.4 million) of the Mortgage assets balance is considered current, and $186.0 million (30 June 2018: $236.6 million) of the Interest
bearing financial liabilities balance is considered current.
Accounting policy
The Group manages and services Special Purpose Vehicle (SPV)
trusts that hold residential mortgage-backed assets and issue
securitised financial liabilities. The trusts are entities that fund
pools of residential mortgage-backed loans via the issuance of
residential mortgage-backed securities (RMBS). All borrowings
of these SPVs are limited in recourse to the assets of the SPV.
As the Group retains the beneficial interest to the residual
income of these trusts, it is deemed to control them and, as a
result, they are consolidated. However, the significant risks and
rewards (most notably credit risk) lie with the RMBS holders.
The assets and liabilities of the SPV have been separately
disclosed in the financial report as this presentation is
considered to provide a more transparent view of the Group’s
financial position. Transactions between the SPV and other
entities within the Group are eliminated on consolidation.
SPV cash and cash equivalents are financial assets and
comprise cash at bank and in hand plus short-term deposits
with an original maturity of three months or less that are
readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value. Cash and
cash equivalents are initially recognised at fair value and
subsequently carried at amortised cost.
SPV mortgage assets are non-derivative financial loan assets
with fixed or determinable payments that are not quoted in an
active market. They are recognised net of any credit loss
provision.
The Group uses derivative financial instruments to hedge the
risks associated with SPV interest rate and foreign currency
fluctuations. All these derivative financial instruments are
stated at fair value. Gains or losses arising from fair value
changes on derivatives that do not qualify for hedge
accounting are recognised in the statement of comprehensive
income.
SPV payables represent unsecured non-derivative, non-interest
bearing financial liabilities in respect of goods and services
provided to the trusts prior to the end of the financial year.
They include accruals and other creditors and are recognised at
amortised cost.
SPV interest bearing financial liabilities are initially recognised
at fair value calculated net of directly attributable transaction
costs, and subsequently measured at amortised cost. Any
difference between the proceeds (net of transaction costs) and
the redemption amount is recognised in the statement of
comprehensive income over the period of the contract using
the effective interest rate method.
Key estimates and assumptions
The impact to the Group from the adoption of the expected
credit loss model on the mortgage assets is minimal because
the historical provisioning methodology of the Group is
materially consistent with the provision estimated under the
expected credit loss model.
Analysis of SPV mortgage assets impairment provision
Balance at the beginning of the year
(Decrease)/increase in provisions
Utilisation of provision against incurred losses and adjustments to estimates
Balance at the end of the year
30 June
2019
$m
13.6
(3.9)
0.5
10.2
30 June
2018
$m
30.1
0.7
(17.2)
13.6
73
Challenger Limited 2019 Annual Report
Note 8 Life contract liabilities
Fair value of life contract liabilities
Life investment contract liabilities – at fair value
Life insurance contract liabilities – at margin on services value
Reinsurance contract liabilities – at margin on services value
Total life contract liabilities
30 June
2019
$m
6,757.7
6,113.1
(0.6)
12,870.2
30 June
2018
$m
6,635.3
5,016.7
76.3
11,728.3
Movement in life contract
liabilities
Balance at the beginning of
the year
Deposits and premium
receipts
Payments and withdrawals
Revenue per Note 1
Expense per Note 2
Balance at the end of
the year
Life investment
contract liabilities
30 June
2019
$m
30 June
2018
$m
Life insurance contract
liabilities
30 June
2019
$m
30 June
2018
$m
Outward reinsurance
contract liabilities
30 June
2019
$m
30 June
2018
$m
Total life contract
liabilities
30 June
2019
$m
30 June
2018
$m
6,635.3
6,356.5
5,016.7
3,885.5
76.3
80.2 11,728.3 10,322.2
2,421.9
(2,612.0)
98.3
214.2
2,564.6
(2,470.2)
(48.1)
232.5
1,143.5
(634.0)
(227.0)
813.9
1,452.7
(499.2)
(512.8)
690.5
-
(58.7)
(20.2)
2.0
-
(6.1)
(0.1)
2.3
3,565.4
(3,304.7)
(148.9)
1,030.1
4,017.3
(2,975.5)
(561.0)
925.3
6,757.7
6,635.3
6,113.1
5,016.7
(0.6)
76.3 12,870.2 11,728.3
Analysis of life insurance and reinsurance contract liability and expenses
Best estimate liability
Value of future life insurance contract benefits
Value of future expenses
Value of future acquisition expenses
Value of future premiums
Total best estimate liability
Value of future profit margins
Net life insurance and reinsurance contract liability
Life insurance and reinsurance contract operating expenses
Maintenance expenses
Total life insurance and reinsurance contract operating expenses
Analysis of life contract profit
Profit margin release on life insurance contracts
Loss recognition in respect of life insurance contracts1
Loss recognition in respect of life investment contracts
Difference in actual and assumed experience in respect of life insurance contracts
Difference in actual and assumed experience in respect of life investment contracts
Profit arising from difference between actual and assumed experience
Investment earnings on assets in excess of life contract liabilities
Life contract profit after tax
30 June
2019
$m
5,849.8
159.8
134.9
(526.6)
5,617.9
494.6
6,112.5
43.7
43.7
19.9
(76.8)
(68.9)
176.0
174.1
224.3
172.2
396.5
30 June
2018
$m
4,854.7
148.9
110.7
(494.0)
4,620.3
472.7
5,093.0
39.3
39.3
11.7
(95.4)
(81.0)
157.2
199.6
192.1
173.5
365.6
1 Under margin on services (MoS), any profits expected over the life of a contract are recognised over the life of the contract; however, if on the liability valuation basis
the contract is expected to be loss making, the capitalised value of these future losses is recognised at the point of sale. Retail insurance contracts are in loss
recognition because the liability valuation basis uses a risk-free discount rate but the rates offered to customers are higher.
74
Note 8 Life contract liabilities (continued)
Accounting policy
Life insurance claims expense
Challenger Limited 2019 Annual Report
The operations of the Group include the selling and
administration of life contracts through Challenger Life
Company Limited (CLC). These contracts are governed under
the Life Insurance Act 1995 (the Life Act) and are classified as
either life insurance contracts or life investment contracts. Life
insurance and life investment contract liabilities are collectively
referred to as life contract liabilities or policy liabilities.
Life investment contract liabilities
Life investment contracts are contracts regulated under the
Life Act but which do not meet the definition of life insurance
contracts under AASB 1038 Life Insurance Contracts and
similar contracts issued by entities operating outside
of Australia.
For fixed term policies, the liability is based on the fair value of
the income payments and associated expenses, being the net
present value of the payments and expenses using an
appropriate discount rate curve as determined by the
Appointed Actuary.
Life insurance contract liabilities
Life insurance contracts are contracts regulated under the Life
Act that involve the acceptance of significant insurance risk.
Insurance risk is defined as significant if, and only if, an insured
event could cause an insurer to pay significant additional
benefits in any scenario, excluding scenarios that lack
commercial substance (i.e. have no discernible effect on the
economics of the transaction).
The financial reporting methodology used to determine the
value of life insurance contract liabilities is referred to as
margin on services (MoS). Under MoS, the excess of premiums
received over payments to customers and expenses (the
margin) is recognised over the life of the contract in a manner
that reflects the pattern of risk accepted from the policyholder
(the service) unless future margins are negative, in which case
the future losses are recognised in the statement of
comprehensive income immediately. The planned release of
this margin is recognised in the statement of comprehensive
income as part of the movement in life insurance contract
liabilities.
Life insurance contract liabilities are usually determined using
a projection method, whereby estimates of policy cash flows
(premiums, payments and expenses) are projected into the
future. The liability is calculated as the net present value of
these projected cash flows using a risk-free discount
rate curve.
The key areas of judgement in the determination of the
actuarial assumptions are the duration of claims/policy
payments, mortality, surrenders, acquisition and maintenance
expense levels, and economic assumptions for discount and
inflation rates.
Life insurance premium revenue
Life insurance premiums are recognised as revenue
when received.
Life insurance claims expense is recognised in expenses when
the liability to the policyholder under the contract has
been established.
Inwards reinsurance
The Group has maintained inwards reinsurance arrangements
during the period that meet the definition of a life insurance
contract. The MoS methodology requires the present value of
future cash flows arising from reinsurance contracts to be
included in the calculation of life insurance contract liabilities.
Outwards reinsurance
The Group maintained outwards reinsurance arrangements to
manage longevity risk in respect of part of the closed book of
individual lifetime annuities. During the year, one of these
arrangements was recaptured resulting in the partial
derecognition of the outward reinsurance liability balance.
Valuation
The MoS valuation, calculated in accordance with APRA
Prudential Standards results in the systematic release of
planned margins over the life of the policy via a ‘profit carrier’.
The Group maintains life insurance contracts including
individual lifetime annuities, wholesale mortality, wholesale
morbidity, longevity reinsurance and wholesale lifetime
annuities. Annuity payments are used as the profit carrier for
lifetime annuities and premium receipts or best estimate claim
payments are used as the profit carrier for wholesale mortality,
wholesale morbidity and longevity reinsurance.
Key assumptions applied in the valuation of life
contract liabilities
Tax rates
The bases of taxation (including deductibility of expenses) are
assumed to continue in accordance with legislation current at
the reporting date.
Discount rates
Under APRA Prudential Standards and AASB 1038 Life
Insurance Contracts, life insurance contract liabilities are
calculated by discounting expected future cash flows at a risk-
free rate, set at the Commonwealth Government Bond curve
plus an illiquidity premium where applicable or for foreign-
denominated liabilities, a curve derived from the yields of
highly liquid AAA-rated sovereign risk securities in the currency
of the policy liabilities plus an illiquidity premium where
applicable. The illiquidity premium is determined by reference
to observable market rates including Australian sovereign debt,
corporate, securitised and collateralised debt publicly placed in
the domestic market, and market swap rates.
Life investment contract liabilities are calculated under the fair
value through profit and loss provisions of AASB 9 Financial
Instruments. The discount rates are determined based on the
current observable, objective rates that relate to the nature,
structure and term of the future liability cash flows.
For both insurance and investment contracts the approach is
the same as adopted at 30 June 2018. Discount rates applied
for Australian liabilities were between 1.5%-2.5% (30 June
2018: 2.4%-3.7%) per annum.
75
Challenger Limited 2019 Annual Report
Note 8 Life contract liabilities (continued)
Valuation (continued)
Key assumptions applied in the valuation of life contract
liabilities (continued)
Expenses
Forecasted expenses for the next year are allocated between
acquisition, maintenance and investment based on the nature
of the expense. Forecasted maintenance expenses then are
converted to a per-contract unit cost or percentage of account
balance, depending on the nature of the expense.
Inflation
Inflation estimates are based on long-term expectations and
reviewed at least annually for changes in the market
environment based on a comparison of real and nominal yields
of instruments of equivalent term and credit risk. The current
assumption for Australia is 1.2% per annum for short-term
inflation and 1.6% per annum for long-term inflation
(30 June 2018: 1.7% short-term, 2.3% long-term).
Surrenders
For life investment contracts, no surrenders or voluntary
discontinuances are assumed. For Australian life insurance
contracts where a surrender value is payable on withdrawal,
a rate of surrenders is assumed in line with Challenger’s own
experience on these products, currently between 1.3%-1.7%
per annum (30 June 2018: 1.3%-1.7%). For inwards
reinsurance of Japanese business, a rate of surrenders is
assumed in line with local experience in relation to similar
contracts, currently 3.5% per annum (30 June 2018: 3.5%).
Where policyholders have the option to commute a life
insurance contract, the value of this option is included within
the life contract liabilities. We also assume surrender rates
based on past experience for this business which vary by
product types and duration in-force for the contract.
Mortality
Base mortality rates for individual lifetime annuities are
determined as a multiple of annuitant experience based on
LML08 and LFL08 tables, adjusted for Challenger’s own recent
experience. LML08 and LFL08 are mortality tables developed
by the Continuous Mortality Investigation (CMI) based on
United Kingdom annuitant lives experience from 2007–2010.
The tables refer to male and female lives respectively. Rates
are adjusted for expected future mortality improvements
based on observed and expected improvements. For the age
ranges and cash flow projection periods that contribute the
majority of CLC’s exposure, rates of future mortality
improvement applied are between 0.3%-2.6% per annum
(30 June 2018: 0.0%-2.2%).
Base mortality rates for wholesale mortality and longevity
reinsurance are determined as a multiple of pensioner
mortality rates (based on the self-administered pension
schemes or SAPS2 tables mortality investigation developed by
the Institute and Faculty of Actuaries (UK) using United
Kingdom data collected between 2004–2012). Rates are
adjusted for expected future mortality improvements based on
observed and expected improvements.
76
For the age ranges and cash flow projection periods that
contribute the majority of CLC’s exposure, rates of future
mortality improvement applied are between 0.6%-2.1% per
annum (30 June 2018: 0.6%-2.1%). Base mortality rates for
the inwards reinsurance of Japanese business are determined
as a multiple of Japanese population mortality rates.
Impact of changes in assumptions on life insurance contracts
Under MoS, changes in actuarial assumptions are recognised
by adjusting the value of future profit margins in life insurance
contract liabilities. Changes in future profit margins are
released over future periods unless that product group is in an
expected net loss position (loss recognition), in which case
changes in assumptions are recognised in the statement of
comprehensive income in the period in which they occur. The
valuation impact of changes to discount rate assumptions as a
result of market and economic conditions, such as changes in
benchmark market yields, are recognised in the statement of
comprehensive income in the period in which they occur.
Restrictions on assets
Financial assets held in Challenger Life Company Limited (CLC)
can only be used within the restrictions imposed under the Life
Insurance Act 1995 (the Life Act). The main restrictions are
that the assets in a statutory fund can only be used to meet
the liabilities and expenses of that statutory fund, to acquire
investments to further the business of the statutory fund or as
distributions when capital adequacy requirements are met.
Statutory fund information
The life contract operations of CLC are conducted within four
separate statutory funds. Both the shareholders’ and
policyholders’ interests in these statutory funds are reported in
aggregate in the financial report of the Group. Fund 1 is a
non-investment-linked fund and Fund 3 is investment-linked.
Both of these are closed to new business. Funds 2 and 4 are
the principal operating funds of the Group. Fund 2 contains
non-investment-linked contracts, including the Group’s term
annuity business, lifetime annuity policies and the related
outwards reinsurance, plus the wholesale mortality, wholesale
morbidity and longevity inwards reinsurance. Fund 4 contains
inwards reinsurance of annuity business written in Japan.
Life contract liabilities for Funds 1, 2, 3 and 4 are $2.0 million,
$11,649.0 million, $2.9 million and $1,216.3 million
respectively (30 June 2018: $2.4 million, $10,688.0 million,
$2.9 million, and $1,035.0 million).
Current/non-current split for total life contracts
There is a fixed settlement date for the majority of life contract
liabilities. Approximately $2,428.7 million on a discounted
basis (30 June 2018: $2,080.6 million) of life contract liabilities
have a contractual maturity within 12 months of the reporting
date. Based on assumptions applied for the 30 June 2019
valuation of life contract liabilities, $3,046.8 million of principal
payments on fixed term and lifetime business are expected in
the year to 30 June 2020 (expected in the year to 30 June
2019: $2,687.3 million).
Challenger Limited 2019 Annual Report
Note 8 Life contract liabilities (continued)
Life insurance risk
The Group is exposed to longevity risk on its individual lifetime
annuities (both direct and reinsured) and wholesale longevity
reinsurance. Longevity risk is the risk that policyholders may
live longer than expectations. The Group is exposed to
mortality risk on the wholesale mortality reinsurance and
reinsurance of fixed term business written in Japan. This is the
risk that death rates in the reference portfolios exceed
expectations. The Group is also exposed to morbidity risk on
the wholesale morbidity reinsurance. That is the risk that
morbidity rates in the reference portfolios exceed expectation.
The Group manages the longevity risk by regular reviews of
the portfolio to confirm continued survivorship of policyholders
receiving income plus regular review of longevity experience to
ensure that longevity assumptions remain appropriate. In
addition, the Group maintained reinsurance arrangements to
manage longevity risk in respect of part of the closed book of
individual lifetime annuities.
One of these arrangements was discontinued in 2019 resulting
in the Group being exposed to the longevity risk in respect to
those closed books of individual lifetime annuities. The Group
manages the mortality and morbidity risk by regular reviews of
the portfolio to ensure that mortality and morbidity
assumptions remain appropriate. The Company’s insurance
risk policy is approved by the Board and sets out the relevant
risk limits for insurance exposures, to ensure the insurance risk
portfolio is appropriately diversified and contains no significant
concentrations of insurance risk.
Insurance risk sensitivity analysis
The following table discloses the sensitivity of life insurance
contract liabilities, profit after income tax and equity to
changes in the key assumptions relating to insurance risk, both
gross and net of reinsurance:
Insurance risk sensitivity
analysis
50% increase in the rate
of mortality improvement
10% increase in
maintenance expenses
Increase in life insurance contract liabilities
Gross
Net
Loss after tax and equity impact
Gross
Net
30 June
2019
$m
30 June
2018
$m
30 June
2019
$m
30 June
2018
$m
30 June
2019
$m
30 June
2018
$m
30 June
2019
$m
30 June
2018
$m
29.1
15.2
32.3
13.8
29.0
15.2
16.9
(20.3)
(22.6)
(20.3)
(11.8)
13.8
(10.6)
(9.7)
(10.6)
(9.7)
Liquidity risk for insurance contracts
The following table summarises the undiscounted maturity
profile of the Group’s life insurance contract liabilities. The
analysis is based on undiscounted estimated cash outflows,
including interest and principal payments. The undiscounted
maturity profile of life investment contracts is disclosed in Note
18 Financial risk management.
Undiscounted life insurance
contract liabilities
2019
2018
Actuarial information
1 year or less
$m
672.7
598.7
1-3 years
$m
1,129.0
1,029.6
3-5 years
$m
871.6
769.1
>5 years
$m
4,449.5
3,953.1
Total
$m
7,122.8
6,350.5
Mr A Kapel FIAA, as the Appointed Actuary of CLC, is satisfied
as to the accuracy of the data used in the valuations of life
contract liabilities in the financial report and the tables in this
note. The life contract liabilities have been determined at the
reporting date in accordance with the Life Act, APRA
Prudential Standards, AASB 1038 Life Insurance Contracts, and
AASB 9 Financial Instruments.
77
Challenger Limited 2019 Annual Report
Note 9 External unit holders’ liabilities
Current
Non-current
Total liabilities to external unit holders
Accounting policy
30 June
2019
$m
1,356.4
609.8
1,966.2
30 June
2018
$m
1,451.0
684.0
2,135.0
The Group controls a number of guaranteed index return
trusts that contain contributed funds in respect of fixed term
wholesale mandates. The fixed term and guaranteed nature of
the mandates effectively places the balance of the risks related
to the performance of the trusts with the Group. As a result,
the Group is deemed to control these trusts. The contributed
funds for these trusts are classed as a liability and external unit
holders’ liabilities on the statement of financial position
represent the funds owing to third parties on these mandates.
The liability is recognised at fair value.
Note 10 Derivative financial instruments
Analysis of derivative financial instruments
Non-SPV
Interest rate swaps
Less than one year
One to three years
Three to five years
Greater than five years
Total interest rate swaps
Inflation-linked swaps
Less than one year
One to three years
Three to five years
Greater than five years
Total inflation-linked swaps
Futures contracts
Less than one year
Total futures contracts
Forward currency contracts
Less than one year
Total forward currency contracts
Cross-currency swaps
Less than one year
One to three years
Three to five years
Greater than five years
Total cross-currency swaps
Equity swaps
Less than one year
One to three years
Total equity swaps
Infrastructure swaps
Less than one year
Total infrastructure swaps
30 June 2019
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
30 June 2018
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
5,597.8
9,363.0
5,415.3
25,152.0
45,528.1
384.0
221.5
245.6
1,394.1
2,245.2
10,838.2
10,838.2
2,005.7
2,005.7
1,546.1
1,762.6
2,140.6
1,041.5
6,490.8
1,118.0
836.3
1,954.3
200.0
200.0
8.2
23.6
61.0
352.4
445.2
12.0
6.4
5.8
111.6
135.8
-
-
16.6
16.6
26.7
10.4
17.7
10.5
65.3
0.8
7.8
8.6
-
-
(3.2)
(13.6)
(29.5)
(272.2)
(318.5)
4,544.8
8,288.1
2,492.9
10,538.1
25,863.9
3.4
31.1
22.7
200.7
257.9
-
-
-
(36.9)
(36.9)
1,018.4
262.0
243.1
1,014.1
2,537.6
(0.9)
(0.9)
10,706.5
10,706.5
(9.9)
(9.9)
3,975.5
3,975.5
(113.4)
(55.7)
(19.3)
(6.5)
(194.9)
625.6
1,324.4
2,509.5
530.1
4,989.6
(7.7)
-
(7.7)
1,792.9
-
1,792.9
-
-
-
-
10.0
4.2
-
25.5
39.7
-
-
33.5
33.5
4.1
20.3
7.7
4.1
36.2
6.0
-
6.0
-
-
(3.1)
(14.6)
(22.9)
(124.7)
(165.3)
(1.1)
-
(1.3)
(12.4)
(14.8)
(0.6)
(0.6)
(34.5)
(34.5)
(10.7)
(121.6)
(66.0)
(10.5)
(208.8)
(28.8)
-
(28.8)
-
-
78
0.2
-
46.5
46.7
0.6
-
0.6
420.6
-
-
-
-
-
-
-
-
-
-
-
(452.8)
(0.1)
-
-
(0.1)
(0.1)
(0.1)
(0.2)
(453.0)
Note 10 Derivative financial instruments (continued)
Challenger Limited 2019 Annual Report
30 June 2019
Net fair
value
assets
$m
Net fair
value
liabilities
$m
30 June 2018
Net fair
value
assets
$m
Notional
value
$m
Net fair
value
liabilities
$m
Analysis of derivative financial instruments
(continued)
Credit default swaps
Less than one year
One to three years
Three to five years
Total credit default swaps
Options
Less than one year
One to three years
Total options
Total non-SPV
Notional
value
$m
10.0
66.9
1,638.8
1,715.7
1.1
2.5
3.6
70,981.6
-
1.0
88.9
89.9
-
0.6
0.6
762.0
(0.1)
-
-
(0.1)
40.6
10.0
858.6
909.2
-
-
-
(568.9)
3.6
-
3.6
50,778.8
SPV
Interest rate swaps – SPV
Less than one year
One to three years
Three to five years
Total interest rate swaps – SPV
Cross-currency swaps – SPV
Greater than five years
Total cross-currency swaps – SPV
Total – SPV
Total derivative financial instruments1
6.5
5.7
0.2
12.4
-
-
-
-
(0.1)
(0.1)
-
(0.2)
7.9
9.9
0.5
18.3
320.3
320.3
332.7
71,314.3
0.5
0.5
0.5
762.5
(0.1)
(0.1)
(0.3)
(569.2)
401.6
401.6
419.9
51,198.7
0.5
0.5
0.5
421.1
1 The Group’s derivative financial instruments are subject to enforceable netting arrangements under International Swaps and Derivatives Association (ISDA) Master
Agreements with derivative counterparties, allowing for net settlement as a single arrangement of multiple instruments with a counterparty in the event of default or
other specified circumstances. If applied to the derivative portfolio, the derivative assets would reduce by $342.2 million (30 June 2018: $235.3 million) and the
derivative liabilities would reduce by $342.2 million (30 June 2018: $235.3 million).
Accounting policy
The Group uses derivative financial instruments predominantly
to hedge its risks associated with interest rate and foreign
currency fluctuations and to gain exposure to different
markets. All derivative financial instruments are stated at fair
value. Gains or losses arising from fair value changes on
derivatives that do not qualify for hedge accounting are
recognised in the statement of comprehensive income. For the
purpose of hedge accounting, hedges are classified as:
• fair value hedges when they hedge the exposure to changes
in the fair value of a recognised asset or liability;
• cash flow hedges when they hedge the exposure to
variability in cash flows that is attributable either to a
particular risk associated with a recognised asset or liability
or to a forecast transaction; or
• hedges of net investments in foreign operations when they
hedge the exposure to changes in the value of the assets
and liabilities of foreign-controlled entities when they are
translated from their functional currency to the presentation
currency.
At the inception of a hedge relationship to which the Group
wishes to apply hedge accounting, the Group formally
designates and documents the hedge relationship and the risk
management objectives and strategies for undertaking the
hedge. The documentation includes identification of the
hedging instrument, the hedged item or transaction, the
nature of the risk being hedged and how the entity will assess
the effectiveness of the instrument in offsetting the exposure
to changes in the hedged item.
Such hedges are expected to be highly effective in achieving
offsetting changes in fair values, cash flows or foreign
exchange differences and are assessed on an ongoing basis to
determine that they actually have been effective over the
period that they were designated.
Fair value hedges
Fair value hedges are hedges of the Group’s exposure to
changes in the fair value of a recognised asset or liability, an
unrecognised firm commitment, or an identified portion of
such an asset, liability or firm commitment that is attributable
to a particular risk and could affect profit or loss.
79
Challenger Limited 2019 Annual Report
Note 10 Derivative financial instruments (continued)
Derivatives designated as hedges of net investment
in foreign currency operations
The Group hedges its exposure to accounting gains and losses
arising from translation of foreign-controlled entities from their
functional currency into the Group’s presentation currency on
consolidation. At 30 June 2019, a post-tax loss of
$34.7 million (30 June 2018: post-tax loss of $16.6 million)
was recognised in other comprehensive income (OCI) for the
hedging of exposure to the net investment in foreign currency
operations.
Derivatives designated as cash flow hedges
The Group applies hedge accounting when it can demonstrate
that all, or a portion of, the value movements of a derivative
financial instrument effectively hedges the variability in cash
flows attributable to a specific risk associated with a
recognised asset or liability or probable future transaction. As
described in Note 18 Financial risk management, SPVs enter
into interest rate swap agreements to hedge the interest rate
risk between variable rate loans, which generally reprice with
changes in official interest rates, and issued RMBS that reprice
with changes in the 30-day and 90-day bank bill swap rates.
Cross-currency swaps are also used to hedge currency
movements on foreign denominated RMBS. The SPVs apply
hedge accounting to both types of transactions, with the fair
value change on the effective portion of the derivative being
recognised in OCI.
For the year ended 30 June 2019, a post-tax loss of
$0.2 million (30 June 2018: post-tax gain of $0.5 million) was
recognised in OCI for cash flow hedges with no statement of
comprehensive income impact in relation to any ineffective
portions during either the current or prior comparative period.
Accounting policy (continued)
Fair value hedges (continued)
For fair value hedges, both the carrying amount of the hedged
item and the derivative are remeasured to fair value through
the statement of comprehensive income. The same applies
where the hedged item is an unrecognised firm commitment.
Any subsequent cumulative change in the fair value of the firm
commitment attributable to the hedged risk is recognised as
an asset or liability with a corresponding gain or loss
recognised in the statement of comprehensive income.
The Group discontinues fair value hedge accounting if the
hedging instrument expires or is sold, terminated or exercised,
the hedge no longer meets the criteria for hedge accounting
or the Group revokes the designation.
Cash flow hedges
Cash flow hedges are hedges of the Group’s exposure to
variability in cash flows attributable to a particular risk
associated with a recognised asset or liability, or a highly
probable forecast transaction, that could affect the statement
of comprehensive income. The effective portion of the gain or
loss on the hedging instrument is recognised directly in equity,
while the ineffective portion is recognised in the statement of
comprehensive income.
Amounts recognised in equity are transferred to the statement
of comprehensive income when the hedged transaction affects
profit or loss, such as when hedged income or expenses are
recognised or when a forecast sale or purchase occurs. When
the hedged item is the cost of a non-financial asset or liability,
the amounts taken to equity are transferred to the initial
carrying amount of the non-financial asset or liability.
If the forecast transaction is no longer expected to occur,
amounts previously recognised in equity are transferred to the
statement of comprehensive income. If the hedging
instrument expires or is sold, terminated or exercised without
replacement or rollover, or if its designation as a hedge is
revoked, amounts previously recognised in equity remain in
equity until the forecast transaction occurs.
Hedges of net investments in foreign operations
The gain or loss on the effective portion of the hedging
instrument is recognised directly in equity and the gain or loss
on the ineffective portion is recognised immediately in the
statement of comprehensive income. The cumulative gain or
loss previously recognised in equity is recognised in the
statement of comprehensive income on disposal or partial
disposal of the foreign operation.
80
Note 11 Notes to statement of cash flows
Reconciliation of profit to operating cash flow
Profit for the year
Adjusted for
Net realised and unrealised gains on investment assets
Share of associates’ net profit
Change in life contract liabilities1
Depreciation and amortisation expense
Impairment in associates and other investments
Share-based payments
Dividends from associates
Change in operating assets and liabilities
Decrease in receivables
(Increase)/decrease in other assets
(Decrease)/increase in payables
(Decrease)/increase in provisions
Increase in life contract liabilities
(Decrease)/increase in external unit holders’ liabilities
Increase/(decrease) in net tax liabilities
Net cash flows from operating activities
1 Changes relate to movements through the statement of comprehensive income.
Reconciliation of cash
Cash at bank and on hand
Cash at bank and on hand – SPV
Total cash and cash equivalents1
1 All cash and cash equivalents are considered current.
Accounting policy
Challenger Limited 2019 Annual Report
30 June
2019
$m
310.7
(731.0)
(22.2)
881.2
15.3
(20.4)
21.4
31.6
36.9
(6.4)
(21.8)
(1.4)
260.7
(168.8)
66.5
652.3
30 June
2019
$m
725.4
66.5
791.9
30 June
2018
$m
323.8
(172.9)
(30.0)
364.3
16.0
13.3
23.7
21.9
24.1
1.8
5.3
7.1
1,041.8
447.2
(110.0)
1,977.4
30 June
2018
$m
741.7
97.3
839.0
Cash and cash equivalents are financial assets and comprise
cash at bank and in hand plus short-term deposits with an
original maturity of three months or less that are readily
convertible to known amounts of cash and which are subject
to an insignificant risk of changes in value.
Cash and cash equivalents are recognised and carried at fair
value. For the purposes of the statement of cash flows, cash
and cash equivalents are stated net of bank overdrafts.
81
Challenger Limited 2019 Annual Report
Section 4: Capital structure and financing costs
This section outlines how the Group manages its capital structure and related financing costs, as well as capital adequacy
and reserves. It also provides details on the dividends and earnings per share of the Company.
Note 12 Contributed equity
Analysis of contributed equity
Ordinary shares issued and fully paid
CPP Trust shares treated as Treasury shares
CPP deferred share purchases treated as Treasury shares
Total contributed equity
Movements in contributed equity
Ordinary shares
Balance at the beginning of the year
Equity placement
Issued under dividend reinvestment plan
Balance at the end of the year
CPP Trust
Balance at the beginning of the year
Shares purchased (including settled forwards)
Vested shares released to employees
Balance at the end of the year
CPP deferred share purchases
Balance at the beginning of the year
CPP deferred share purchases
Settled forward purchases
Balance at the end of the year
30 June 2019
30 June 2018
No. of shares
m
Value of shares
$m
No. of shares
m
Value of shares
$m
611.6
(3.0)
(2.8)
605.8
610.9
-
0.7
611.6
4.4
2.8
(4.2)
3.0
4.8
0.8
(2.8)
2.8
2,155.3
(30.5)
(31.1)
2,093.7
2,148.5
-
6.8
2,155.3
40.4
32.8
(42.7)
30.5
56.4
7.5
(32.8)
31.1
610.9
(4.4)
(4.8)
601.7
572.0
38.3
0.6
610.9
5.3
4.8
(5.7)
4.4
4.8
4.0
(4.0)
4.8
2,148.5
(40.4)
(56.4)
2,051.7
1,641.9
499.7
6.9
2,148.5
39.5
49.4
(48.5)
40.4
47.9
47.4
(38.9)
56.4
Accounting policy
Terms and conditions of contributed equity
Ordinary shares are classified as equity. Issued capital in
respect of ordinary shares is recognised as the fair value of the
consideration received by the parent entity. Incremental costs
directly attributable to the issue of new shares or options are
shown in equity as a deduction, net of tax, from the proceeds.
Ordinary shares
A holder of an ordinary share is entitled to receive dividends
and to one vote on a show of hands and on a poll.
Challenger Performance Plan (CPP) Trust
Treasury shares are ordinary shares in the Company held by
the Challenger Performance Plan (CPP) Trust or under CPP
deferred share purchase agreements in respect of equity
incentive plan awards to employees. Refer to Note 27
Employee entitlements for further details.
The CPP Trust is a controlled entity and holds shares in the
Company. As a result, the CPP Trust’s shareholding in the
Company is disclosed as Treasury shares and deducted from
equity. Dividends paid from the Company to the CPP Trust are
eliminated on consolidation.
CPP deferred share purchases
The shares purchased under forward agreements are treated
as Treasury shares from the date of the agreement. Shares are
transferred to the CPP Trust on the future settlement date.
82
Challenger Limited 2019 Annual Report
Note 12 Contributed equity (continued)
Capital management
Dividends
A company is generally limited in the risk-taking activities that it
can engage in by the amount of capital it holds, with capital
acting as a buffer against risk, ensuring that there are sufficient
resources to enable the company to continue normal business
in the event of an unexpected loss.
The Group manages capital via an Internal Capital Adequacy
Assessment Process (ICAAP) at both the Group and the
prudentially-regulated Challenger Life Company Limited (CLC)
level. The objective of the ICAAP is to maintain financial
stability of the Group and CLC whilst ensuring the
shareholders earn an appropriate risk-adjusted return through
optimisation of the capital. The ICAAPs for the Group and CLC
are approved by the respective boards and are reviewed at
least annually.
There were no material changes to the Group’s capital
management process during the period. All of the Group
regulated entities have at all times during the current and prior
financial year complied with the externally imposed capital
requirements to which they are subject.
Internal Capital Adequacy Assessment Process (ICAAP)
Summary Statement – Challenger Limited
The Group is a Level 3 Head (as defined in Prudential Standard
3PS 001) under the APRA conglomerates framework. Level 3
groups are groups of companies that perform material
activities across more than one APRA-regulated industry and/or
in one or more non-APRA regulated industries. APRA’s non-
capital conglomerate prudential standards relating to the
measurement, management, monitoring and reporting of
aggregate risk exposures and intragroup transactions and
exposures came into effect on 1 July 2017.
In March 2016, APRA announced that it would defer the
implementation of conglomerate capital requirements until a
number of other domestic and international policy initiatives
were further progressed. There has been no further update
from APRA in relation to this position.
Under the draft standards, the Group is required to have an
ICAAP Summary Statement. The Group ICAAP Summary
Statement aims to maintain an investment grade credit rating
and robust capital ratios in order to support its business
objectives, protect regulated entities within the Group from
operational and other risks outside those regulated entities and
maximise shareholder returns. The Group believes that
maintaining an investment grade rating is the most appropriate
target from a capital structure perspective and is essential in
order to secure access to capital at a reasonable cost.
Credit ratings
Standard & Poor’s long-term credit ratings for the Company
and CLC at the statement of financial position date are ‘BBB+’
(positive) and ‘A’ (positive) respectively (30 June 2018: ‘BBB+’
(positive) and ‘A’ (positive) respectively). There were no
changes to either the Company or CLC’s ratings during the
period and they reflect the financial strength of the Company
and CLC. In particular, they demonstrate the Group’s strong
business profile, earnings and capital position.
The Group has historically targeted a dividend payout ratio of
between 45% - 50% of normalised profit after tax over the
medium term, subject to prevailing market conditions and
alternate uses of capital.
The dividend payout ratio for the year ended 30 June 2019
was 54.2% of normalised profit after tax (30 June 2018:
52.1%). The payout ratio is currently above the target
reflecting the resilience during the year of Challenger’s
business and strong capital position.
Dividend Reinvestment Plan (DRP)
The Company maintained a DRP during the period. On 26
September 2018, the Company issued 329,710 ordinary
shares to shareholders under the DRP. The DRP issue price per
share for the 2018 final dividend was $10.4334 and represents
the volume weighted average share price over the ten trading
days from 5 to 18 September 2018. The DRP participation rate
was 3.1% of all issued shares, resulting in proceeds of $3.4
million.
For the interim 2019 dividend, the Company issued 411,192
ordinary shares on 26 March 2019. The DRP issue price per
share for the interim 2019 dividend was $8.1695 and
represents the volume weighted average share price over the
10 trading days from 1 to 14 March 2019. The interim DRP
participation rate was 3.1% of all issued shares, resulting in
proceeds of $3.4 million.
ICAAP Summary Statement – CLC
CLC is a life insurance company regulated under the Life Act.
The Life Act, via prudential standards issued by APRA, imposes
minimum statutory capital requirements on all life insurance
companies. Under these standards a life company must have in
place an ICAAP, documented in an ICAAP Summary
Statement. CLC complied with these requirements at all times
during the year.
Prescribed capital amount (PCA)
CLC holds capital in order to ensure that under a range of
adverse scenarios it can continue to meet its regulatory and
contractual obligations to its customers. CLC is regulated
by APRA and is required to hold a minimum level of
regulatory capital.
CLC’s regulatory capital base and PCA have been calculated in
accordance with prudential capital standards issued by APRA.
While CLC does not target a specific PCA ratio, CLC’s internal
capital models result in a PCA ratio under current
circumstances in the range of 1.3 to 1.6 times. This range can
change over time and is dependent on numerous factors.
CLC’s PCA ratio is currently within this range of 1.3 to
1.6 times.
The PCA ratio at 30 June 2019 was 1.53 times (30 June 2018:
1.53 times), reflecting changes in asset allocation, net AUM
growth, increased common equity Tier 1 capital and changes
in retained earnings.
83
Challenger Limited 2019 Annual Report
Note 12 Contributed equity (continued)
Capital management (continued)
CLC’s target surplus
CLC maintains a target level of capital representing APRA’s
PCA plus a target surplus. The target surplus is a management
guide to the level of excess capital that CLC seeks to hold over
and above APRA’s minimum requirements. CLC’s target
surplus is set to ensure that it provides a buffer against adverse
market conditions and having regard to CLC’s credit rating.
CLC capital
CLC’s regulatory capital
Common Equity Tier 1 regulatory capital
Additional Tier 1 regulatory capital
Tier 2 regulatory capital – subordinated debt1
CLC total regulatory capital base
Prescribed capital amount
Asset risk charge2
Insurance risk charge3
Operational risk charge
Aggregation benefit
CLC prescribed capital amount
CLC excess over prescribed capital amount
Capital adequacy ratio (times)
CLC uses internal capital models to determine its target
surplus, which are risk-based and are responsive to changes in
CLC’s asset allocation and market conditions.
Details of the CLC capital adequacy multiple are below:
30 June 2019
$m
30 June 2018
$m
2,789.4
805.0
405.3
3,999.7
2,539.5
135.3
51.8
(104.0)
2,622.6
1,377.1
1.53
2,677.8
805.0
405.4
3,888.2
2,484.8
70.0
46.4
(54.8)
2,546.3
1,341.9
1.53
1 Differs from $403.8 million (30 June 2018: $403.7 million) disclosed in Note 13 Interest bearing financial liabilities due to $1.5 million (30 June 2018: $1.7 million) of
accrued interest.
2 Asset risk charge includes the combined stress scenario adjustment and default stress.
3 During the period, reinsurance of certain lifetime risk was cancelled resulting in an increased insurance risk charge and aggregation benefit at 30 June 2019 when
compared to 30 June 2018.
84
Challenger Limited 2019 Annual Report
Note 13 Interest bearing financial liabilities
30 June 2018
Cash flows
Non-cash movements
30 June 2019
Facility
$m
Opening
balance
$m
Proceeds/
(repayments)
$m
Foreign
exchange
$m
Fair value
changes
$m
Other
$m
Closing
balance
$m
Facility
$m
Bank loans
Corporate
Controlled property trusts1
Controlled infrastructure trusts
Repurchase agreements
Total bank loans
Non-bank loans
Subordinated debt
Challenger Capital Notes 1
Challenger Capital Notes 2
Other finance
Total non-bank loans
Total interest bearing financial
liabilities
Current
Non-current
-
400.0
548.4
551.2
197.2
197.2
3,816.0
3,816.0
4,964.4 4,561.6
400.0
345.0
460.0
15.0
403.7
341.9
450.9
15.0
1,220.0 1,211.5
6,184.4 5,773.1
3,839.5
1,933.6
5,773.1
-
(118.6)
(5.2)
632.5
508.7
-
-
-
(2.3)
(2.3)
-
32.4
-
-
32.4
-
-
-
-
-
-
1.4
-
-
1.4
0.1
-
-
-
0.1
-
459.8
192.0
400.0
-
459.8
(3.8)
-
192.0
- 4,448.5 4,448.5
(3.8) 5,100.3 5,500.3
-
1.7
1.8
-
400.0
403.8
345.0
343.6
460.0
452.7
12.7
12.7
3.5 1,212.8 1,217.7
506.42
32.4
1.5
(0.3) 6,313.1 6,718.0
4,473.2
1,839.9
6,313.1
1 Total facility limit consists of redraw loan facility limits totalling nil (30 June 2018: $101.0 million) and non-redraw loan facilities limits totalling $459.8 million
(30 June 2018: $450.2 million).
2 Differs to Statement of cash flows due to $189.0 million (30 June 2018: $258.2 million) net repayments relating to SPVs. Total net cash proceeds comprise $632.8
million (30 June 2018: $988.7 million) proceeds from borrowings and $315.4 million (30 June 2018: $708.3 million) repayments of borrowings, inclusive of SPVs.
30 June 2017
Cash flows
Non-cash movements
30 June 2018
Facility
$m
Opening
balance
$m
Proceeds/
(repayments)
$m
Foreign
exchange
$m
Fair value
changes
$m
Other
$m
Closing
balance
$m
Facility
$m
Bank loans
Corporate
Controlled property trusts1
Controlled infrastructure trusts
Repurchase agreements
Total bank loans
Non-bank loans
Subordinated debt
Challenger Capital Notes 1
Challenger Capital Notes 2
Other finance
Total non-bank loans
Total interest bearing financial
liabilities
Current
Non-current
-
400.0
520.0
537.0
201.1
201.1
3,287.5
3,287.5
4,425.6 4,008.6
400.0
345.0
460.0
17.0
393.6
340.2
449.2
17.0
1,222.0 1,200.0
5,647.6 5,208.6
3,336.1
1,872.5
5,208.6
-
8.4
(3.9)
528.5
533.0
10.6
-
-
(2.0)
8.6
-
17.6
-
-
17.6
-
-
-
-
-
-
1.6
-
-
1.6
(0.5)
-
-
-
(0.5)
-
548.4
197.2
-
400.0
0.8
551.2
197.2
-
- 3,816.0 3,816.0
0.8 4,561.6 4,964.4
-
1.7
1.7
-
400.0
403.7
345.0
341.9
460.0
450.9
15.0
15.0
3.4 1,211.5 1,220.0
541.62
17.6
1.1
4.2 5,773.1 6,184.4
3,839.5
1,933.6
5,773.1
1 Total facility limit consists of redraw loan facilities limits totalling $101.0 million (30 June 2017: $101.0 million) and non-redraw loan facility limits totalling
$450.2 million (30 June 2017: $436.0 million).
2 Differs to Statement of cash flows due to $258.2 million (30 June 2017: $392.6 million) net repayments relating to SPVs and $3.0 million debt issue costs.
Total net cash proceeds comprise $988.7 million (30 June 2017: $860.9 million) proceeds from borrowings and $708.3 million (30 June 2017: $611.4 million)
repayments of borrowings, inclusive of SPVs.
85
Challenger Limited 2019 Annual Report
Note 13 Interest bearing financial liabilities (continued)
Accounting policy
All borrowings and subordinated debt are financial liabilities
and are initially recognised at fair value. For borrowings and
subordinated debt which are subsequently measured at fair
value through profit or loss, directly attributable transaction
costs are expensed with movements on fair value recognised in
the statement of comprehensive income.
Borrowings and subordinated debt, other than those held by
CLC’s statutory funds or their controlled entities, are
subsequently measured at amortised cost. Any difference
Details of liabilities
Bank loans
Bank loans
Corporate
Type
Facility
Loan
Controlled
property
trusts1
Maturity
Tranche 1: $150m expiring
on 30 June 2022
Tranche 2: $250m expiring
on 30 June 2024
July 2019 to October 2024
Facility
June 2022
Controlled
infrastructure
trusts
between the proceeds (net of transaction costs) and the
redemption amount is recognised in the statement of
comprehensive income over the period of the contract using
the effective interest rate method.
Repurchase agreements are all short-term in nature, and are
therefore valued at amortised cost which approximates fair
value.
Rate type Ranking/security
Floating
Secured by guarantees between members of the
Group
Variable
1) First ranking mortgages over Japanese
investment properties: $420.9 million
(30 June 2018: $399.4 million)
2) First ranking mortgage over County Court,
VIC: $38.6 million (30 June 2018: $50.2
million)
Variable
First ranking mortgages over infrastructure
assets
1 Controlled property trusts consist of multiple loans with maturity dates from July 2019 to October 2024.
Repurchase agreements
Challenger Capital Notes – 1 and 2 (Notes 1 and Notes 2)
CLC has entered into repurchase agreements with certain
counterparties whereby fixed income securities are sold for
cash whilst simultaneously agreeing to repurchase the fixed
income security at a fixed price and fixed date in the future.
These agreements finance bonds held for hedging purposes
and are interest bearing, with interest factored into the price
at which the bonds are repurchased and paid on repurchase.
All agreements as at 30 June 2019 are current and all except
$1,265.0 million matured in July 2019. The remaining
agreements mature in August 2019. They will continue to be
rolled into new agreements in the future.
CLC uses Australian Government and Semi-Government Bonds
with repurchase agreements, interest rate swaps and bond
futures to hedge movements in interest rates on its asset
portfolio, annuity policy liabilities, Guaranteed Index Return
mandates and the Challenger Index Plus Fund.
Notes 1 and Notes 2 have similar structural characteristics,
including:
• quarterly, floating, discretionary, non-cumulative
distributions based on a margin over 3 month BBSW;
• optional exchange whereby notes may be redeemed or
resold for cash or converted to ordinary shares in the
Company, at the Company’s option, on the relevant
Optional Exchange Date (or on an earlier date in certain
circumstances), subject to APRA’s prior written
approval; and
• mandatory conversion to ordinary shares in the Company on
the relevant Mandatory Conversion Date, subject to certain
conditions being satisfied. If the conditions to mandatory
conversion are not met on the relevant Mandatory
Conversion Date, conversion will be deferred to a later date
when the conditions are retested.
Non-bank loans
Subordinated debt
CLC issued subordinated notes of $400.0 million on 24
November 2017 with a call date on 24 November 2022.
Holders of the subordinated notes have the option to convert
their holding into ordinary shares of Challenger Limited on 24
November 2024 if CLC has not exercised its call option on 24
November 2022. If holders do not elect to convert the
subordinated notes to ordinary shares of Challenger Limited,
the subordinated notes will be fully eligible as Tier 2 regulatory
capital of CLC until 24 November 2038.
86
Note 13 Interest bearing financial liabilities (continued)
Challenger Limited 2019 Annual Report
Challenger Capital Notes – 1 and 2 (Notes 1 and Notes 2)
(continued)
Issue date
Issue amount
Optional Exchange
Date
Mandatory Conversion
Date
Notes 1
9 October 2014
$345.0 million
Notes 2
7 April 2017
$460.0 million
25 May 2020
22 May 2023
25 May 2022
22 May 2025
The costs associated with the issue of both Notes 1 and Notes
2 have been capitalised against the relevant liability and will be
expensed to the statement of comprehensive income over the
respective lives of Notes 1 and Notes 2. Neither the Notes 1
issue nor the Notes 2 issue constitute regulatory capital of the
Company. The proceeds from the issue of both Notes 1 and
Notes 2 were used to fund a subscription for notes issued by
CLC. Both issues of notes by CLC to the Company were
approved by APRA and constitute Additional Tier 1 capital of
CLC.
Note 14 Reserves and retained earnings
Other finance
Other finance includes a limited recourse non-bank loan for
the financing of equipment totalling $12.7 million (30 June
2018: $15.0 million). The loan has a maturity date of
November 2020.
Key estimates and assumptions
Subordinated debt valuation
Subordinated debt is recognised at fair value and is valued by
reference to the ask price observable in the market at balance
date.
The change recognised in the statement of comprehensive
income in respect of valuation changes for the year ended 30
June 2019 was a loss of $0.1 million (30 June 2018: gain of
$0.5 million).
Share-based payments reserve
Balance at the beginning of the year
Share-based payments for the period
Releases from share-based payments reserve
Tax in equity
Balance at the end of the year
Cash flow hedge reserve – SPV1
Balance at the beginning of the year
(Loss)/gain on cash flow hedges
Balance at the end of the year
Foreign currency translation reserve1
Balance at the beginning of the year
Gain on translation of foreign entities2
Loss on hedge of net investment in foreign entities2
Balance at the end of the year
Adjusted controlling interests reserve1
Balance at the beginning of the year
Change in holdings in controlled entities
Balance at the end of the year
Total reserves
Retained earnings
Balance at the beginning of the year
Profit attributable to equity holders
Dividends paid
Total retained earnings
1 These items may eventually be recycled to the profit and loss section of the statement of comprehensive income.
2 Net of tax.
30 June
2019
$m
30 June
2018
$m
(43.0)
21.4
(42.7)
6.6
(57.7)
0.3
(0.2)
0.1
(3.3)
35.4
(34.7)
(2.6)
12.7
(4.9)
7.8
(52.4)
(23.2)
23.7
(48.5)
5.0
(43.0)
(0.2)
0.5
0.3
(5.2)
18.5
(16.6)
(3.3)
12.1
0.6
12.7
(33.3)
1,467.0
307.8
(215.8)
1,559.0
1,350.1
322.5
(205.6)
1,467.0
87
Challenger Limited 2019 Annual Report
Note 14 Reserves and retained earnings (continued)
Accounting policy
Share-based payments reserve
Adjusted controlling interests reserve
An expense is recognised over the vesting period of share-
based payments granted to employees. This expense is based
on the valuation of the equity benefits conferred at the grant
date. When an instrument is granted, and an expense
incurred, there is a corresponding increase in the share-based
payments reserve directly in equity.
This reserve relates to changes arising from movements in the
ownership interests in entities already controlled by the Group.
The difference between the fair value of the consideration
paid/received for the change in holding and the change in the
Group’s share of the net assets of the entity is recorded in this
reserve.
The total of this reserve is net of any gain or loss realised on
the disposal of forfeited shares held within the schemes. On
vesting of the award they are subsequently recognised as an
increase in equity and a reduction in share-based payment
reserve at an average acquisition price, which may be higher or
lower than the initial recognised valuation price.
Foreign currency translation reserve
This reserve is used to record foreign exchange differences
arising from the translation of the foreign subsidiaries. It also
includes the effective portion of fair value changes on foreign
exchange derivative contracts designated as hedges of a net
investment in a foreign entity.
Note 15 Finance costs
Interest expense
Interest expense – SPV
Interest expense – property trusts1
Interest expense – Challenger Capital Notes 1 and 2
Other finance costs
Total finance costs
1 $4.9 million of interest was capitalised in the period (30 June 2018: $2.2 million).
Accounting policy
Finance costs represent interest incurred on interest bearing
financial liabilities (primarily external unit holders’ liabilities
distributions, repurchase agreements, the securitised
residential mortgage-backed securities (RMBS) issued by the
consolidated Special Purpose Vehicles (SPV), subordinated
debt, bank loans and other borrowings) and are recognised as
an expense in the period in which they are incurred.
Finance costs that are directly attributable to the acquisition,
construction or production of qualifying property assets (being
assets that take a substantial period of time to develop for
their intended use or sale) are capitalised as part of the cost of
that asset. Revenue earned on the investment of specific
Cash flow hedge reserve – SPV
This comprises the effective portion of the cumulative net
change in the fair value of cash flow hedging instruments
related to hedged transactions.
30 June
2019
$m
313.7
23.1
6.8
36.5
5.5
385.6
30 June
2018
$m
184.4
28.1
10.6
32.3
10.1
265.5
borrowings pending their expenditure on qualifying assets is
deducted from the borrowing costs eligible for capitalisation.
To the extent that the Group allocates general borrowed funds
for the purpose of obtaining a qualifying property asset, the
borrowing costs eligible for capitalisation are determined by
applying a capitalisation rate to the expenditure on that asset.
The capitalisation rate of 3.9% (30 June 2018: 3.8%) is the
weighted average of the borrowing costs applicable to the
borrowings that are outstanding during the period, other than
borrowing made specifically for the purpose of obtaining the
qualifying asset.
88
Challenger Limited 2019 Annual Report
Note 16 Dividends paid and proposed
Dividends declared and paid during the year
Final 30 June 2018 100% franked dividend: 18.0 cents (30 June 2017: 17.5 cents 100%
franked dividend)
Interim 30 June 2019 100% franked dividend: 17.5 cents (30 June 2018: 17.5 cents 100%
franked dividend)
Total dividends paid
Dividend proposed (not recognised as a liability at 30 June)
Final 30 June 2019 100% franked dividend: 18.0 cents (30 June 2018: 100% franked
18.0 cents)
30 June
2019
$m
30 June
2018
$m
109.4
106.4
215.8
99.5
106.1
205.6
109.5
109.4
Refer to Note 12 Contributed equity for details of the dividend policy. A dividend reinvestment plan will be in operation for the 30 June 2019 final dividend.
Dividend franking credits
Franking credits available to shareholders are $87.5 million
(30 June 2018: $132.2 million), based on a tax rate of 30%.
This amount is calculated from the balance of the franking
account as at the end of the reporting period, adjusted for
franking credits that will arise from the settlement, after the
end of the reporting period, of current liabilities for income tax
and interest on Challenger Capital Notes 1 and 2.
The impact of the proposed dividend will be to reduce the
balance of the franking credit account by $46.7 million. All
dividends are franked at a tax rate of 30%.
Note 17 Earnings per share
Basic earnings per share
Diluted earnings per share
Profit attributable to ordinary shareholders
Add back interest expense on Challenger Capital Notes 1 and 2
Add back interest expense net of tax on CLC Subordinated Notes
Total earnings used in the calculation of diluted earnings per share
Number of shares
Weighted average of ordinary shares issued
Weighted average of Treasury shares
Weighted average ordinary shares for basic earnings per share
Adjusted for potential ordinary shares:
Weighted average effect of Challenger Performance Plan
Weighted average effect of Challenger Capital Notes 1 and 2
Weighted average effect of CLC Subordinated Notes
Weighted average ordinary shares for diluted earnings per share
30 June
2019
cents
50.9
44.8
$m
307.8
32.9
11.2
351.9
30 June
2018
cents
54.0
52.2
$m
322.5
32.3
6.5
361.3
Number
Number
611,216,128 605,226,219
(8,511,558)
605,011,050 596,714,661
(6,205,078)
4,481,432
117,792,197
58,479,532
10,711,069
65,575,106
19,550,342
785,764,211 692,551,178
Accounting policy
Basic earnings per share is calculated by dividing the total
profit for the year attributable to equity holders of the
Company by the weighted average number of ordinary shares
outstanding during the financial year. The number of ordinary
shares outstanding is net of Treasury shares held by the
Challenger Performance Plan (CPP) Trust or under CPP
deferred share purchase agreements in respect of equity
incentive plan awards to employees.
The weighted average number of Treasury shares for the
period was 6,205,078 (2018: 8,511,558).
Diluted earnings per share is calculated by dividing the total
adjusted profit attributable to equity holders of the Company
by the weighted average number of ordinary shares
outstanding during the year adjusted for the effects of dilutive
shares that may be converted under the terms of Challenger
Capital Notes 1 and 2 (Notes) of 117.8 million shares (2018:
65.6 million), CLC Subordinated Notes of 58.5 million shares
(2018: 19.6 million shares) and shares granted under the CPP
of 4.5 million shares (2018: 10.7 million).
89
Challenger Limited 2019 Annual Report
Note 17 Earnings per share (continued)
Accounting policy (continued)
The dilutive share count for Challenger’s convertible debt
(Challenger Capital Notes and subordinated debt) is based on
the following formula:
Face value of debt
Conversion factor x Challenger’s 20-day VWAP share price
The conversion factor on all Challenger’s convertible debt is
99% of the weighted average Challenger share price over the
last 20 days of trading in each reporting period.
The profit attributable to ordinary shareholders is adjusted by
$44.1 million interest on the Notes and CLC Subordinated
Notes (2018: $38.8 million) for the diluted calculation when
the Notes and CLC Subordinated Notes are considered dilutive.
Since the CPP Trust commenced operation in December 2006,
no shares have been issued to the CPP Trust. Instead, shares
are acquired by the CPP Trust to mitigate shareholder dilution.
There have been no other transactions involving ordinary
shares or potential ordinary shares between the reporting date
and the date of authorisation of these financial statements.
90
Challenger Limited 2019 Annual Report
Section 5: Risk management
This section outlines how financial risk is managed within the Group and provides additional information about how the
overall risk management program seeks to minimise potentially adverse financial effects associated with key financial risks.
This section also provides disclosures on the fair values of assets and liabilities of the Group, the valuation techniques used
in determining the fair value of those assets and liabilities, and the sensitivities of assets categorised as Level 3 instruments
to reasonably possible changes in valuation assumptions.
Note 18 Financial risk management
Governance and risk management framework
Interest rate risk
Interest rate risk is the risk of fluctuations in the Group’s
earnings and equity arising from movements in market interest
rates, including changes in the absolute levels of interest rates,
the shape of the yield curve, the margin between the different
yield curves and the volatility of interest rates.
It is the Group’s policy to minimise the impact of interest rate
movements on debt servicing capacity, Group profitability,
business requirements and company valuation. The Group
targets hedging of between 30-70% of drawn net recourse
interest bearing liabilities of the corporate segment. The
amount of drawn net recourse corporate interest bearing
liabilities, and their duration, is determined with reference to
the annual budget and the most current forecasts. The
Group’s strategy is to have no interest rate hedges with a
duration of greater than five years and targets average hedge
duration of three years.
CLC’s market risk policy is approved by the CLC Board and sets
out the relevant risk limits for interest rate exposure. It is CLC’s
policy to minimise the impact of interest rate movements on its
projected future cash flows. The management of the risks
associated with life investment and life insurance contracts,
including interest rate risk, are subject to the prudential
requirements of the Life Act and APRA. This includes satisfying
capital adequacy requirements, which in turn include
consideration of how the interest rate sensitivity of assets and
liabilities are matched.
For the SPV entities, the impact of a rising/falling bank bill
swap rate (BBSW) benchmark over the Reserve Bank of
Australia’s target cash rate results in an increase/decrease in
the cost of funding and therefore on the profit of the trusts.
This interest rate risk is mitigated by actively adjusting the
interest rates charged to borrowers if a sustained adverse
differential to the benchmark is evidenced. SPV entities are
also exposed to the risks arising from borrowers fixing the
rates on their mortgage. This interest rate risk is managed by
using cash flow hedges to swap the fixed rate to a floating
rate exposure at an amount equal to the notional value of the
mortgages being fixed.
The Group’s activities expose it to a variety of financial risks,
such as market risk (including currency risk, interest rate risk,
inflation risk, equity price risk and credit spread risk), credit
default risk and liquidity risk. The management of these risks is
fundamental to the Group’s business and to building
shareholder value. The Board is responsible, in conjunction
with senior management, for understanding the risks
associated with the activities of the Group and implementing
structures and policies to adequately monitor and manage
those risks.
The Board has established the Group Risk Committee (GRC)
and Group Audit Committee (GAC) to assist in the discharge
of certain responsibilities. In particular, the GRC assists the
Board in setting the risk appetite and ensuring the Group has
an effective risk management framework incorporating
management, operational and financial controls.
The Executive Risk Management Committee (ERMC) is an
executive committee, chaired by the Chief Risk Officer (CRO),
which assists the GRC, GAC and Board in the discharge of
their risk management obligations by implementing the
Board-approved risk management framework.
The Group’s Risk Management division has day-to-day
responsibility for monitoring the implementation of the
framework with oversight, analysis, monitoring and reporting
of risks. The CRO provides regular reporting to the GRC and
the Board.
The Group’s principal financial instruments consist of cash and
cash equivalents, receivables, available-for-sale assets, financial
assets at fair value through profit and loss, payables, life
insurance contract liabilities, life investment contract liabilities,
derivatives and other interest bearing financial liabilities.
Details of the significant accounting policies and methods
adopted, including the criteria for recognition, the basis of
measurement and the basis on which income and expenses
are recognised, in respect of each class of financial
instruments, are disclosed in Section 1: Basis of preparation
and overarching significant accounting policies and included in
the relevant notes to the financial statements.
Market risk
Market risk is the risk that the fair value and/or future cash
flows from a financial instrument will fluctuate as a result of
changes in market factors. Market risk comprises (amongst
others) interest rate risk (due to fluctuations in market interest
rates), price risk (due to fluctuations in the fair value of equities
and other alternatives or credit spreads) and currency risk (due
to fluctuations in foreign currency exchange rates).
91
Challenger Limited 2019 Annual Report
Note 18 Financial risk management (continued)
Interest rate risk (continued)
Interest rate sensitivity
The Group’s sensitivity to movements in interest rates in
relation to the value of financial assets and liabilities is shown
in the table below. It is assumed that the change happens at
the statement of financial position date and that there are
concurrent movements in interest rates and parallel moves in
the yield curve. All material underlying exposures and related
hedges are included in the analysis which includes investment
properties with leases, where the future income stream is
duration-hedged for interest rate movements. The impact on
profit and equity is post-tax at a rate of 30%. The risks faced
and methods used in the sensitivity analysis are the same as
those applied in the comparative period. As shown below,
100 basis points (1%) movements in interest rates would have
only a small net impact on the Group’s financial position as
upside risks in CLC and the property trusts largely offset
downside risk in the SPV entities, and vice versa:
Change in variable
+100bps
-100bps
+100bps
-100bps
+100bps
-100bps
Profit/(loss)
30 June 2019
$m
1.2
(1.2)
(0.7)
0.7
0.5
(0.5)
Change in equity
30 June 2019
$m
1.2
(1.2)
(0.7)
0.7
0.5
(0.5)
Profit/(loss)
30 June 2018
$m
2.9
(2.9)
(0.9)
0.9
2.0
(2.0)
Change in equity
30 June 2018
$m
2.9
(2.9)
(0.9)
0.9
2.0
(2.0)
Non-SPV
SPV
Total
Price risk
Price risk is the risk that the fair value of a financial instrument
will fluctuate as a result of changes in market prices (other
than those arising from interest rate or currency risk), whether
those changes are caused by factors specific to the individual
financial instrument or its issuer, or factors affecting all similar
financial instruments. The Group is exposed to equity price risk
on its holdings in equity securities, which include a range of
investments in absolute return strategies where returns are
considered to be generally uncorrelated to listed equity market
returns, and credit spread risk on its fixed income securities.
The Group is required to fair value all equities and fixed
income securities held to back life contract liabilities.
Equity risks will arise as a natural result of CLC’s Asset
Allocation Plan. Equity prices can be driven by a range of risk
factors specific to an individual exposure including broad
macro-economic and instrument specific factors which may be
uncorrelated with broader equity markets. The Group’s
primary tools for managing investment price risks are CLC’s
Internal Capital Adequacy Assessment Process (ICAAP) and
Asset Allocation plan.
Equity price risk sensitivity
The potential impact of movements in the market value of
listed and unlisted equities on the Group’s statement of
comprehensive income and statement of financial position is
shown in the below sensitivity analysis. This sensitivity analysis
has been performed to assess the direct risk of holding equity
instruments; therefore any potential indirect impact on fees
from the Group’s funds management business has been
excluded.
The impact on profit and equity is post-tax at a rate of 30%.
The risks faced and methods used in the sensitivity analysis are
the same as those applied in the comparative period. As
shown below, a 10% movement in equity prices would have a
material impact on the consolidated Group’s financial position.
It is assumed that the relevant change occurs as at the
statement of financial position date.
Equities and other alternatives
Property securities
Infrastructure investments
Other equities and alternative
assets
Total assets
Change in
variable
+10%
-10%
+10%
-10%
+10%
-10%
+10%
-10%
Profit/(loss)
30 June 2019
$m
8.9
(8.9)
56.5
(56.5)
164.9
(164.9)
230.3
(230.3)
Change in equity
30 June 2019
$m
8.9
(8.9)
56.5
(56.5)
164.9
(164.9)
230.3
(230.3)
Profit/(loss)
30 June 2018
$m
26.8
(26.8)
33.6
(33.6)
92.7
(92.7)
153.1
(153.1)
Change in equity
30 June 2018
$m
26.8
(26.8)
33.6
(33.6)
92.7
(92.7)
153.1
(153.1)
92
Challenger Limited 2019 Annual Report
Note 18 Financial risk management (continued)
Price risk (continued)
Credit spread risk sensitivity
The Group is exposed to price movements resulting from credit
spread fluctuations through its fixed income securities (net of
subordinated debt) and policy liabilities. As at 30 June 2019, a
50 basis point increase/decrease in credit spreads would result
in a post-tax (at 30%) unrealised loss/gain in the statement of
comprehensive income and equity of $73.9 million (30 June
2018: $61.4 million).
Currency risk
It is the Group’s policy to minimise the exposure of all
statement of financial position items to movements in foreign
exchange rates. Currency exposure arises primarily as a result
of investments in the Eurozone, Japan, the United Kingdom
and the United States, so currency risk therefore arises from
fluctuations in the value of the Euro, Japanese Yen, British
Pound and US Dollar against the Australian Dollar. In order to
protect against foreign currency exchange rate movements,
the Group has entered into foreign currency derivatives.
In addition, the Group has exposure to foreign exchange risk
upon consolidation of its foreign currency denominated
controlled entities and materially mitigates this by designating
foreign currency derivatives as hedges of net investments in
foreign entities in equity to match its foreign currency
translation reserve exposure. Effectiveness is monitored on a
regular basis to ensure that the hedge remains between 80-
125% effective and any ineffective portion of the hedge is
recognised directly in the statement of comprehensive income.
The SPV entities hedge exposure to foreign currency risk
arising from issuing mortgage-backed securities in foreign
currencies. The currencies impacted are primarily the British
Pound, Euro and US Dollar. All derivatives in the SPV entities
are designated as cash flow hedges. These hedges are
effective and there is no material impact on the profit and loss.
The following table details the Group’s net exposure to foreign
currency as at the reporting date in Australian dollar
equivalent amounts:
30 June 2019
Financial assets
Financial liabilities
Foreign currency contracts and cross currency swaps
Net exposure in Australian dollars
30 June 2018
Financial assets
Financial liabilities
Foreign currency contracts and cross currency swaps
Net exposure in Australian dollars
The analysis in the currency risk table shows the impact on
the statement of comprehensive income and equity of a
movement in the Group’s major foreign currency exposure
exchange rates against the Australian dollar using the net
exposure at the balance date. All underlying exposures and
related hedges are included in the analysis.
A sensitivity of 10% has been applied as this reflects a
reasonable measurement given the current level of exchange
rates and the volatility observed on an historic basis. The
impact on profit and equity is post-tax at a rate of 30%.
GBP
$m
USD
$m
Euro
$m
JPY
$m
Other
$m
503.9
(5.8)
(497.0)
1.1
2,506.8
-
(2,506.6)
0.2
1,031.5
(3.2)
(1,019.1)
9.2
739.2
(11.9)
(730.6)
(3.3)
2,363.3
-
(2,353.4)
9.9
834.7
(8.2)
(828.0)
(1.5)
899.3
(419.0)
(486.1)
(5.8)
742.8
(399.4)
(331.8)
11.6
624.9
-
(624.3)
0.6
476.0
-
(473.8)
2.2
The risks faced and methods used in the sensitivity analysis are
the same as those applied in the comparative period. As
shown in the table on the following page, a 10% movement
in foreign currency exchange rates would have minimal impact
on the Group’s financial position.
93
Challenger Limited 2019 Annual Report
Note 18 Financial risk management (continued)
Currency risk (continued)
British Pound (GBP)
US Dollar (USD)
Euro (EUR)
Japanese Yen (JPY)
Other
Total
Movement in
variable against $
+10%
-10%
+10%
-10%
+10%
-10%
+10%
-10%
+10%
-10%
+10%
-10%
Profit/(loss)
30 June 2019
$m
0.1
(0.1)
-
-
0.7
(0.7)
-
-
-
-
0.8
(0.8)
Change in equity
30 June 2019
$m
0.1
(0.1)
-
-
0.7
(0.7)
(0.4)
0.4
-
-
0.4
(0.4)
Profit/(loss)
30 June 2018
$m
(0.4)
0.4
0.7
(0.7)
(0.1)
0.1
0.2
(0.2)
0.2
(0.2)
0.6
(0.6)
Change in equity
30 June 2018
$m
(0.4)
0.4
0.7
(0.7)
(0.1)
0.1
0.8
(0.8)
0.2
(0.2)
1.2
(1.2)
Credit default risk
Credit exposure by credit rating
The Group makes use of external ratings agencies (Standard &
Poor’s, Fitch, Moody’s or other reputable credit rating agency)
to determine credit ratings. Where a counterparty or debt
obligation is rated by multiple external rating agencies, the
Group will use Standard & Poor’s ratings where available. All
credit exposures with an external rating are also rated
internally and cross-referenced to the external rating, if
applicable. Where external credit ratings are not available,
internal credit ratings are assigned by appropriately qualified
and experienced credit personnel who operate separately from
the risk originators.
Each business unit is responsible for managing credit risks
that arise with oversight from a centralised credit risk
management team.
The table below provides information regarding the maximum
credit risk exposure of the Group in respect of the major
classes of financial assets by equivalent credit rating. The
maximum credit exposure is deemed to be the carrying value
of the asset not including any collateral or other credit
protection in place. The analysis classifies the assets according
to internal or external credit ratings. Assets rated investment
grade are those rated by Standard & Poor’s at BBB– or above,
with non-investment grade therefore being below BBB–.
Investment grade
AAA
$m
AA
$m
A
$m
Non-inv.
grade
$m
BBB
$m
Other
$m
Total
$m
30 June 2019
Cash and cash equivalents
Cash and cash equivalents – SPV
Receivables
Mortgage assets – SPV
Fixed income securities
Derivative assets
Total assets with credit exposures
30 June 2018
Cash and cash equivalents
Cash and cash equivalents – SPV
Receivables
Mortgage assets – SPV
Fixed income securities
Derivative assets
Total assets with credit exposures
725.4
66.5
16.5
431.1
7,530.8
-
8,770.3
741.7
97.3
26.4
555.4
7,293.5
-
8,714.3
-
-
12.5
144.5
3,022.7
611.9
3,791.6
-
-
26.3
186.9
1,548.9
347.1
2,109.2
-
-
212.4
222.2
2,191.6
60.3
2,686.5
-
-
212.8
237.9
1,805.5
24.9
2,281.1
-
-
21.5
55.4
2,629.5
14.6
2,721.0
-
-
23.5
59.7
2,579.4
3.6
2,666.2
-
-
3.7
7.9
2,112.1
75.7
2,199.4
-
-
2.0
5.9
1,893.6
45.5
1,947.0
94
-
-
313.4
(0.5)
725.4
66.5
580.0
860.6
115.8 17,602.5
762.5
428.7 20,597.5
-
-
-
145.5
(1.3)
741.7
97.3
436.5
1,044.5
160.8 15,281.7
421.1
305.0 18,022.8
-
Challenger Limited 2019 Annual Report
Note 18 Financial risk management (continued)
Credit default risk (continued)
Mortgage assets – SPV
Concentration risk
Mortgage assets – SPV are funded via securitised residential
mortgage-backed securities (RMBS). As a result, the Group is
not exposed to significant credit risk on these assets as this is
borne by the RMBS holder.
The credit risk framework includes an assessment of the
counterparty credit risk in each business unit and at a total
Group level. The Group has no significant concentrations of
credit risk at the statement of financial position date.
Collateral held over assets
Ageing and impairment of amortised cost financial assets
In the event of a default against any of the mortgages in any
SPV, the trustee has the legal right to take possession of the
secured property and sell it as a recovery action against
settlement of the outstanding account mortgage balance. At
all times of possession, the risks and rewards associated with
ownership of the property are held by the trustee on behalf of
the RMBS holder.
The table below gives information regarding the carrying value
of the Group’s financial assets measured at amortised cost.
The analysis splits these assets by those that are neither past
due nor impaired, those that are past due and not impaired
(including an ageing analysis), and those past due and
impaired at the statement of financial position date:
Amortised cost financial assets
30 June 2019
Receivables
Mortgage assets – SPV
Total receivables
30 June 2018
Receivables
Mortgage assets – SPV
Total receivables
Not past
due/not
impaired
$m
Past due but not impaired
0-1
months
$m
1-3
months
$m
3-6
months
$m
Past due
and
impaired
$m
Total
$m
580.0
742.9
1,322.9
436.2
923.5
1,359.7
-
44.8
44.8
-
50.2
50.2
-
29.0
29.0
0.1
37.8
37.9
-
14.5
14.5
0.2
11.5
11.7
-
29.4
29.4
580.0
860.6
1,440.6
-
21.5
21.5
436.5
1,044.5
1,481.0
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty
in raising funds to meet cash commitments associated with
financial instruments. This may result from either the inability
to sell financial assets at their fair values, a counterparty failing
on repayment of a contractual obligation, the inability to
generate cash inflows as anticipated or unexpected increase in
cash outflows.
The Group aims to ensure that it has sufficient liquidity to
meet its obligations on a short and medium-term basis. In
setting the level of sufficient liquidity, the Group considers
new business activities in addition to current contracted
obligations. It considers: minimum cash requirements;
collateral and margin call buffers; Australian Financial Services
Licence (AFSL) requirements; cash flow forecasts; associated
reporting requirements; other liquidity risks; and contingency
plans.
The basis of the approach to liquidity management is to target
sufficient liquidity to meet all cash requirements of the Group
over an ensuing 12 month period which ensures that the
regulatory guidelines set out in ASIC Regulatory Guide
166 Licensing: Financial requirements for holders of an AFSL
are met.
The Group aims to ensure that it has sufficient liquidity to
meet its obligations on a short, medium and long-term basis.
The Life liquidity management policy is approved by the CLC
Board and sets out liquidity targets and mandated actions
depending on actual liquidity levels relative to those targets.
Detailed forecast cash positions are reported regularly to the
CLC Asset Liability Committee (ALCo). From 1 July 2019, ALCo
is replaced by the Financial Risk Committee (FRC) and the
Investment Committee (IC). The IC is a committee of
investment professionals from within CLC and represents the
first line. The FRC is a committee of professionals mainly from
the Risk division that is independent from the investment team
of CLC. The FRC represents the second line for CLC. At the
reporting date, all requirements of the CLC Board approved
liquidity management policy were satisfied.
Maturity profile of undiscounted financial liabilities
The table on the following page summarises the maturity
profile of the Group’s undiscounted financial liabilities. This is
based on contractual undiscounted repayment obligations.
Totals differ to the amounts on the statement of financial
position by the amount of time value of money discounting
reflected in the statement of financial position values.
95
Challenger Limited 2019 Annual Report
Note 18 Financial risk management (continued)
Maturing profile of undiscounted financial liabilities
30 June 2019
Payables
Payables – SPV
Interest bearing financial liabilities
Interest bearing financial liabilities – SPV
External unit holders’ liabilities
Life investment contract liabilities
Life insurance contract liabilities1
Derivative liabilities
Total undiscounted financial liabilities1
30 June 2018
Payables
Payables – SPV
Interest bearing financial liabilities
Interest bearing financial liabilities – SPV
External unit holders’ liabilities
Life investment contract liabilities
Life insurance contract liabilities1
Derivative liabilities
Total undiscounted financial liabilities1
1 year or
less
$m
1,077.2
2.3
4,885.8
236.5
1,356.4
2,822.7
672.7
135.2
11,188.8
589.4
2.2
3,906.2
295.3
1,451.0
2,518.3
598.7
79.0
9,440.1
1-3
years
$m
3-5
years
$m
6.1
10.2
154.5
326.3
609.8
2,866.7
1,129.0
75.2
5,177.8
24.4
-
926.0
396.2
684.0
3,191.1
1,029.6
136.2
6,387.5
-
46.2
1,341.9
185.1
-
830.7
871.6
51.7
3,327.2
-
-
978.2
226.9
-
820.9
769.1
99.4
2,894.5
>5
years
$m
26.2
-
185.7
222.9
-
510.2
4,449.5
307.1
5,701.6
26.1
-
232.0
279.5
-
532.7
3,953.1
138.4
5,161.8
Total
$m
1,109.5
58.7
6,567.9
970.8
1,966.2
7,030.3
7,122.8
569.2
25,395.5
639.9
2.2
6,042.4
1,197.9
2,135.0
7,063.0
6,350.5
453.0
24,883.9
1 Disclosure of life insurance contract liabilities is not required under AASB 7 Financial Risk Management, for reference purposes they have been included. Refer to
Note 8 Life contract liabilities for further details.
Note 19 Fair values of financial assets and liabilities
Fair value determination and classification
Fair value reflects the price that would be received on sale of
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The
majority of the Group’s financial instruments are held in the
life insurance statutory funds of CLC and, as a result, are
required by AASB 1038 Life Insurance Contracts to be
designated at fair value through profit and loss where this is
permitted under AASB 9 Financial Instruments.
Financial instruments measured at fair value are categorised
under a three level hierarchy, reflecting the availability of
observable market inputs when estimating the fair value. If
different levels of inputs are used to measure a financial
instrument’s fair value, the classification within the hierarchy is
based on the lowest level that is significant to the fair value
measurement. The three levels are:
Level 1
Level 2
unadjusted quoted prices in active markets are the valuation inputs for identical assets or liabilities (i.e. listed
securities).
valuation inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly (as prices) or indirectly (derived from prices) are used.
Level 3
there are valuation inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The unobservable inputs into the valuation of the Group’s
Level 3 assets and liabilities are determined based on the best
information available, including the Group’s own assessment
of the assumptions that market participants would use in
pricing the asset or liability. Examples of unobservable inputs
are estimates about the timing and amount of cash flows,
discount rates, earnings multiples and internal credit ratings.
Valuation techniques
The majority of the Group’s listed and unlisted fixed income
securities, over-the-counter derivative financial instruments
and interest bearing liabilities including the subordinated debt
issuance are classified as Level 2. This recognises the availability
of a quoted price but not from an active market as defined by
the standard.
Fixed income securities where market observable inputs are
not available are classified Level 3. The Group’s derivative
financial instruments are traded over-the-counter so, whilst
they are not exchange traded, there is a market observable
price. All of the fixed income and government/semi-
government securities have prices determined by a market.
96
Note 19 Fair values of financial assets and liabilities (continued)
Challenger Limited 2019 Annual Report
Externally rated unlisted fixed income securities are valued by
applying market observable credit spreads on similar assets
with an equivalent credit rating and are classified as Level 2.
Internally-rated fixed income securities are Level 3 as the
determination of an equivalent credit rating is a significant
non-observable input.
Equity, infrastructure and property securities that are exchange
traded are generally classified as Level 1. Where quoted prices
are available, but are not from an active market, they are
classified as Level 2. If market observable inputs are not
available, they are classified as Level 3. Valuations can make
use of cash flow forecasts discounted using the applicable
yield curve, earnings-multiple valuations or, for managed
funds, the net assets of the trust per the most recent financial
report.
External unit holders’ liabilities are valued at the face value of
the amounts payable and classified as Level 2. The portion of
life investment contract liabilities classified as Level 2 represent
products or product options for which the liability is
determined based on an account balance, rather than a
discounted cash flow as applied to the rest of the portfolio.
Cash and cash equivalents are carried at amortised cost. To
determine a fair value where the asset is liquid or maturing
within three months, the fair value is approximate to the
carrying amounts. This assumption is applied to liquid assets
and the short-term elements of all other financial assets and
financial liabilities.
The mortgage SPVs have total equity attributable to residual
income unitholders (RIU) holders at amortised cost of
$0.2 million (2018: $0.3 million). The fair value of this RIU
holders’ asset is $62.4 million (2018: $73.7 million) and would
be classified as Level 3 in the fair value hierarchy.
Challenger Capital Notes 1 and 2 have carrying values of
$345.0 million and $460.0 million. The fair value of these
notes is $350.3 million and $485.7 million respectively and are
classified as Level 1 in the fair value hierarchy.
Valuation process
For financial instruments and investment properties
categorised within Level 3 of the fair value hierarchy, the
valuation process applied in valuing such instruments is
governed by the CLC Practice Note on Investment Asset and
Financial Liability Valuation. The Practice Note outlines the
Valuation Committee’s responsibilities in the valuation of
investment assets and financial liabilities for the purposes of
financial reporting. All significant Level 3 financial instruments
are referred to the Valuation Committee which generally
meets monthly, or more frequently if required.
All financial instruments and investment properties are
measured on a recurring basis. Refer Note 5 Financial assets –
fair value through profit and loss and Note 6 Investment and
development property for further details on the valuation
process applied to unlisted financial instruments and
investment properties.
The table on the following page summarises the financial
instruments and investment properties measured at fair value
at each level of the fair value hierarchy as at the statement of
financial position date.
97
Challenger Limited 2019 Annual Report
Note 19 Fair values of financial assets and liabilities (continued)
Valuation process (continued)
30 June 2019
Derivative assets
Fixed income securities1
Equity and other alternatives
Infrastructure investments1
Property securities
Investment and development property2
Total assets
Derivative liabilities
Interest bearing financial liabilities
External unit holders’ liabilities
Life investment contract liabilities
Total liabilities
30 June 2018
Derivative assets
Fixed income securities
Equity and other alternatives
Infrastructure investments1
Property securities
Investment and development property2
Total assets
Derivative liabilities
Interest bearing financial liabilities
External unit holders’ liabilities
Life investment contract liabilities
Total liabilities
Level 1
$m
Level 2
$m
-
-
6.9
210.6
-
-
217.5
-
836.0
-
-
836.0
-
-
38.4
165.8
240.4
-
444.6
0.6
818.2
-
-
818.8
761.9
15,604.8
1,025.7
234.9
-
155.8
17,783.1
569.1
443.1
1,966.2
58.1
3,036.5
420.5
13,347.0
738.3
204.4
-
452.2
15,173.8
452.3
454.6
2,135.0
64.9
3,106.8
Level 3
$m
0.6
1,997.7
299.6
421.6
127.8
3,573.4
6,420.7
0.1
12.5
-
6,699.6
6,712.2
0.6
1,934.7
366.6
413.7
142.3
3,583.0
6,440.9
0.1
14.8
-
6,570.4
6,585.3
Total
$m
762.5
17,602.5
1,332.2
867.1
127.8
3,729.2
24,421.3
569.2
1,291.6
1,966.2
6,757.7
10,584.7
421.1
15,281.7
1,143.3
783.9
382.7
4,035.2
22,047.9
453.0
1,287.6
2,135.0
6,635.3
10,510.9
1 The Group has exposures to structured entities (entities designed so that voting or similar rights are not the dominant factor in determining who controls the entity;
for example, when any voting rights relate purely to administrative tasks) via investments in asset-backed finance vehicles (where it may act as a lender or purchaser
of notes and/or residual income units) and securitisations (such as mortgages, finance leases and other types of collateralised vehicles). The Company assesses, at
inception and at each reporting date, whether a structured entity should be consolidated based on the accounting policy. The maximum exposure to loss is limited to
the reported fair value of the underlying securities plus any guaranteed undrawn commitments to the counterparties. At 30 June 2019 the carrying value of asset-
backed financing assets was $81.8 million (30 June 2018: $57.3 million) with $39.5 million undrawn commitments (30 June 2018: none) and securitisations was
$3,276.0 million (30 June 2018: $3,010.8 million) plus $81.2 million undrawn commitments (30 June 2018: $88.2 million).
2 Refer Note 6 Investment and development property for valuation techniques and key unobservable inputs.
Level 3 reconciliation
The following table shows a reconciliation of the movement in the fair value of financial instruments categorised within Level 3 of
the fair value hierarchy during the year:
Balance at the beginning of the year
Fair value gains/(losses)
Acquisitions
Maturities and disposals
Transfers to other categories1,2
Balance at the end of the year
Unrealised gains/(losses) included in the statement of
comprehensive income for assets and liabilities held at the
statement of financial position date
30 June 2019
Assets
$m
6,440.9
72.4
2,723.3
(2,772.3)
(43.6)
6,420.7
Liabilities
$m
6,585.3
312.0
2,354.0
(2,539.1)
-
6,712.2
30 June 2018
Assets
$m
6,521.6
317.7
2,463.7
(2,357.8)
(504.3)
6,440.9
Liabilities
$m
6,691.2
190.6
2,510.2
(2,806.7)
-
6,585.3
76.3
(312.0)
266.7
(177.1)
1 The Group transfers between levels of the fair value hierarchy when there is a change in the observability of the pricing inputs or a change to valuation methodology.
2 Transfers to/from other categories are due to changes in the market observability of inputs used in the valuation of financial instruments. There were no transfers
between Level 1 and Level 2 during the reporting period. There were $216.0 million (30 June 2018: $35.1 million) of transfers into Level 3 and $259.6 million
(30 June 2018: $539.4 million) of transfers out of Level 3 during the reporting period.
98
Challenger Limited 2019 Annual Report
Note 19 Fair values of financial assets and liabilities (continued)
Level 3 sensitivities
The following table shows the sensitivity of Level 3 financial instruments to a reasonably possible change in alternative
assumptions in respect of the non-observable inputs into the fair value calculation:
30 June 2019
Derivative assets
Derivative liabilities
Fixed income securities
Interest bearing financial liabilities
Level 3
value1
$m
Positive
impact
$m
Negative
impact
$m Valuation technique
0.6
(0.1)
1,997.7
(12.5)
0.1
0.2
10.5
0.2
(0.1) Discounted cash flow
0.1 Discounted cash flow
(37.2) Discounted cash flow
(0.4) Discounted cash flow
Equity and other alternatives
299.6
22.7
(24.2) Pricing model
Infrastructure investments
Property securities
Investment contract liabilities
421.6
127.8
(6,699.6)
Investment and development property 3,573.4
(291.5)
Total Level 3
30 June 2018
Derivative assets
Derivative liabilities
Fixed income securities
Interest bearing financial liabilities
0.6
(0.1)
1,934.7
(14.8)
4.9
6.4
3.5
166.7
215.2
0.1
0.3
10.2
-
(4.9)
Discounted cash flow,
External financial report
Market capitalisation,
(6.4)
Discounted cash flow
(3.5) Discounted cash flow
Market capitalisation,
Discounted cash flow
(152.7)
(229.3)
(0.1) Discounted cash flow
(0.2) Discounted cash flow
(77.1) Discounted cash flow
- Discounted cash flow
Equity and other alternatives
366.6
25.5
(27.5) Pricing model
Infrastructure investments
Property securities
Investment contract liabilities
413.7
142.3
(6,570.4)
7.3
7.1
3.6
Investment and development property 3,583.0
(144.4)
Total Level 3
151.3
205.4
(7.2)
Discounted cash flow,
External financial report
Market capitalisation,
(7.1)
Discounted cash flow
(3.6) Discounted cash flow
Market capitalisation,
Discounted cash flow
(138.6)
(261.1)
Reasonably possible change
in non-observable input2,3
Primarily credit spreads
Primarily credit spreads
Primarily credit spreads
Primarily credit spreads
Earnings multiple,
Mortality rate
Primarily discount rate on cash
flow models
Primarily capitalisation rate
Primarily expense assumptions
Primarily capitalisation rate
Primarily credit spreads
Primarily credit spreads
Primarily credit spreads
Primarily credit spreads
Earnings multiple,
Mortality rate
Primarily discount rate on cash
flow models
Primarily capitalisation rate
Primarily expense assumptions
Primarily capitalisation rate
1 The fair value of the asset or liability would increase/decrease if the credit spread, discount rate or expense assumptions decrease/increase or if the other inputs
increase/decrease.
2 Specific asset valuations will vary from asset to asset as each individual industry profile will determine appropriate valuation inputs to be utilised.
3 The effect of a change to reflect a reasonably possible alternative assumption was calculated by adjusting the credit spreads by 50bps, discount rates by between
50bps – 100bps, changing the valuation of the unlisted schemes by 5% and adjusting the expense assumption allocation splits by 10%.
Note 20 Collateral arrangements
Accounting policy
CLC receives collateral, where it is considered necessary, when
entering into certain financial arrangements. The amount of
collateral required is subject to management’s credit
evaluation of the counterparty which is performed on a case-
by-case basis. Cash received of $415.1 million (30 June 2018:
$173.8 million) from third parties as collateral is recorded in
payables. CLC is not permitted to sell or repledge financial or
non-financial assets held as collateral in the absence of default
by the owner of the collateral.
Collateral pledged as security
Cash
Other financial assets1
Total collateral pledged
CLC is required to pledge collateral, as part of the standard
terms of transactions, when entering into certain financial
arrangements. Cash paid to third parties as collateral is
recorded in receivables. Other financial assets transferred as
collateral are not derecognised from the statements of
financial position as the risks and rewards of ownership remain
with CLC. At the balance sheet date, the fair value of cash and
financial assets pledged are as follows:
30 June
2019
$m
220.1
5,991.0
6,211.1
30 June
2018
$m
241.3
5,110.8
5,352.1
99
1 Includes assets sold under repurchase agreements. Please refer Note 13 Interest bearing financial liabilities for more information.
Challenger Limited 2019 Annual Report
Section 6: Group structure
This section provides details and disclosures relating to the parent entity of the Group, controlled entities, investments in
associates and any acquisitions and/or disposals of businesses in the year. Disclosure for related parties is also provided in
this section.
Note 21 Parent entity
Company
Statement of comprehensive income for the year ended
Dividends and interest from controlled entities
Finance costs
Profit before income tax
Income tax benefit
Total comprehensive income for the year
Statement of financial position as at
Assets
Cash and cash equivalents
Receivables
Financial asset – fixed income securities1
Current tax asset
Deferred tax assets
Investment in controlled entities
Total assets
Liabilities
Payables
Interest bearing financial liabilities
Current tax liability
Total liabilities
Net assets
Equity
Contributed equity
Share-based payments reserve
Retained earnings
Total equity
30 June
2019
$m
30 June
2018
$m
322.7
(36.5)
286.2
3.3
289.5
2.8
1,224.1
805.0
6.0
-
2,088.9
4,126.8
344.7
796.5
-
1,141.2
2,985.6
2,155.3
(113.6)
943.9
2,985.6
390.5
(35.8)
354.7
6.5
361.2
2.5
1,393.0
805.0
-
2.4
2,067.5
4,270.4
548.9
793.0
1.0
1,342.9
2,927.5
2,148.5
(92.3)
871.3
2,927.5
1 Financial asset – fixed income securities relates to the subscription by the Company of notes issued by CLC that qualify as Additional Tier 1 capital of CLC.
Refer Note 26 Contingent liabilities, contingent assets and credit commitments for details of any contingent liabilities applicable to the parent entity.
100
Challenger Limited 2019 Annual Report
Note 22 Controlled entities
The table below presents the hierarchical structure of Challenger Limited showing its controlled entities that form the main
composition of the Group as at 30 June 2019:
Entity name
Challenger Limited
Challenger Group Holdings Limited
Challenger Group Services Pty Limited
Challenger Treasury Limited
Challenger Japan Holdings Pty Limited
Challenger Funds Management Holdings Pty Limited
Fidante Partners Holdings Pty Limited
Fidante Partners Holdings Europe Limited (incorporated in the UK)
Challenger Investment Partners Limited
Challenger Life Company Holdings Limited
Challenger Life Company Limited
Challenger Wholesale Finance Holdings Pty Limited
Principal activity
Corporate
Corporate
Corporate
Corporate
Funds management
Funds management
Funds management
Funds management
Life
Life
Life
Challenger’s percentage holding of the above entities is 100% and all are incorporated in Australia unless otherwise stated.
Entities with non-controlling interests represent net assets of $22.5 million (30 June 2018: $0.4 million).
Accounting policy
Principles of consolidation
Controlled entities are consolidated from the date on which
control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out
of the Group. The acquisition method of accounting is applied
on acquisition or initial consolidation. This method ascribes fair
values to the identifiable assets and liabilities acquired. The
difference between the net fair value acquired and the fair
value of the consideration paid (including the fair value of any
pre-existing investment in the entity) is recognised as either
goodwill on the statement of financial position or a discount
on acquisition through the statement of comprehensive
income. There have been no material acquisitions or disposals
of controlled entities during the year.
Note 23 Investment in associates
The financial statements consolidate the financial information
of controlled entities. An entity is controlled when the
Company is exposed, or has rights, to variable returns from its
involvement with the entity and has the ability to affect those
returns through its power over the entity. The statement of
financial position date and the accounting policies of
controlled entities are consistent with those of the Company.
The Company assesses, at inception and at each reporting
date, whether an entity should be consolidated based on the
accounting policy.
All intercompany balances and transactions, including
unrealised profits arising from intra-group transactions, are
eliminated in full. Non-controlling interests represent the share
in the net assets of subsidiaries attributable to equity interests
not owned directly or indirectly by the Group.
Name of company
Alphinity Investment Management Pty Ltd
Ardea Investment Management Pty Ltd
Avenir Capital Pty Ltd
Bentham Asset Management Pty Ltd
Eiger Capital Pty Ltd
FME Asset Management Ltd
Greencape Capital Pty Ltd
Lennox Capital Partners Pty Ltd
Merlon Capital Partners Pty Ltd
Novaport Capital Pty Ltd
Resonance Asset Management Ltd2
Structured Credit Research LLP
Wavestone Capital Pty Ltd
Whitehelm Capital Pty Ltd
Wyetree Asset Management Pty Ltd
Total investment in associates3
1 Represents ownership and voting rights percentages.
2 Challenger is deemed to have significant influence.
3 Investment in associates is all considered non-current.
Principal activity
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Funds Management
Country of
domicile
Australia
Australia
Australia
Australia
Australia
UK
Australia
Australia
Australia
Australia
UK
UK
Australia
Australia
UK
30 June
2019
%1
30
30
40
49
40
20
50
40
30
49
-
50
33
30
49
30 June
2018
%1
30
30
40
49
-
-
50
40
30
49
-
50
33
30
49
30 June
2019
$m
1.3
3.1
2.7
0.7
0.8
2.0
34.2
2.1
1.7
0.2
0.7
0.4
2.3
4.9
1.0
58.1
30 June
2018
$m
2.0
3.2
1.6
0.7
-
-
39.8
1.6
1.6
0.5
0.7
2.2
2.5
5.0
1.0
62.4
101
Challenger Limited 2019 Annual Report
Note 23 Investment in associates (continued)
30 June
2019
$m
30 June
2018
$m
62.4
2.2
22.2
(28.7)
-
-
58.1
22.2
36.3
1.8
38.1
18.5
1.8
20.3
17.8
53.5
-
30.0
(18.6)
(0.6)
(1.9)
62.4
30.0
35.9
1.2
37.1
16.9
1.3
18.2
18.9
there has been a change recognised directly in the associate’s
equity, the Group recognises its share of any changes in the
statement of changes in equity.
Investments in entities held to back investment contract
liabilities and life insurance contract liabilities are exempt from
the requirement to apply equity accounting and have been
designated on initial recognition as financial assets measured
at fair value through profit or loss.
Key estimates and assumptions
An assessment is performed at each statement of financial
position date to determine whether there is any indication of
impairment and whether it is necessary to recognise any
impairment loss against the carrying value of the net
investment in associates.
The Group determines the dates of obtaining or losing
significant influence of another entity based on an assessment
of all pertinent facts and circumstances that affect the ability
to significantly influence the financial and operating policies of
that entity.
Movements in carrying amount of investment in associates
Opening balance
Acquisition of investment in associates
Share of associates’ net profit
Dividends and net capital redemptions
Reclassification as equity security
Impairment of investment in associates
Carrying amount at the end of the year
Share of associates’ profit or loss
Profit after tax for the year
Share of the associates’ statement of financial position
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Investments in associates held by Challenger Life
Company (CLC)
CLC holds a 33.3% equity interest in Assetsecure Pty Ltd and
is deemed to have significant influence. The investment
($8.0 million) is disclosed in Note 5 Financial assets – fair value
through profit and loss (Shares in listed and unlisted
corporations).
Accounting policy
Associates are entities over which the Group has significant
influence of the entities’ financial and operating policies but
not control. Investments in associates, other than those
backing life contracts, are accounted for under the equity
method whereby investments are carried at cost adjusted for
post-acquisition changes in the Group’s share of the net assets
of the entity. Investments in associates that back life contracts
are designated as financial assets at fair value through profit
and loss.
Associates’ financial reports are used to apply the equity
method and both the financial year end date and accounting
policies of associate entities are consistent with those of the
Group.
The consolidated statement of comprehensive income reflects
the share of the results of operations of associates. Where
102
Challenger Limited 2019 Annual Report
Note 24 Related parties
Key management personnel
The Directors and key executives of Challenger Limited during the reporting period were as follows:
Directors
Peter Polson
Richard Howes (Appointed 2 January 2019)
Brian Benari (Retired 1 January 2019)
Graham Cubbin (Retired 26 October 2018)
Steven Gregg
John M Green
JoAnne Stephenson
Duncan West (Appointed 10 September 2018)
Melanie Willis
Leon Zwier
Key executives
Richard Howes (Appointed 2 January 2019)
Brian Benari (Retired 1 January 2019)
Angela Murphy (Appointed 12 December 2018)
Chris Plater
Ian Saines
Andrew Tobin
Independent Chair
Managing Director and Chief Executive Officer
Former Managing Director and Chief Executive Officer
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Managing Director and Chief Executive Officer
Former Managing Director and Chief Executive Officer
Chief Executive, Distribution, Product and Marketing
Chief Executive & Chief Investment Officer, Life
Chief Executive, Funds Management
Chief Financial Officer
Controlled entities and associates
Unless an exception applies under relevant legislation,
transactions between commonly-controlled entities within the
Group (except where otherwise disclosed) are conducted on
an arm’s length basis under normal commercial terms and
conditions. The Group’s interests in controlled entities are
disclosed in Note 22 Controlled entities.
Other related parties
During the year, there were transactions between the Group
and Challenger-sponsored managed funds for the provision of
investment management, transaction advisory and other
professional services.
Transactions were also entered into between the Group and
associated entities (refer to Note 23 Investment in associates)
for the provision of distribution and administration services.
The Group earned fee income during the year of $46.0 million
(2018: $45.8 million) from transactions entered into with non-
controlled funds and associates. Transactions are conducted
on an arm’s length basis under normal commercial terms and
conditions.
Loans to Directors and key executives
There were no loans made to Directors or key executives as at
30 June 2019 (30 June 2018: nil).
Group products
From time to time, Directors or key executives of the Company
or their related entities may purchase products from the
Group. These purchases are on the same arm’s length terms
and conditions as those offered to other employees or
customers.
Total remuneration of Key Management Personnel and Non-Executive Directors
Short-
term
benefits
$
Post-
employment
benefits
$
Share-based
payments
$
Other
benefits
$
Termination
benefits
$
KMP and Non-Executive Directors
Non-Executive Directors
2019
2018
KMP
2019
2018
1,812,945
1,715,860
100,580
82,580
-
-
-
-
6,766,774
7,373,153
103,870 7,722,428
8,815,992
100,245
354,813
644,673
All KMP and Non-Executive Directors
2019
2018
8,579,719
9,089,013
204,450 7,722,428
8,815,992
182,825
354,813
644,673
-
-
-
-
-
-
Total
$
1,913,525
1,798,440
14,947,885
16,934,063
16,861,410
18,732,503
103
Challenger Limited 2019 Annual Report
Section 7: Other items
This section provides information that is less significant in understanding the financial performance and position of the
Group perhaps due to lack of movement in the amount or the overall size of the balance. Nevertheless, these items assist
in understanding the Group or are required under Australian or International Accounting Standards, the Corporations Act
2001 and/or the Corporations Regulations.
Note 25 Goodwill and other intangible assets
Goodwill
Other intangible assets
Software at cost
Less: accumulated amortisation
Revenue sharing agreement
Less: accumulated amortisation
Foreign exchange gain
Total other intangible assets
Balance at the beginning
of the year
Additions
Disposal of operation1
Impairment
Amortisation expense
Foreign exchange gain
Balance at the end of
the year
30 June
2019
$m
557.3
30 June
2018
$m
571.6
25.7
(7.7)
18.0
5.8
(0.5)
0.6
5.9
23.9
19.6
(4.1)
15.5
5.8
(0.1)
0.1
5.8
21.3
Goodwill
Software
Revenue sharing
agreement
30 June
2019
$m
30 June
2018
$m
30 June
2019
$m
30 June
2018
$m
30 June
2019
$m
30 June
2018
$m
571.6
-
(14.3)
-
-
-
571.6
-
-
-
-
-
15.5
6.1
-
-
(3.6)
-
16.8
14.5
-
(11.7)
(4.1)
-
5.8
-
-
-
(0.4)
0.5
557.3
571.6
18.0
15.5
5.9
5.8
-
-
-
(0.1)
0.1
5.8
1 Disposal of infrastructure business operation (Oikos Storage Limited) within the Life CGU.
combination, irrespective of whether other assets or liabilities
of the Group are assigned to those units or groups of units.
Each unit, or group of units, to which the goodwill is allocated
represents the lowest level within the Group at which the
goodwill is monitored for internal management purposes.
Impairment is determined by assessing the recoverable amount
of the CGU (or group of CGUs) to which the goodwill relates.
Accounting policy
Goodwill
Goodwill acquired in a business combination is initially
measured at cost, being the excess of the fair value of the
consideration for the business combination over the Group’s
interest in the net fair value of the acquiree’s identifiable
assets, liabilities and contingent liabilities. Following initial
recognition, goodwill is measured at cost less any accumulated
impairment losses.
For the purpose of impairment testing, goodwill acquired in a
business combination is, from the acquisition date, allocated to
each of the Group’s cash generating units (CGU), or groups of
CGUs, that are expected to benefit from the synergies of the
104
Note 25 Goodwill and other intangible assets (continued)
Challenger Limited 2019 Annual Report
Accounting policy (continued)
When the recoverable amount of the CGU (or group of CGUs)
is less than the carrying amount, an impairment loss is
recognised and allocated first to reduce the carrying amount
of any goodwill allocated to that CGU, then to reduce the
carrying amount of the other assets in the unit on a pro rata
basis. Impairment losses recognised for goodwill are not
subsequently reversed.
CGUs within the Group are predominantly business
operations.
When goodwill forms part of a CGU (or group of CGUs) and
an operation within that unit is disposed of, the goodwill
associated with the operation disposed of is included in the
carrying amount of the operation when determining the gain
or loss on disposal of the operation. Goodwill disposed of in
this manner is measured based on the relative values of
the operation disposed of and the portion of the CGU
retained.
Other intangible assets
Other intangible assets acquired are recorded at cost less
accumulated amortisation and impairment losses. The cost of
an intangible asset acquired in a business combination is its
fair value as at the date of acquisition.
Amortisation is calculated based on the timing of projected
cash flows over the estimated useful lives.
Certain internal and external costs directly incurred in
acquiring and developing software have been capitalised and
are being amortised on a straight line basis over their
useful lives.
Leases, where the lessor retains substantially all the risk and
benefits of ownership, are classified as operating leases. Initial
direct costs incurred in negotiating an operating lease are
added to the carrying amount of the leased asset and
recognised as an expense over the term of the lease on the
same basis as the lease income. Incentives received on entering
into operating leases are recognised as liabilities and are
amortised over the life of the lease.
Where the Group acquires, as part of a business combination,
an operating lease over land, the fair value of this lease is
recognised separately from goodwill. This intangible asset is
recorded at fair value less accumulated amortisation.
Amortisation is calculated using the straight line method over
the effective life of the lease (in this case, 25 years).
Key estimates and assumptions
Goodwill recoverable amounts
The Group assesses whether goodwill is impaired at least
annually in accordance with its accounting policy. The
recoverable amount of each CGU is determined based on
value in use calculations, that utilise cash flow projections
based on financial forecasts approved by senior management
which cover an appropriate time horizon.
The discount rate is based on a number of factors. The
relevant assumptions in deriving the value of the CGU are
as follows:
• budgeted gross margins, being the average gross margins
achieved in the year ended immediately preceding the
budgeted year, adjusted for the expected impact of
competitive pressure on margins and expected efficiency
improvements;
• bond rate, taken as the yield on a government bond at the
beginning of the budgeted year; and
• growth rates, which are consistent with long-term trends in
the industry segments in which the businesses operate.
The derived values in use for each CGU are in excess of the
carrying values of goodwill.
Sensitivity to change in assumptions
Management is of the view that reasonable changes in the key
assumptions, such as an increase in the discount rate by 1% or
a change in cash flow of 5%, would not cause the respective
recoverable amounts for each CGU to fall short of the carrying
amounts as at 30 June 2019. All goodwill is non-current.
Other intangible assets amortisation
Useful lives of intangible assets used in the calculation
of the amortisation expense are examined on an annual
basis and where applicable, adjustments are made on a
prospective basis.
Intangible Useful Life Depreciation method
Goodwill
Indefinite
Not applicable
Straight line basis over its useful
life, usually a period of five years
3-10 years
Software
Revenue
sharing
agreement 15 years
The life of the investment has been
assessed as being 15 years
Impairment testing of goodwill
The following CGUs represent the carrying amounts of
goodwill:
30 June
2019
$m
429.7
CGU
Life
Funds
Management 127.6
557.3
Total
Discount rate
30 June
2018
$m
444.0
30 June
2019
%
10.0
30 June
2018
%
10.5
Cash
flow
horizon
(years)
5
127.6
571.6
10.0
10.5
5
105
Challenger Limited 2019 Annual Report
Note 26 Contingent liabilities, contingent assets and credit commitments
Warranties
Contingent future commitments
Over the course of its corporate activity the Group has given,
as a seller of companies and as a vendor of assets, including
real estate properties, warranties to purchasers on several
agreements that are still outstanding at 30 June 2019. Other
than noted below, at the date of this report no material claims
against these warranties have been received by the Group.
Parent entity guarantees and undertakings
The Company has extended the following guarantees and
undertakings to entities in the Group:
1. A guarantee supporting the corporate banking facility and
certain other financial commitments, such as hedging
arrangements;
2. Letters of support in respect of certain subsidiaries in the
normal course of business. The letters recognise the
Company’s intention to provide support to those
subsidiaries so that they can continue to meet their
obligations;
3. Australian Financial Services Licence deeds of undertaking
as an eligible provider; and
4. Guarantees to support contractual commitments on
warranties to certain third parties.
Third party guarantees
Bank guarantees have been issued by third party financial
institutions on behalf of the Group and its subsidiaries for items
in the normal course of business, such as rental contracts. The
amounts involved are not considered to be material to the Group.
CLC has made capital commitments to external counterparties
for future investment opportunities such as development or
investment purchases. As at 30 June 2019 there are potential
future commitments totalling $398.0 million (30 June 2018:
$408.8 million) in relation to these opportunities. The Group
has made capital commitments to associates to subscribe for
up to $10.0 million (30 June 2018: $10.5 million) of non-
redeemable preference shares to enable them to meet their
working capital requirements. Contractual obligations for
future property repairs and maintenance are in place but
cannot be quantified until required.
Subsidiary guarantees
CLC has provided a guarantee to a third party regarding the
performance of its subsidiary in respect of certain reinsurance
arrangements.
Contingent tax assets and liabilities
In the normal course of business, the Group has interactions
with the ATO in relation to the taxation treatment of various
matters. Any potential tax liability resulting from these
interactions is only provided for when it is probable that an
outflow will occur and a reliable estimate of the amount can
be made.
Analysis of credit commitments
Non-cancellable operating leases – Group as lessee
Amounts due in less than one year
Amounts due between one and two years
Amounts due between two and five years
Amounts due in greater than five years
Total operating leases – Group as lessee
Contracted capital expenditure
Amounts due in less than one year
Amounts due between one and two years
Amounts due between two and five years
Amounts due in greater than five years
Total capital expenditure commitments
Non-cancellable operating leases – Group as lessor
Amounts due in less than one year
Amounts due between one and two years
Amounts due between two and five years
Amounts due in greater than five years
Total operating leases – Group as lessor
Other contracted commitments
Amounts due in less than one year
Total other contracted commitments
Net commitments owed to Group
106
30 June
2019
$m
30 June
2018
$m
9.1
8.2
22.3
32.6
72.2
32.1
19.8
0.8
-
52.7
8.2
8.1
21.5
38.4
76.2
233.3
51.7
30.1
-
315.1
(223.7)
(214.7)
(549.1)
(789.0)
(1,776.5)
(248.8)
(227.4)
(593.2)
(1,137.7)
(2,207.1)
15.9
15.9
54.0
54.0
(1,635.7)
(1,761.8)
Challenger Limited 2019 Annual Report
Note 26 Contingent liabilities, contingent assets and credit commitments
(continued)
Other information
Group as lessor
In the normal course of business, the Group enters into various
contracts that could give rise to contingent liabilities in relation
to performance obligations under those contracts. The
information usually required by Australian Accounting
Standards is not disclosed for a number of such contracts on
the grounds that it may seriously prejudice the outcome of the
claims. At the date of this report, significant uncertainty exists
regarding any potential liability under these claims.
Operating leases
Group as lessee
Investment properties owned by the Group are leased to third
parties under operating leases. Lease terms vary between
tenants and some leases include percentage rental payments
based on sales volume.
Contracted capital expenditure commitments
These represent amounts payable in relation to capital
expenditure commitments contracted for at the statement of
financial position date but not recognised as liabilities. They
primarily relate to the investment property portfolio and
property, plant and equipment.
The Group has entered into commercial operating leases for
the rental of properties where it is not in the best interests of
the Group to purchase these properties. These leases have
terms ranging between one and 12 years with renewal terms
included in the contracts. Renewals are at the specific option
of the entity that holds the lease.
Other contracted commitments
This represents amounts payable in relation to fitout
commitments and acquisition of investment properties that
have exchanged prior to the balance date and will settle
subsequent to the balance date.
Note 27 Employee entitlements
Annual leave
Long service leave
Employee1 entitlements provision
1 The total number of employees of the Group at 30 June 2019 was 687 (30 June 2018: 676) on a full-time equivalent (FTE) basis.
30 June
2019
$m
5.9
7.2
13.1
30 June
2018
$m
5.3
7.4
12.7
Accounting policy
Superannuation funds
Obligations for contributions to superannuation funds are
recognised as an expense in the statement of comprehensive
income as they are incurred. The Group does not hold or pay
into any defined benefit superannuation schemes on behalf of
employees.
Wages, salaries, annual leave and non-monetary benefits
Liabilities for wages and salaries, including non-monetary
benefits and annual leave expected to be settled wholly within
12 months of the statement of financial position date, are
recognised in respect of employees’ services up to the
statement of financial position date. They are measured at the
amounts expected to be paid when the liabilities are settled.
Liabilities for accumulated sick leave are recognised when the
leave is taken and are measured at the rates paid or payable.
Long service leave
A liability for long service leave is recognised as the present
value of estimated future cash outflows to be made in respect
of services provided by employees up to the statement of
financial position date. The estimated future cash outflows are
discounted using yields from Australian corporate bonds which
have durations to match, as closely as possible, the estimated
future cash outflows.
Factors which affect the estimated future cash outflows such
as expected future salary increases, experience of employee
departures and period of service, are included in the
measurement.
Share-based payment transactions
Long-term equity-based incentive plan
The Group has an employee share incentive plan for the
granting of non-transferable share rights to executives and
senior employees. Shares in the Company held by the
employee share trust are classified as Treasury shares and
presented in the statement of financial position as a deduction
from equity.
Employees of the Group receive remuneration in the form of
share-based payment transactions, whereby employees render
services in exchange for shares or rights over shares (equity-
settled transactions).
The cost of equity-settled transactions with employees is
measured by reference to the fair value at the date at which
they are granted. The fair value is determined using an option
pricing model.
107
Challenger Limited 2019 Annual Report
Note 27 Employee entitlements (continued)
Accounting policy (continued)
Share-based payment transactions (continued)
Employee share acquisition plan
In accordance with Australian Accounting Standards, the cost
of equity-settled transactions is recognised in the statement of
comprehensive income, together with a corresponding
increase in equity, over the period in which the performance
conditions are fulfilled, ending on the date on which the
relevant employees become fully entitled to the award
(vesting date).
At the Company level, the cost of Treasury shares is recognised
as a reduction in equity. On vesting of the award they are
subsequently recognised as an increase in equity and a
reduction in share-based payment reserve at an average
acquisition price.
The cumulative expense or investment recognised for equity-
settled transactions at each statement of financial position
date reflects the extent to which the vesting period has expired
and the best estimate of the number of awards that will
ultimately vest.
No adjustment is made for the likelihood of market
performance conditions being met as the effect of these
conditions is included in the determination of fair value at
grant date.
Where the terms of an equity-settled award are modified, as a
minimum an expense is recognised as if the terms had not
been modified. In addition, an expense is recognised for any
increase in the value of the transaction as a result of the
modification, as measured at the date of modification.
Where an equity-settled award is cancelled during the vesting
period (other than an award cancelled when the vesting
conditions are not satisfied), it is treated as if it had vested on
the date of cancellation, and any expense not yet recognised
for the award is recognised immediately.
However, if a new award is substituted for the cancelled
award, and designated as a replacement award on the date
that it is granted, the cancelled and new awards are treated as
if they were a modification of the original award.
Share-based compensation benefits are provided to employees
via the Challenger Performance Plan (CPP). The Group has
formed a trust to administer the Group’s employee share
acquisition plan (CPP Trust).
The CPP Trust is consolidated, as the substance of the
relationship is that the trust is controlled by the Group.
Through contributions to the CPP Trust, the Group typically
purchases shares in the Company on market. Shares acquired
are held by the CPP Trust, are disclosed as Treasury shares and
are deducted from contributed equity.
In addition to shares held by the CPP Trust, the Group has
entered into forward purchase agreements (CPP deferred
share purchases) to hedge unvested performance share rights.
The CPP deferred share purchase agreements have exercise
dates that broadly match the vesting dates of the performance
rights issued by the CPP and they require the delivery of
Challenger Limited shares to the CPP Trust, by a third party,
for the contracted price. The shares to be purchased under
these agreements are treated as Treasury shares from the date
of the agreement.
In such deferred contracts, changes in the fair value arising
from variations in market rates do not affect the amount of
cash to be paid or the number of Challenger shares to be
received, and these contracts are classified as equity
instruments. Changes in the fair value of an equity instrument
are not recognised in the financial statements. The liability to
the third party is recorded on the balance sheet at present
value and the discount is unwound through the statement of
comprehensive income over the duration of the contract.
Deferred performance share rights (DPSRs)
This instrument is a performance right which gives a right to a
fully-paid share in the Company at the end of the vesting period.
The vesting period is typically between one and three years on
existing awards.
The table below sets out the details of the DPSRs granted
under the CPP during 2019 and movements on previous
issues.
Latest
date for
vesting1
Grant date
11 Sep 18 01 Sep 21
11 Sep 18 01 Sep 20
11 Sep 18 01 Sep 19
11 Sep 17 01 Sep 20
11 Sep 17 01 Sep 19
11 Sep 17 01 Sep 18
09 Jun 17
01 Sep 19
12 Sep 16 01 Sep 18
12 Sep 16 01 Sep 17
13 Sep 15 01 Sep 17
Total
Reference
price
$
10.368
10.368
10.368
12.264
12.264
12.264
12.596
9.210
9.210
6.989
Fair value
at grant
$
9.66
9.94
10.22
11.39
11.73
12.07
11.79
8.26
8.59
6.44
Outstanding
at
1 July 2018
-
-
-
433,042
432,217
432,217
9,758
415,410
491,127
564,572
2,778,343
Granted
during
the year
493,789
454,730
454,727
-
-
-
-
-
-
-
1,403,246
Vested
during the
year
-
(4,122)
(4,122)
-
(36,974)
(430,991)
-
-
(489,939)
(564,572)
(1,530,720)
Expired
during the
year
(33,802)
(12,752)
(12,751)
(41,559)
(11,201)
(1,226)
(7,319)
(38,541)
(1,188)
-
(160,339)
Outstanding
at
30 June 2019
459,987
437,856
437,854
391,483
384,042
-
2,439
376,869
-
-
2,490,530
1 At the date of vesting, fully-paid shares are transferred to the individual and released from the CPP Trust.
108
Challenger Limited 2019 Annual Report
Note 27 Employee entitlements (continued)
Accounting policy (continued)
Hurdled performance share rights (HPSRs)
This instrument is a performance share right which gives a
right to a fully-paid share in the Company at certain vesting
dates, subject to the achievement of performance conditions
based on total shareholder returns (TSR). The HPSRs are
awarded based on a range of criteria reflecting, in addition to
current year performance, the longer-term ability for an
employee to add significant value to Challenger and for
retention purposes. The award of HPSRs ensures longer-term
alignment of interests between Challenger and its employees.
The vesting period for awards granted prior to 30 June 2014 is
typically over four years with three vesting parcels at the end
of the second, third and fourth years. Effective 1 July 2014,
the Board determined that any new HPSR awards will not be
eligible to vest until the third anniversary following grant.
Subject to continued employment and meeting the absolute
TSR performance target, two thirds of a HPSR award will be
eligible to commence vesting on the
third anniversary and the final third on the fourth anniversary
following grant. This change has the effect of increasing the
vesting period.
To the extent that the absolute TSR performance targets are
not satisfied for a particular tranche of award, unvested HPSRs
have the opportunity to vest at the end of the following
tranche’s vesting period, subject to the higher absolute TSR
performance requirements which reflect another year of
compound growth. Unvested awards have the opportunity to
vest on the fifth anniversary following grant. Any unvested
awards lapse at the end of the fifth anniversary following
grant. This approach is applied to ensure that key
management personnel and employees are motivated to
deliver strong long-term performance. HPSRs are converted to
ordinary fully paid shares upon vesting.
The table below sets out details of the HPSRs granted under
the CPP during 2019 and movements on previous issues:
Expected
date for
vesting1
Grant date
11 Sep 18 01 Sep 22
11 Sep 18 01 Sep 21
11 Sep 17 01 Sep 21
11 Sep 17 01 Sep 20
01 Sep 20
09 Jun 17
09 Jun 17
01 Sep 19
12 Sep 16 01 Sep 20
12 Sep 16 01 Sep 19
13 Sep 15 01 Sep 19
13 Sep 15 01 Sep 18
04 Mar 15 01 Sep 18
16 Sep 14 01 Sep 18
Total
Reference
price
$
11.720
11.720
12.732
12.732
9.017
9.017
9.017
9.017
7.013
7.013
6.439
7.698
Fair value
at grant
$
3.94
4.56
5.42
6.11
8.55
9.71
3.80
4.33
2.84
3.27
3.34
2.96
Outstanding
at
1 July 2018
-
-
713,971
1,266,646
14,376
25,317
862,144
1,513,254
1,102,267
1,914,609
74,850
674,892
8,162,326
Granted
during
the year
829,121
1,432,709
-
-
-
-
-
-
-
-
-
-
2,261,830
Vested during
the year
-
-
-
-
-
-
-
-
-
(1,914,609)
(74,850)
(674,892)
(2,664,351)
Expired
during the
year
(34,646)
(59,866)
(60,952)
(108,133)
(10,782)
(18,988)
(55,261)
(96,994)
(97,270)
-
-
-
(542,892)
Outstanding
at
30 June 2019
794,475
1,372,843
653,019
1,158,513
3,594
6,329
806,883
1,416,260
1,004,997
-
-
-
7,216,913
1 At the date of vesting, fully-paid shares are transferred to the individual and released from the CPP Trust.
Key estimates and assumptions
Share-based payments
The Group measures the cost of equity-settled transactions
with employees granted during the year by reference to the
fair value of the share rights at the date at which they are
granted. The fair values are determined by independent
external valuers using a Black-Scholes model for DPSRs and a
Monte Carlo simulation model for HPSRs which utilises the TSR
share price hurdles. Key inputs into the valuation models for
equity awards granted during the year are as follows:
Input
Dividend yield (%)
Risk-free rate (%)
Volatility2 (%)
Valuation ($)
11 Sep 18
DPSR1
2.80
2.00–2.02
n/a
10.22–9.66
11 Sep 18
HPSR1
2.80
2.00–2.20
26
4.56–3.94
1 Staggered deferred vesting applies to these grants.
2 Forecast volatility rate implied from historic trend.
109
Challenger Limited 2019 Annual Report
Note 28 Remuneration of auditor
Amounts received or due and receivable by Ernst & Young relating to:
Full year audit and half year review of the Group financial report
Other audit services – audit and review of trusts and funds
Other services in relation to the Group
– taxation services
– other assurance services
Total auditor remuneration1
30 June
2019
$
1,630,924
687,878
30 June
2018
$
1,615,234
726,018
168,801
495,113
2,982,716
354,760
631,248
3,327,260
1 Auditor’s remuneration for the Group is paid by Challenger Group Services Limited, a wholly owned entity within the Group.
Note 29 Subsequent events
At the date of this report, no matter or circumstance has arisen that has affected, or may significantly affect, Challenger’s
operations, the results of those operations or the Group’s state of affairs in future financial years.
110
Challenger Limited 2019 Annual Report
Directors’ declaration
In accordance with a resolution of the Directors of Challenger Limited, we declare that, in the opinion of the Directors:
a)
the financial statements and notes of Challenger Limited and its controlled entities (the Group) are in accordance with the
Corporations Act 2001, including:
(i) giving a true and fair view of the Group’s financial position as at 30 June 2019 and of its performance for the year ended
on that date; and
(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001;
b)
c)
d)
the financial statements and notes of the Group also comply with International Financial Reporting Standards as issued by the
International Accounting Standards Board, which is disclosed in Section 1(i) Basis of preparation and statement of compliance;
there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and
payable; and
this declaration has been made after receiving the declarations required to be made to the Directors from the Chief Executive
Officer and Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 for the financial year ended
30 June 2019.
On behalf of the Board
P Polson
Independent Chair
Sydney
12 August 2019
R Howes
Managing Director and Chief Executive Officer
Sydney
12 August 2019
111
Challenger Limited 2019 Annual Report
Ernst & Young
200 George Street
Sydney NSW 2000 Australia
GPO Box 2646 Sydney NSW 2001
Tel: +61 2 9248 5555
Fax: +61 2 9248 5959
ey.com/au
Independent auditor’s report to the shareholders of Challenger Limited
Report on the Audit of the Financial Report
Opinion
We have audited the financial report of Challenger Limited (the Company) and its subsidiaries (collectively the Group), which
comprises the consolidated statement of financial position as at 30 June 2019, the consolidated statement of comprehensive
income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to
the financial statements, including a summary of significant accounting policies, and the directors’ declaration.
In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including:
a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2019 and of its consolidated
financial performance for the year ended on that date; and
b) complying with Australian Accounting Standards and the Corporations Regulations 2001.
Basis for Opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further
described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the
Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of
the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that
are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance
with the Code.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial
report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in
forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description
of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our
report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond
to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including
the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying
financial report.
112
Challenger Limited 2019 Annual Report
1 Valuation of Life Contract Liabilities
Financial report reference: Note 8
Why significant to the audit
How our audit addressed the key audit matter
The Group recognised a provision for future claims
associated with insurance policies. The valuation
methodology to estimate the provision adopted by the
Group involves complex and subjective judgments about
future events.
Key assumptions used in the Group’s model to determine
the value of the life contract liabilities include:
• Discount rates
• Inflation
• Future claims administration expenses
• Mortality rates and redemptions
These assumptions, along with policy information, are used
as inputs to the Group’s model to calculate the Life Contract
Liabilities.
This was a key audit matter due to the size of the balance
(30 June 2019: $12,870.2 million), relative to total assets
and the degree of judgment and estimation uncertainty
associated with the valuation.
Our audit procedures involved an assessment of the
effectiveness of relevant controls over assumptions and policy
information used as inputs into the Group’s model. Our IT
specialists were involved to assess whether policy information
was extracted accurately from the Group’s underlying
administration system into the valuation process.
Our audit procedures included the following in the evaluation
of the assumptions used by the Group:
• Considered the Group’s governance process and controls to
determine the methodology and assumptions.
• Assessed the results of the experience investigations carried
out by the Group to determine whether they supported the
assumptions used by the Group.
• Assessed the movements in modelled profit margins and
best estimate liabilities for insurance risk transactions.
• Performed a recalculation for a sample of the life contract
liability valuations.
Where appropriate we involved our life insurance actuarial
specialists in the above procedures and overall assessment of
the valuation methodology, key assumptions and models
deriving the valuation of the life contract liabilities.
We assessed the adequacy of the related financial report
disclosures.
113
Challenger Limited 2019 Annual Report
2 Valuation of Level 3 Assets
Financial report reference: Note 19
Why significant to the audit
How our audit addressed the key audit matter
The Group holds a portfolio of assets carried at fair value,
for which an observable market value is not readily available.
These assets are classified as Level 3 assets within the fair
value hierarchy of the financial report and include:
• Fixed income securities
• Equities and other alternatives
• Infrastructure investments
• Property securities
• Investment and development property
Level 3 assets require judgment to be applied in determining
their fair value, as the valuation inputs for these assets are
not based on observable market transactions or other readily
available market data.
The Group exercised judgment to arrive at their best
estimates of fair value of these assets. There is complexity
in this process, as well as uncertainty associated with the
valuation and modelling methodologies and the assumptions
adopted.
This was a key audit matter due to the size of the balance
relative to total assets (30 June 2019: $6,420.7 million), and
the degree of judgment and estimation uncertainty associated
with the valuation.
Our audit procedures included the following, using sampling
techniques:
• Considered the Group’s controls over the valuation of Level
3 assets.
• Tested the mathematical accuracy of the valuation models
and consistency with the Group’s documented methodology
and assumptions.
• Our valuation specialists assessed the Group’s valuation and
modelling methodologies and assessed the key judgmental
inputs used in the year-end valuations, including the
discount rate and the terminal value.
• Assessed the competence, qualifications and objectivity of
the external property valuation experts used by the Group
for the property portfolio valuation.
• Our real estate valuation specialists assessed the Group’s
property portfolio valuation against independent
expectations based on property class, location and market
of the underlying properties.
• Obtained valuation statements provided by external
investments managers in respect of unit trusts and hedge
funds. We assessed the valuations of investments as
provided by external investment managers, including an
assessment of the reliability of the information received.
We assessed the adequacy of the related financial report
disclosures.
114
Challenger Limited 2019 Annual Report
3 Valuation of Goodwill
Financial report reference: Note 25
Why significant to the audit
How our audit addressed the key audit matter
Goodwill has been recognised as a result of the Group’s
historical acquisitions, representing the excess of the
purchase consideration over the fair value of assets and
liabilities acquired. On acquisition date, the goodwill has been
allocated to the applicable Cash Generating Units (CGUs).
An impairment assessment is performed at each reporting
period, comparing the carrying amount of each CGU
containing goodwill with its recoverable amount. The
recoverable amount of each CGU is determined on a value
in use basis. This calculation incorporates a range of
assumptions, including future cash flows, discount rate and
terminal growth rate.
This was a key audit matter due to the size of Goodwill
relative to total assets (30 June 2019: $557.3 million), and
the degree of judgment and estimation uncertainty
associated with the impairment assessment.
Our audit procedures included the following:
• Assessed the valuation methodology used to calculate the
recoverable amount of each CGUs.
• Agreed the projected cash flows used in the impairment
models to the Board approved five year plan of the Group.
• Compared the Group’s implied growth rate assumption to
comparable companies.
• Considered the accuracy of historical cash flow forecasts.
• Assessed the methodology and assumptions used in the
calculation of the discount rate, including comparison of the
rate to market benchmarks.
• Tested the mathematical accuracy of the impairment model
for each CGU.
• Assessed the Group’s sensitivity analysis and evaluated
whether any reasonable foreseeable change in assumptions
could lead to a material impairment.
Our valuation specialists were involved in the above procedures
where appropriate.
We assessed the Group’s determination of the CGUs to which
goodwill is allocated and the adequacy of the related financial
report disclosures.
115
Challenger Limited 2019 Annual Report
Information Other than the Financial Report and Auditor’s Report Thereon
The directors are responsible for the other information. The other information comprises the information included in the
Company’s 2019 Annual Report, but does not include the financial report and our auditor’s report thereon.
Our opinion on the financial report does not cover the other information and accordingly we do not express any form of
assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion.
In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or
otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard.
Responsibilities of the Directors for the Financial Report
The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in
accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors
determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material
misstatement, whether due to fraud or error.
In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern,
disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors
either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the Audit of the Financial Report
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will
always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the
basis of this financial report.
As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain
professional scepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error,
as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by the directors.
• Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the
Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However,
future events or conditions may cause the Group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the
financial report represents the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the
Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the
Group audit. We remain solely responsible for our audit opinion.
We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the directors with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the
financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report
unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine
that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
116
Challenger Limited 2019 Annual Report
Report on the Audit of the Remuneration Report
Opinion on the Remuneration Report
We have audited the Remuneration Report included in pages 24 to 47 of the Directors’ report for the year ended 30 June 2019.
In our opinion, the Remuneration Report of Challenger Limited for the year ended 30 June 2019, complies with section 300A of
the Corporations Act 2001.
Responsibilities
The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance
with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based
on our audit conducted in accordance with Australian Auditing Standards.
Ernst & Young
T Johnson
Partner
Sydney
12 August 2019
L Burns
Partner
Sydney
12 August 2019
117
Challenger Limited 2019 Annual Report
Investor information
Substantial shareholders
The number of shares held by substantial shareholders and their associates, based on the latest substantial shareholder
notifications, and the 20 largest individual shareholders are as follows:
Substantial shareholders as at 31 July 2019
MS&AD Insurance Group Holdings Inc
Caledonia (Private) Investments Pty Ltd
Citicorp Nominees Pty Ltd
HSBC Custody Nominees (Australia) Limited
J P Morgan Nominees Australia Pty Limited
National Nominees Limited
HSBC Custody Nominees (Australia) Limited – GSCO ECA
BNP Paribas Nominees Pty Ltd
HSBC Custody Nominees (Australia) Limited – A/C 2
Warbont Nominess Pty Ltd
Argo Investments Limited
BNP Paribas Nominees Pty Ltd < Agency Lending DRP A/C>
HSBC Custody Nominees (Australia) Limited – GSI EDA
BNP Paribas Nominees Pty Ltd
CS Third Nominees Pty Ltd
CPU Share Plans Pty Ltd
National Nominees Limited
Australian United Investment Company Ltd
AMP Life Limited
20 largest individual shareholders as at 31 July 2019
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18. Woodross Nominees Pty Ltd
19.
20.
Total 20 largest individual shareholders – issued capital
Total remaining shareholders balance
Citicorp Nominees Pty Ltd
BKI Investment Company Ltd
Number of
shares
98,633,303
91,886,048
% of issued
capital
16.13
15.02
158,725,502
134,731,821
79,009,067
15,419,679
14,815,362
7,670,000
7,335,942
6,467,834
5,440,311
4,805,407
4,342,141
3,795,726
3,300,928
2,673,363
2,010,449
1,800,000
1,734,244
1,705,376
1,511,069
1,485,000
458,799,221
152,797,412
25.95
22.03
12.92
2.52
2.42
1.25
1.20
1.06
0.89
0.79
0.71
0.62
0.54
0.44
0.33
0.29
0.28
0.28
0.25
0.24
75.02
24.98
Distribution of shares (as at 31 July 2019)
Range
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Unmarketable parcels
Minimum $500.00 parcel at $7.09 per unit
Number of
shareholders
19,367
19,915
3,703
2,065
101
45,151
Minimum
parcel size
71
Number of
shares
9,389,670
47,597,264
26,850,335
43,186,400
484,572,964
611,596,633
% of issued
capital
1.54
7.78
4.39
7.06
79.23
100.00
Holders
1,241
Units
40,376
ASX listing
Voting rights
On a show of hands, every member present at the meeting in
person or by proxy shall have one vote and upon a poll each
share shall have one vote.
Challenger Limited shares are listed on the ASX under code
CGF. Share price details and company information can be
accessed via either the Company website:
› www.challenger.com.au
or the ASX website:
› www.asx.com.au
118
Challenger Limited 2019 Annual Report
Investor information (continued)
Buy-back
There is currently no market buy-back.
On market acquisitions for employee incentive schemes during the financial year ended
30 June 2019
2.8 million Challenger Limited ordinary shares were purchased on market to satisfy entitlements under Challenger’s employee
incentive schemes at an average price per share of $11.71.
Top 20 noteholders of Challenger Capital Notes 1 as at 31 July 2019
HSBC Custody Nominees (Australia) Limited
Australian Executor Trustee Ltd
BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd DRP
National Nominees Limited
Navigator Australia Ltd
Citicorp Nominees Pty Limited
Eastcoote Pty Ltd
Australian Executor Trustee Ltd
J P Morgan Nominees Australia Ltd
Netwealth Investments Limited
GCF Investments Pty Ltd
Taverners No 11 Pty Ltd
MF Investments No 1 Pty Ltd
Willimbury Pty Ltd
Nulis Nominees (Australia) Limited
GCF Investments Pty Ltd
270 King Street Pty Ltd
Taverners No 11 Pty Ltd
Picko Pty Ltd
Dakshina Pty Ltd
20 largest individual noteholders as at 31 July 2019
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Total 20 largest individual noteholders – issued notes
Total remaining noteholders balance
Distribution of notes (as at 31 July 2019)
Number of
notes
304,835
99,636
86,155
69,768
52,815
40,855
40,000
37,453
37,343
34,276
33,200
30,586
30,000
22,000
21,735
20,000
17,600
17,550
17,549
17,381
1,030,737
2,419,263
% of issued
notes
8.84
2.89
2.50
2.02
1.53
1.18
1.16
1.09
1.08
0.99
0.96
0.89
0.87
0.64
0.63
0.58
0.51
0.51
0.51
0.50
29.88
70.12
Range
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Unmarketable parcels
Minimum $500.00 parcel at $102.14 per unit
Number of
holders
3,105
409
41
29
1
3,585
Minimum
parcel size
5
Number of
notes
1,120,715
860,501
308,187
855,762
304,835
3,450,000
% of notes
32.48
24.94
8.93
24.80
8.85
100.00
Holders
1
Units
4
119
Challenger Limited 2019 Annual Report
Investor information (continued)
Top 20 noteholders of Challenger Capital Notes 2 as at 31 July 2019
HSBC Custody Nominees (Australia) Limited
BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd DRP
Australian Executor Trustees Ltd
Citicorp Nominees Pty Ltd
National Nominees Limited
Navigator Australia Ltd
Netwealth Investments Limited
HSBC Custody Nominees (Australia) Limited – A/C 2
Taverners J Pty Ltd
Australian Executor Trustees Ltd
Taverners No 11 Pty Ltd
Taverners J Pty Ltd
LBL Investment Pty Ltd
Trustees of Church Property, Diocese of Newcastle
Nulis Nominees (Australia) Limited
Australian Executor Trustees Ltd
Taverners No 11 Pty Ltd
Mutual Trust Pty Ltd
Citicorp Nominees Pty Limited
20 largest individual noteholders as at 31 July 2019
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Total 20 largest individual noteholders – issued notes
Total remaining noteholders balance
Distribution of notes (as at 31 July 2019)
Number of
notes
415,276
119,367
113,985
89,356
70,919
45,067
41,769
39,818
38,760
37,001
35,876
35,821
32,538
30,000
29,270
23,607
23,129
21,604
21,514
21,425
1,286,102
3,313,898
% of issued
notes
9.03
2.59
2.48
1.94
1.54
0.98
0.91
0.87
0.84
0.80
0.78
0.78
0.71
0.65
0.64
0.51
0.50
0.47
0.47
0.47
27.96
72.04
Range
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Unmarketable parcels
Minimum $500.00 parcel at $106.15 per unit
Number of
holders
5,084
548
34
35
3
5,704
Minimum
parcel size
5
Number of
notes
1,658,321
1,160,009
256,007
877,035
648,628
4,600,000
% of notes
36.05
25.22
5.57
19.06
14.10
100.00
Holders
2
Units
2
ASX listing
Shareholder queries
Challenger Capital Notes 1 are listed on the ASX under the
trade symbol CGFPA. Challenger Capital Notes 2 are listed on
the ASX under the trade symbol CGFPB. Note price details can
be accessed via the ASX website:
› www.asx.com.au
Voting rights
Challenger Capital Notes 1 and 2 do not confer any voting
rights in the Company but if they are exchanged or converted
for ordinary shares in accordance with their terms of issue,
then the voting rights of the ordinary shares will be the same
as for ordinary shares.
For any administrative matters in respect of your Challenger
Limited shareholding or noteholding, please contact the
Company’s share registrar, Computershare:
Computershare Investor Services Pty Limited
Level 3, 60 Carrington Street, Sydney NSW 2000
Telephone: 1800 780 782
Website: › www.computershare.com.au
To assist with all enquiries, please quote your unique Security
Reference Number (SRN) and your current address when
dealing with Computershare.
120
Additional information
Principal place of business and
registered office in Australia
Level 2
5 Martin Place
Sydney NSW 2000
Telephone: 02 9994 7000
Facsimile: 02 9994 7777
Investor services: 13 35 66
Directors
Peter Polson (Chair)
Richard Howes (Managing Director and
Chief Executive Officer)
John M Green
Steven Gregg
JoAnne Stephenson
Duncan West
Melanie Willis
Leon Zwier
Company secretaries
Michael Vardanega
Andrew Brown
Website
› challenger.com.au
Manage your shareholding at
Computershare Investor Services
Computershare Investor
Services Pty Limited
Level 3, 60 Carrington Street
Sydney NSW 2000
Telephone: 02 8234 5000
› computershare.com.au
Telephone: 1800 780 782
Auditor
Ernst & Young
200 George Street
Sydney NSW 2000
Go electronic
Challenger can deliver all of your
shareholder communications electronically,
just update your details via Computershare
Investor Services.
Online digital version of this report
The 2019 Annual Report is available at:
› challenger.com.au/annualreport2019