2020 Annual Review
Our performance over the last financial year reflects the impacts of these events. It also demonstrates the resilience we have built through the diversification of our business, while maintaining financial discipline and strong capital and risk management practices.
This year we have also focused on responding to shifts in our operating environment with new initiatives to build deeper customer engagement, targeted activities to support financial advisers and expanding our work with leading superannuation funds. Underpinning our business strategy is our commitment to good corporate governance, risk management and sustainability.
Challenger is well placed to manage through the current market volatility and has the financial flexibility to enhance future returns.
Despite the extremely challenging environment, Challenger’s assets under management grew 4% to $85 billion. This increase reflects lower Life investment assets and market-leading net flows in the Funds Management business.
Normalised net profit before tax was down 8% to $507 million, inline with our guidance range. Statutory net loss after tax was $416 million and includes significant negative investment experience relating to the coronavirus pandemic market sell-off in global financial markets. Challenger Life is required to value all assets and liabilities supporting the Life business at fair value, with the investment market volatility over the past six months resulting in significant investment losses. Approximately half of these losses are unrealised.
In response to the market and economic volatility, Challenger acted quickly to reposition the investment portfolio in order to maintain a strong capital position. In June 2020, we undertook a successful $270 million institutional placement to further enhance our capital position. We also undertook a share purchase plan for retail investors, raising $35 million, which was completed in July 2020. With $1.6 billion in excess regulatory capital and over $3 billion in cash and liquid fixed income, Challenger is well placed to manage through the current market volatility.
In light of ongoing economic and market uncertainty, protecting the balance sheet is of upmost importance, consequently the Board has decided it is prudent not to pay a final FY20 dividend.
As shareholders would expect, our performance and the broader economic outlook is reflected in the remuneration outcomes for Key Management Personnel (KMP) this year. The Board has materially reduced reward outcomes for KMP, with no cash variable reward payments to be made. Furthermore, there have been no fixed pay increases, a group-wide salary freeze and the Board has reduced its base fees by 20% for the next six months.
Challenger’s sales in 2020 were relatively resilient with total Life sales up 13 per cent to $5.2 billion. The result reflected growth from our partnership with MS&AD Insurance Holdings Inc. (MS&AD) in Japan and institutional relationships, which offset a fall in domestic retail annuity sales.
Australian annuity sales were down 27 per cent to $2.4 billion. The drop was due to structural changes in the financial advice market, the transition to new product means test rules and the impact of the pandemic. The completion of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in 2019, accelerated change across the wealth management industry. We have seen a decrease in the number of financial advisers aligned to major banks and a reduction in exposure to wealth management by the large banks.
This year we invested in initiatives that position us for future growth including initiatives aimed at deepening our engagement with customers, such as our new, Retirement Made Simple hub, and Retire with Confidence tool. We targeted deeper engagement with independent financial advisers and continued to innovate our product offerings including a new lifetime annuity payment option, RBA Cash Linked, that was specifically designed for customers and advisers who are concerned with investing in a low interest rate environment.
Challenger is the fifth largest active manager in the country1. Our clients amongst others include the top 30 Australian pension funds.
Funds Management earnings before tax increased by 13% with business momentum underpinned by a sharp increase in net flows during FY20, reflecting both product development and strong investment performance.
The Funds Management business continues to expand its product offering with new partnerships and investment strategies. In 2020, Fidante Partners commenced a strategic joint venture with global alternative asset manager Ares Management Corporation, where we will coordinate marketing and investment across Australia, New Zealand and into the United States.
At both Board and Leadership Team level, having the right mix of skills and experience is critical to good governance. Following our expanded strategic relationship with MS&AD, we welcomed Masahiko Kobayashi as a Non-Executive director of Challenger in August 2019. We also bid farewell to Leon Zwier who had served on the Board, with dedication and commitment, for the past 13 years.
During the year we appointed Nick Hamilton to the Leadership Team as Chief Executive of Funds Management, following the retirement of Ian Saines. Nick was General Manager of Fidante Partners prior to his appointment and, in that capacity, he oversaw the exceptional growth in that business over the past four years.
We believe we have a strong mix of experience, skills and tenure at both Board and Leadership Team level to manage the business through the cycle and strategically position ourselves to drive long-term growth.
Sustainability forms an important part of our business strategy. It is essential to our long-term success, and during the past six months has been a significant part of our response to the coronavirus pandemic. Our 2020 Sustainability Report outlines how we manage and anticipate current and future environmental, social and governance opportunities and challenges. It highlights the matters which have the most significant impact on our ability to create value for stakeholders.
During the 2020 financial year, we undertook work to enhance our understanding of current and potential climate-related risks and to develop mitigation strategies. We have also published responsible investment statements for Challenger Life and CIP Asset Management.
We launched our new corporate values and refreshed our Code of Conduct, and were globally recognised for workplace gender equality. We also created a new diversity and inclusion strategy, reinforcing our commitment to gender equality and placing a greater focus on inclusion.
There’s no doubt that the 2020 financial year has been one of the most challenging we have faced, and we would like to thank the Board and Challenger team for their efforts and achievements during the year. We also thank our shareholders for their continued support.
We are confident that Challenger has the right foundations in place to withstand the current disruption, and grow in coming years, as conditions improve and structural changes in the sector play out.
