Our operating environment has been impacted by a number of factors, including significant changes in the wealth industry. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has been a key driver in this regard.
Our commitment to good corporate governance and our focus on risk management positioned us well and remains the core of our approach.
Ensuring the right mix of skills and experience both on our Board and Leadership Team is fundamental to our governance process and essential to Challenger’s ongoing success. In January 2019, long serving executive Richard Howes commenced as CEO, bringing a wealth of knowledge, capability and passion to the role. At the same time, we farewelled outgoing CEO Brian Benari, who for the past seven years led the development and implementation of our strategy.
As part of our Board renewal process, we welcomed Duncan West to the Challenger Board in September 2018 as an Independent Non-Executive Director, and in the following month, Graham Cubbin retired from the Board after 15 years of service. Effective renewal like this ensures our Board maintains a strong mix of experience, skills and tenure.
In 2020, I expect the Board will appoint a new Director when the MS&AD Group seeks representation on the Challenger Board. This follows the announcement earlier this year regarding the expansion of our strategic relationship with MS&AD. This relationship leverages the strengths of both businesses to create opportunities for continued growth.
This year we have undertaken an extensive review of our Remuneration Framework in response to stakeholder feedback and to ensure continued alignment to our strategy. The review has resulted in important changes to drive long-term performance and strong risk management, with clear alignment to shareholder interests.
These changes include significant extensions to vesting periods for short and long-term incentives, and capping the maximum short-term incentives for key management personnel. We are also allocating a fixed amount of long-term incentives on face value, or maximum value basis. To promote alignment with shareholder interests, maximum total reward will continue to be weighted to variable performance-based pay, which means a large proportion of the reward is at risk and will be issued in equity with long deferral.
Sustainability forms an important part of our business strategy and is essential to the long-term success of our business. Our 2019 Sustainability Report details how we manage and anticipate current and future environmental, social and governance opportunities and challenges, and highlights the matters that have the most significant impact on our ability to create value for stakeholders.
This includes our highly engaged team who are dedicated and committed to delivering for our customers. Our 2019 employee engagement survey revealed leading sustainable engagement and risk culture scores, among the highest in the industry.
We have also been recognised as an Employer of Choice for Gender Equality by the Workplace Gender Equality Agency. This is an acknowledgement of our efforts to ensure a diverse and inclusive workforce and highlights the value we place on diversity in delivering customer and community outcomes.
Engaging in constructive public policy settings is another important element of our strategy and directly aligns with our vision to provide our customers with financial security for retirement. In 2019, we saw increased focus from both government and industry on the financial needs of retirees and we continue to engage to work towards good financial outcomes for older Australians.
I would like to thank the Board and the Challenger team for their continued efforts this year. I am confident that the business remains in a good position and I look forward to working with you as we build on the strong foundations of our business and pursue our next phase of growth.
Independent Chair
Despite this, Challenger’s normalised earnings have remained steady for the year, highlighting the resilience of our business. At the same time we have made good progress implementing our strategy to ensure we’re well positioned to capture opportunities for growth as conditions evolve.
Importantly, we have maintained our strong capital position, with our PCA ratio currently towards the top end of our target range. Challenger Life holds $1.4 billion in excess regulatory capital, which supports future growth in our annuity book and provides protection against different conditions.
Overall, our financial results for FY19 reflect the challenging operating environment, with key metrics below expectations for the year. Normalised net profit before tax was up $1 million to $548 million, in line with the revised guidance provided in January 2019.
Group assets under management (AUM) were stable at $82 billion, with growth subdued because of industry disruption and internalisation of investment management by a large superannuation fund.
Statutory profit after tax was down $15 million on 2018 to $308 million. This includes $88 million of negative investment experience.
In our Life business, domestic sales were down a modest 4%, despite the significant disruption across the wealth industry this year. Total annuity sales, however, were substantially lower driven by a decline in MS Primary sales in Japan, which were down 54% due to the higher US interest rates relative to Australia.
In March 2019, we announced an expanded strategic relationship with the MS&AD Group that will deliver increased annuity sales in 2020 and beyond with the reinsurance of US dollar annuities from 1 July. This will remove the impact of US interest rates on our sales and also diversifies our product offering in Japan.
Solid growth in underlying net income in our Funds Management business was offset by lower performance fees (down $16 million). Excluding performance fees, Funds Management earnings before interest and tax increased by 23%.
The strong foundations we have built over 10 years of disciplined implementation of our strategy will enable us to manage through the current operating environment. Together with the long-term tailwinds propelling our business, these foundations position us well to capture opportunities as they emerge.
In 2019, we have focused on supporting and nurturing advice groups and regions less impacted by disruption, and making it easier and more efficient for advisers to write annuities. This approach has helped drive strong growth in sales by independent financial advisers, particularly in the second half. Increasing the availability of Challenger annuities via superannuation and investment platforms is also key, and in 2019 we launched our products on three leading platforms serving the independent advice market.
Our Funds Management business continues to be differentiated by consistently strong performance against benchmarks over many years across both Fidante Partners and Challenger Investment Partners (CIP) investment products. Supporting continued growth, in 2019 Fidante Partners launched its new ActiveX series of active ETFs and welcomed new small cap boutique, Eiger Capital. Fidante Partners and CIP also introduced several new products and strategies to the market.
In 2019, we have demonstrated that the business is in good shape to navigate the current operating environment and well positioned to deliver future growth.
We continue to be recognised as the clear brand leader in our industry, with 95% of advisers rating Challenger as a leader in retirement income, well above our peers.
Our strategy positions us to capture the significant opportunities created by the growing superannuation system. In 2020, we will invest in new initiatives to support deeper integration with the advice process, and to build bottom-up customer demand for our products. In Funds Management, we will continue to bring new products to market, broadening investors’ access to the extensive expertise of our boutique managers.
Underpinning these efforts, we have a highly engaged and capable team with a strong risk management culture. I believe our people are Challenger’s greatest asset and I look forward to working with them to deliver strong customer and shareholder outcomes.
Managing Director and Chief Executive Officer
Independent Non-Executive Director and Chair
Peter has been the independent Chair since 2004 and an independent Non-Executive Director since 2003. Peter is Chair of the Nomination Committee and a member of the Group Risk Committee, Group Audit Committee and Remuneration Committee.
Independent Non-Executive Director
JoAnne has been an independent Non-Executive Director since 2012 and is Chair of the Group Remuneration Committee and a member of the Group Risk Committee, Group Audit Committee and Nomination Committee.
Managing Director and Chief Executive Officer
Richard was appointed Managing Director and CEO of Challenger Limited in January 2019 and 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 Life and Chief Investment Officer.
Independent Non-Executive Director
Duncan became an independent Non-Executive Director in 2018 and is a member of the Group Risk Committee, Group Audit Committee and Nomination Committee.
Independent Non-Executive Director
John has been an independent Non-Executive Director since 2017 and is a member of the Group Risk Committee, Group Audit Committee, Remuneration Committee and Nomination Committee.
Independent Non-Executive Director
Melanie has been an independent Non-Executive Director since 2017 and is Chair of the Group Risk Committee and a member of the Group Audit Committee and Nomination Committee.
Independent Non-Executive Director
Steven has been an independent Non-Executive Director since 2012 and is Chair of the Group Audit Committee and a member of the Group Risk Committee, Remuneration Committee and Nomination Committee.
Independent Non-Executive Director
Leon has been an independent Non-Executive Director since 2006 and is a member of the Nomination Committee.
Chief Risk Officer
Tony joined Challenger in 2004 and was appointed Chief Risk Officer in 2018. Prior to this, Tony was Chief Financial Officer and Appointed Actuary for the Life business.
Managing Director and Chief Executive Officer
Richard was appointed Managing Director and CEO of Challenger Limited in January 2019 and 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 Life and Chief Investment Officer.
Chief Executive, Distribution, Product and Marketing (DPM)
Angela was appointed Chief Executive, DPM in December 2018, having previously held the role of Chief Operating Officer, DPM. Angela joined Challenger as the Executive General Manager, Human Resources in 2012.
Chief Executive, Life
Chris joined Challenger in 2003 and was appointed Chief Executive of the Life business in 2017. Prior to this, Chris was Chief Investment Officer for the Life business.
Chief Executive, Funds Management
Ian joined Challenger in 2015 as Chief Executive of Funds Management. Prior to this, Ian held senior executive roles with the Commonwealth Bank of Australia.
Chief Executive, People, Corporate Affairs and Sustainability
Michelle joined Challenger in 2016 and was appointed Chief Executive, People, Corporate Affairs and Sustainability in December 2018. Prior to this, Michelle held senior roles in corporate affairs, sustainability and strategy.
Chief Financial Officer
Andrew joined Challenger in 2007 and was appointed Chief Financial Officer in 2012. Prior to this, Andrew was Challenger’s Deputy Chief Financial Officer.
General Counsel and Chief Executive Group Strategy
Michael joined Challenger in 2006 and was appointed General Counsel in 2011. In 2017, Michael’s role was expanded to include responsibility for group strategy.
Sustainability is critical for Challenger to build long-term value for our customers, shareholders, employees and the broader community
Our annual materiality process is critical to identifying the most material risks and opportunities for our business. Through extensive internal and external stakeholder engagement, we’ve gained a clear understanding of how we can create the biggest impacts across our value chain.
We’ve identified eight areas of importance to our business and our stakeholders, with the top five noted as our most material matters.
Maintaining stakeholder trust and confidence is critical to Challenger’s ability to continue 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; ensure the security of its customers’ information; and contribute to industry-wide sustainability commitments.
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.
Climate change (included as part of our discussion on long-term risk management)
Challenger recognises that climate change transition poses immediate and long-term challenges for the global economy. This has implications for our investment decisions and operations.
Challenger is committed to providing great customer experiences and to providing its customers with financial security for retirement. To deliver this, Challenger invests in research to understand its customers; educates advisers and customers on the important role annuities can play in retirement; and designs products and services that meet both customer and society needs.
Challenger works within a complex operating landscape. This includes working closely with distribution and product partners, fund managers and financial advisers, all of whom have been impacted by a changing regulatory and market environment.
As a retirement income provider, Challenger plays a key role in contributing to fiscally responsible solutions that help support 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.
The graph below shows our material matters based on both the importance to the business and importance to our stakeholders.
2019Annual Review
Providing
our customers
with financial
security for
retirement