Challenger’s Strong 1H 2020 Results in the Face of Weak Trading Conditions Prompts FVE Increase

A strong first-half fiscal 2020 result shows the resilience of no-moat Challenger’s business in difficult Australian operating conditions. Our fair value estimate increases to AUD 9.30 per share from AUD 8.20 due to stronger reinsurance than expected of Japanese annuities as well as stronger sales to superannuation and institutional clients seeking guaranteed returns in a low interest rate environment. We also expect better domestic Australian annuity sales and weaker decline in margins. The key takeaways from the half-year results are stronger-than-expected Japanese annuity and institutional guaranteed return product sales which offset weak Australian domestic annuity sales. But management indicate Australian annuity sales improved during the half, with lifetime annuity sales growing 22% faster in the second quarter. The other positive surprise is a softer than expected margin decline despite the higher mix to lower margin Japanese and institutional annuities. In addition, Challenger materially grew its U.K. wholesale pension portfolio, which we expect to add a new income stream from fiscal 2021 and help support margins.