CHALLENGER LIMITED — Annual Report 2012

Oct 18, 2012

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Challenger Limited – Shareholder Review 2012

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Contents

Challenger today		1
Results at a glance		2
Chairman’s report		4
CEO’s report		6
Life and Funds Management		8
Distribution, Product and Marketing		10
Corporate		12
Risk and Human Resources		14
Information for shareholders		16
Directory	inside back cover

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Award-winning annuities

In 2012, Challenger Life was again named the winner of the AFA/Plan for Life ‘Annuity Provider of the Year’, further reinforcing our strength in the annuity market.

Challenger today

Challenger Limited is an ASX-listed investment management company established in 1985. We are the leading provider of annuities and guaranteed retirement income streams in Australia. Through our boutique Funds Management business, Fidante Partners and Aligned Investments, we are the tenth largest Australian fund manager.

Life

Challenger is the leading provider of annuities and guaranteed retirement income streams in Australia. The Life business is regulated by the Australian Prudential Regulation Authority (APRA) and provides products aimed at investors seeking the security and certainty of guaranteed cash flows with protection against market, inflation and longevity risks. Annuity premiums, along with shareholder capital, are invested in a diversified and high quality portfolio of assets to deliver predictable, long-term cash flows to meet commitments to our annuitants while providing attractive returns for shareholders.

Funds Management

Challenger’s Funds Management business comprises Fidante Partners and Aligned Investments, and is one of Australia’s fastest growing fund managers.

Fidante Partners comprises 11 co-owned, separately branded, boutique active investment managers. Challenger provides administration, distribution and business management support to the boutiques and shares in the profits of the boutique partnerships through its equity ownership.

Aligned Investments develops and manages assets under Challenger’s brand for the Life business and third party investors. Aligned Investments invests in fixed income, property and infrastructure assets.

1

Results at a glance

Record retail Life sales and growing funds under management with prudent cost control have delivered strong financial performance

Key financial highlights during the year:

• Normalised net profit after tax[1] (NPAT) up 20% to $297 million

• Normalised earnings per share (EPS) up 11% to 57.5 cents per share

• Net income increased 7% to $528 million, underpinned by growth in Life normalised cash operating earnings

• Expenses increased 5% to $189 million following investment in growth initiatives. The cost to income ratio fell 60 bps to 35.9%

• Statutory net profit after tax (NPAT) decreased to $149 million as a result of largely unrealised investment experience on fixed income and property

• Record sales of retail Life products, up 34% to $1.95 billion

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Financial performance 2012 2011
Net income $528m $494m
Expenses $189m $180m
Normalised NPAT [1] $297m $248m
Statutory NPAT $149m $261m
Normalised earnings per 57.5 51.7
share – basic (cps)
Statutory earnings per 28.8 54.5
share – basic (cps)
Dividend (cps) 18.0 16.5
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• Total funds under management of $33.4 billion, up 20%

• Final dividend of 10.5 cents per share (unfranked), bringing full year dividend to 18.0 cents per share (unfranked), up 9%.

1 Challenger’s normalised profit framework and a reconciliation to statutory profit is disclosed in the Directors’ report and Note 2 in the Challenger Limited 30 June 2012 financial report.

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Normalised earnings and cost to income ratio
$m
300 60%
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2008 2009 2010 2011 2012
Normalised NPAT Cost to income ratio
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Normalised earnings per share
cps
60
50
40
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0
2008 2009 2010 2011 2012
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Normalised NPAT has continued trending up, increasing 36% since 2008. We have successfully grown net income whilst keeping expenses flat, resulting in our cost to income ratio falling to 35.9%. We have lowered our targeted cost to income ratio to a range of 34% to 38%.

We have continued our growth profile, with normalised earnings per share increasing by 55% since 2008. Normalised EPS has been aided by Challenger’s on-market share buy-back program, which commenced in 2008.

Retirement incomes products – annual sales

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$m
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Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12
Retail Institutional
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Funds Management – net flows
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Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12
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The strong growth in retirement incomes sales continued into 2012. Retail life sales have increased by a compound annual growth rate of 26% since 2008.

Funds Management achieved $4.2 billion of net flows in 2012, up from $2.4 billion in 2011. Our Funds Management business has seen positive net flows for the past six halves, in what have been difficult investment markets.

3

Chairman’s report

The 2012 financial year has been another successful year for our company. Performance has remained strong across a broad range of financial metrics, our strategy is clear and focused and we are, on balance, benefiting from structural changes in the markets in which we operate.

In relation to retirement incomes, the market is particularly attractive with Australia’s baby boomer population entering a 20 year growth phase. In 2012 alone, the growing population of retirees saw a transfer of over $53 billion from the accumulation to the retirement phase of their superannuation savings. While guaranteed income products currently represent a small percentage of this market, we are confident that, given the need for dependable and stable income in retirement, this nascent market will grow to a size comparable with other developed nations.

Just as we believe retirees will prioritise capital protection and predictable income, we also believe that investors will require a degree of exposure to growth assets. Our newly rebranded contemporary funds management business, Fidante Partners, now manages our interests in 11 boutique firms and has, in contrast to much of the funds management industry, recorded strong fund inflows over the past three years. While legislatively mandated superannuation contributions undoubtedly provide long-term support to the industry, we are determined to grow market share by creating profitable boutiques with management teams tightly aligned with investors’ economic interests and supported by institutional grade processes and services.

Full year result to 30 June 2012

For the sixth consecutive year, Challenger has increased its normalised net profit after tax. During the past year, an increase of 20% to $297 million was achieved, with almost 95% of net profit after tax represented by underlying operating cash flow of $282 million. Normalised earnings of 57.5 cents per share represented an 11% increase on 2011, with stronger earnings partly offset by an increased number of shares on issue following the exercise by CPH Investments Management Pty Limited of its options in October 2011.

In keeping with our targeted dividend payout ratio of around 30% of normalised earnings, the total dividend

for the year rose by 9% to 18.0 cents per share, unfranked, following the declaration of a final dividend of 10.5 cents per share, unfranked. Dividends remain a core component of shareholder returns and your Board is focused on increasing them over time. Since 2008, dividends have increased by over 40%, in line with our growth in normalised net profit after tax.

Statutory net profit after tax for the year of $149 million was less than normalised net profit and was lower than last year’s statutory profit of $261 million. Accounting standards require Challenger Life to record its financial assets, including Australian government and investment grade corporate bonds, at market value despite our intention to hold them to maturity. When markets are volatile, changes in shortterm value are reflected in our statutory profit and loss. In some years such as 2010, these movements meant that statutory profit was higher than normalised profit; in other years such as the current year it meant that statutory profit was less than normalised profit.

New capital standards

In May 2009, the Australian Prudential Regulation Authority (APRA) announced a review of the capital standards that apply to all Australian life and general insurers. The review has resulted in new capital standards which will be effective from 1 January 2013. The new standards are intended to ensure that all insurers can absorb the effect of a one in 200 year adverse shock, a risk significantly more remote than the Global Financial Crisis, which was considered a one in 70 year event.

While the standards won’t be finalised until the end of 2012, in August we received greater clarity with regard to a number of important issues, including APRA’s planned implementation timetable. Management have worked closely with APRA on these new standards, and it was pleasing we could provide shareholders with some certainty around their impact and timing.

The new standards are expected to increase the amount of capital Challenger Life is required to hold. Our regulatory capital requirement will increase over three years. However, we expect to meet this requirement by generating organic capital via earnings, ensuring we can maintain our existing dividend policy and continue to grow the business.

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Change in Chief Executive Officer

Following Dominic Stevens’ resignation as Chief Executive Officer during the year, the Board instigated its succession plan and appointed Brian Benari to the role of Chief Executive Officer. Brian first joined Challenger in 2003 and has held a number of positions including Chief Executive of the Mortgage Management business and most recently Group Chief Financial Officer/Group Chief Operating Officer.

The opportunity for a Chairman and Board to publicly recognise the achievements of a departed Chief Executive Officer are surprisingly few. Consequently, I would once again like to thank Dominic for the significant contribution he made in his various senior roles at Challenger over the past nine years.

Corporate governance

Your Board and management recognise their duties and obligations to maintain a robust corporate governance system. Risk management is central to our governance approach and is fundamental to building long-term shareholder value. We have a strong risk management framework and culture and continue to ensure governance structures are in place to manage a broad range of risks. It is also important for me to remind shareholders that our remuneration policies are closely linked to Challenger’s risk management framework.

Outlook

The financial services industry is constantly changing as a result of shifting demographics, new regulations, financial market volatility, evolving consumer preferences, and competition. The industry is one of the most challenging and exciting in which to operate. Your company’s senior management team and Board have never been more dedicated to pursuing Challenger’s vision to ‘provide Australians with financial security in retirement’ and emerge as one of Australia’s financial services success stories.

Thank you for your commitment to Challenger and I look forward to seeing you at the Annual General Meeting in November.

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Peter Polson

Chairman

5

CEO’s report

Business and financial performance

Our Life and Funds Management businesses operate in attractive markets and we have distinct competitive advantages in these markets. Our Life business is supported by favourable demographics, changing retiree investment risk preferences and a growing understanding of the financial impacts of living longer. We are an independent investment manager with retirement incomes our core focus. Our Funds Management business model is contemporary, with growth underpinned by mandated superannuation contributions.

From a global standpoint, Australia possesses an enviable superannuation savings system for the accumulation phase; however, the retirement phase has been dominated by products which expose retirees to a series of risks including market, inflation and longevity risk. Retirees are now seeking solutions like annuities to address these risks. Ongoing equity market volatility has further highlighted the need for more secure retirement incomes and has prompted a rethink with regard to asset allocation in retirement.

Annuities are currently a small but growing part of the larger wealth management industry and we have the task of educating the broader market of their benefits and the financial risks in retirement. For this reason we continued to invest in industry leadership initiatives. In 2012, we established a new retirement incomes research team to develop insightful and leading retirement incomes strategies and research. We also continued to invest in annuity product development, launching the award-winning, platform-based Challenger Guaranteed Pension Fund, and released new tools and methodologies to assist advisers grappling with the challenge of how to make their clients’ money last as long as they will.

The Australian retiring baby boomer demographic, who represent the majority of the $1.4 trillion superannuation savings pool, coupled with the growing awareness of the financial risks in retirement, will continue to propel our retirement incomes business for many years to come.

Whilst building out our retirement incomes business, we have also grown our Funds Management operations. Over the past few years we have adopted a unique boutique funds management model which delivers greater alignment of interests with investors, whilst providing institutional grade support to our

boutique partners. As a result, we had industryleading net flows of $4.2 billion in 2012 and have now recorded six consecutive halves of significant positive net flows into this business in what can only be described as difficult investment markets. Our Funds Management business is now the tenth largest Australian fund manager.

The growing importance of our Funds Management division has been underscored by the rebranding of the boutique partnership business to Fidante Partners. This year also saw the acquisition of our eleventh boutique fund manager, emerging markets specialist MIR Investment Management, which has been renamed Metisq Capital.

Overall 2012 financial performance broke a number of company records, including achieving our highest ever retail annuity sales, normalised net profit after tax and normalised earnings per share. The increase in normalised net profit after tax represents the sixth consecutive year of earnings growth and translated into a 9% increase in the full year dividend.

Further details on the 2012 financial performance are included in the Chief Financial Officer’s report on page 12.

New capital standards

Challenger Life is the leading provider of annuities and guaranteed retirement income streams in Australia. Challenger Life is prudentially regulated by APRA and is very well capitalised, with capital surplus to our regulatory requirements increasing to $719 million, up from $678 million in 2011.

As mentioned in the Chairman’s report, APRA’s new capital standards apply to all Australian life and general insurers and will be effective from 1 January 2013. In August 2012, we were able to clarify both the likely impact of the new standards and APRA’s proposed transition arrangements. Challenger Life’s regulatory capital requirement is expected to increase by between $110 million and $125 million per annum for three years, with the first increase effective 1 January 2014.

Based on our current surplus capital position and future organic capital generation capability, we anticipate that we will meet this higher capital requirement, continue to grow the business and maintain our current dividend payout ratio without the need to raise additional capital. The dividend payout ratio is sustainable over the long term.

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The new capital standards are expected to be finalised in late calendar 2012. As a result of the new standards, annuities issued by Australian regulated providers, such as Challenger Life, will be arguably among the most secure in the world, with these standards viewed as more stringent than those in Europe, the US and Canada.

Strategy and outlook

Our vision is clear. It is to provide Australians with financial security in retirement. To achieve this vision we are focused on the following three core strategic objectives:

1. To be recognised as the leader in retirement income solutions in Australia;

2. To increase the portion of the Australian retirement savings pool allocated to secure and lifetime income products; and

3. Within our Funds Management business, to provide superior returns through active investment management.

Meeting our first two objectives requires ongoing investment in education, thought leadership and the development and rollout of cost-effective solutions for retirees. Challenger has a key role to play in informing and educating the market of the benefits of guaranteed retirement income solutions such as annuities, which provide dependable, secure income in retirement.

The Australian funds management industry is undergoing significant change. We believe that the contemporary Fidante Partners boutique fund manager model which is backed by an institutional partner is the right model and plan to grow both the size of the existing boutiques and introduce new ones over the coming years. Fidante Partners is expected to continue to grow at a faster rate than the overall Australian funds management industry.

We are committed to Challenger’s vision and believe that the right strategies and team are in place to achieve this vision. Our business is well positioned to continue to grow strongly and increase shareholder value. We are confident that the best years for Challenger lie ahead.

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Brian Benari Chief Executive Officer

7

Life and Funds Management

Richard Howes

Chief Executive, Life

Challenger Life is the leading provider of annuities and guaranteed retirement income streams in Australia. Life’s products are aimed at investors seeking the security and certainty of guaranteed cash flows with protection against market, inflation and longevity risks. Products are distributed by financial institutions, financial adviser groups, and independent financial advisers. Being an independent provider, Challenger has distribution representation across all major hubs and platforms. Challenger Life has won the Association of Financial Advisers/Plan for Life ‘Annuity Provider of the Year’ award for the past four years and has won the ‘Income Stream – Innovation’ award for the past two years.

Challenger Life is an APRA regulated entity and its financial strength is rated for wholesale investors by Standard & Poor’s, who reaffirmed an ‘A’ credit rating in December 2011.

Changes in demographics and consumer risk preferences are leading to an increase in demand for Life’s products. The increase in demand is being amplified by:

• strong Challenger retirement incomes brand recognition amongst financial advisers and consumers;

• leading product development;

• thought leadership in retirement incomes; and

• increased focus on making Challenger an easy organisation to deal with.

The favourable market dynamics and a range of business initiatives undertaken have resulted in strong organic sales growth. Retail annuity sales increased by 34% in 2012 and have increased by a compound annual growth rate of 26% per annum since 2008.

Life investment assets increased 17% in 2012 to $9.8 billion due to net book growth in both retail and institutional guaranteed income products. Investment assets support these products by delivering sufficient returns to meet the promises made to investors. Seventy six percent of total assets are invested in fixed income, with 86% of the fixed income portfolio

investment grade (up from 83% in 2011). A high quality portfolio of commercial real estate represents a further 16% of total assets. The Australian portfolio, which represents over 80% of the property portfolio, has a weighted average lease life of 6.7 years and is leased to high quality tenants (62% of tenants are AAA rated).

Life generated normalised cash operating earnings of $436 million in 2012, up 9% on 2011. The increase in normalised cash operating earnings was due to the growth in assets as a result of ongoing strong sales.

Our capital position continued to strengthen over the year, ending the year with surplus capital to regulatory requirements of $719 million, up from a surplus position of $678 million at the start of the year.

The outlook for our Life business remains very positive. The retirement incomes market is being propelled by favourable demographic tail winds and an increased awareness of financial risks in retirement by retirees. Challenger continues to launch new business initiatives to grow our retirement incomes market share and increase returns for shareholders.

Rob Woods

Chief Executive, Funds Management

Challenger’s Funds Management business is one of the fastest growing Australian fund managers and is ranked the tenth largest, with $31 billion in Funds Under Management (FUM). Funds Management earnings before interest and taxes increased to $21 million in 2012. The Funds Management business comprises Fidante Partners and Aligned Investments.

Fidante Partners comprises 11 co-owned, separately branded boutique investment managers, with Challenger providing administration, distribution and business management support. The boutique funds management model has widespread support from investors and asset consultants and aligns the interests of boutique principals, investors and Challenger. The success of the model is evident when comparing Fidante Partners’ net flows and growth in FUM against the broader funds management market.

In 2012, the boutique partnership business was rebranded Fidante Partners. As Challenger’s brand has progressively become more synonymous with

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retirement incomes and annuities, it was appropriate to distinguish and separately promote the alphagenerating capability within our boutique partnership funds management business.

Fidante Partners secured its eleventh boutique fund manager in 2012, acquiring a majority interest in MIR Investment Management (MIR). As part of the repositioning of this business, MIR has rebranded itself Metisq Capital. Metisq Capital has $1 billion of funds under management and specialises in the wholesale funds management of Asia-Pacific (ex Japan) and Greater China equities strategies. The Metisq Capital acquisition is the first boutique added since 2010 and adds a specialised emerging markets capability.

Aligned Investments develops and manages products under the Challenger brand for third party investors as well as for Challenger’s Life business. This includes ASX-listed funds Challenger Diversified Property Group (CDI) and Challenger Infrastructure Fund (CIF), as well as a number of large unlisted mandates for institutional investors. In 2012, Aligned Investments was successful in attracting a number of new mandates from a broad range of institutional investors.

A key focus for CIF over the past year has been the strategic review announced in August 2011. The strategic review completed in June 2012 with the announcement of the sale of CIF’s assets and unitholders voting to wind up CIF and return capital. The outcome was a very pleasing one, with the return to unitholders being in excess of 40% since the announcement of the strategic review.

The Funds Management business is well placed to benefit from the Federal Government’s decision to increase compulsory superannuation contributions from 9% to 12% over the next seven years. We expect Fidante Partners to continue to grow at a faster rate than the broader funds management market, with the strategy to continue enhancing our 11 boutique partnerships through broader distribution capabilities and new product development. We will look to add new boutique partners as opportunities arise. The Aligned Investments business provides significant operating leverage with new bespoke solutions being offered to our institutional customers, providing opportunities for continued revenue growth.

Rob Woods and Richard Howes

Chief Executive, Funds Management and Chief Executive, Life

9

Distribution, Product and Marketing

Paul Rogan

Chief Executive, Distribution, Product and Marketing

Challenger’s Distribution, Product and Marketing team is responsible for leading retirement incomes and funds management sales outcomes, coordinating the marketing programs, enhancing customer and adviser experiences, and expanding Challenger’s product range.

Distribution

Sales have benefited from the creation of specialist distribution teams for Life and Funds Management, focused on retirement incomes sales, Fidante Partners or Aligned Investments. We have also significantly increased the number of Business Development Managers to support the growth and demand in our Life and Funds Management offerings.

In 2012, we have seen continued strong growth in retail life sales, with sales in the June quarter our strongest ever. Retail life sales were $1.95 billion in 2012, an increase of 34% on 2011. Retail life sales have increased by a compound annual growth rate of 26% since 2008.

In 2012, Funds Management generated $4.2 billion of net flows, up from $2.4 billion in 2011. Our Funds Management business has seen positive net flows for the past six halves, a very pleasing result given the difficult investment markets during this period.

The major distribution initiatives launched in 2011 have continued into 2012. We are focused on increasing the productivity of our distribution teams and broadening retail annuity sales into more financial planner groups. Both initiatives are aimed at increasing retail annuity sales.

Providing advisers with online tools, electronic interfaces and ongoing product education continues to be a priority. In 2012, we:

• refined our market leading retirement income calculator, which focuses on client retirement cash flows over time and how they behave in different market conditions with different asset allocations. This calculator brings to life the point that retirement and retirees’ portfolios need to manage market, inflation and longevity risks;

• rolled out an e-quote application for advisers, making it easier and quicker to price and apply for annuities;

• integrated Challenger’s systems with Xplan, a market leading financial adviser software, to streamline adviser efficiency when dealing with Challenger;

• continued the bi-annual adviser roadshows, with approximately 2,000 advisers attending. The roadshows focus on educating advisers on retirement incomes strategies and portfolio construction; and

• launched AdviserOnline, a dedicated web based support service to advisers offering new tools, client reporting and functionality.

A key strategic initiative is to continue building on Challenger’s position as a market leader in retirement incomes. To help achieve this, we have continued to invest in our retirement incomes research capability. The Challenger retirement incomes research team produces research focusing on relevant issues in retirement investing, and examines the appropriateness of current retirement strategies. The team’s research contributes to a consistent corporate message on key retirement issues.

Product

Following demand from financial advisers, in 2012 we launched a new product, the Challenger Guaranteed Pension Fund (GPF). GPF provides guaranteed monthly payments over a set period with the ability for principal to be paid out over the life of the investment. GPF is a platform based product with the required flexibility to meet account based pension minimum drawdown requirements. GPF won the 2011 Association of Financial Advisers/Plan for Life ‘Income Stream – Innovation’ award.

We continue to advocate for regulatory change that will enable greater innovation in the retirement incomes market, including changes to allow a market for deferred lifetime annuities.

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Marketing

In early 2011, Challenger launched a major consumer advertising campaign on national television, cinema, radio, print and online. This ‘Real Stories’ campaign continued to run throughout 2012.

‘Real Stories’ depicts how the retirement plans for four individuals have been impacted by the Global Financial Crisis. Challenger’s intent is to bring balance to a discussion that for too long has focused on the benefits of share market investing whilst rarely mentioning the risks.

The campaign targets the over 55 age demographic, an estimated target audience of two million Australians. It also runs in various trade media, and has significantly increased consumer and financial adviser recognition of Challenger as the pre-eminent retirement incomes provider.

As a result of the campaign, financial advisers are now almost three times more likely to think of Challenger first as a retirement incomes provider. The campaign has been recognised by three industry advertising and marketing awards, most recently winning the Money Management/Lonsec Advertising Campaign of the Year Award.

A key priority in 2012 was to differentiate our annuities and boutique partnership funds management businesses. With the Challenger brand progressively becoming more synonymous with secure retirement incomes and annuities, it became appropriate to distinguish and separately promote the alpha-generating capability within our boutique partnership funds management business. As such, in 2012 we formally launched our new boutique partnership funds management brand, Fidante Partners.

Paul Rogan

Chief Executive, Distribution, Product and Marketing

11

Corporate

Andrew Tobin

Chief Financial Officer

Consistent with the last few years, 2012 saw our business experience significant growth, which in turn has driven record financial results.

Normalised net profit after tax rose 20% to $297 million and normalised earnings before interest and tax increased in both our Life and Funds Management businesses.

Normalised earnings per share increased 11% to 57.5 cents per share. The increase was less than the increase in normalised net profit after tax due to an increase in the number of shares on issue following the exercise of 60 million CPH options in late 2011. In 2012, we bought back 13 million shares via our on-market share buy-back.

The strong growth in retail annuity sales continued into 2012, with a record $1.95 billion of retail sales (up 34% on the prior year) and delivered $583 million, or 10%, net retail annuity book growth. This outcome is a direct result of our key focus on distribution, product and marketing and capitalising on the structural market change that is underway in the retirement incomes market.

Our business has significant operating leverage, as measured by our cost to income ratio. This ratio has fallen by 12 percentage points over the past five years to 35.9% and over this period our expenses have remained in the range of $180 million to $190 million. We have also reduced our targeted cost to income ratio down to a range of 34% to 38% (down from 35% to 40%). This highlights that our platform is, and remains highly scalable to support future business growth. Expenses increased by $9 million in 2012 as a direct result of investing in growth initiatives such as increasing our distribution capacity, bolstering our marketing and advertising campaign and establishing a research capability.

Statutory net profit after tax was $149 million, down from $261 million in 2011 as a result of negative investment experience. Negative investment experience for the year was a result of the volatility in credit and equity markets. As we are required to value all assets and liabilities supporting the life business at fair value despite being a hold to maturity investor, volatility can result in significant positive and negative investment experience.

In some years, such as 2010, these movements meant that statutory profit was higher than normalised profit; in other years such as the current year it meant that statutory profit was less than normalised profit. The financial assets we hold are of a high quality and we expect 2012 net investment experience to largely reverse over time as we hold these assets to maturity.

Challenger Life had a $719 million capital surplus above regulatory requirements at the end of 2012, up from $678 million in 2011 and is well positioned to transition to APRA’s new capital standards as outlined in the CEO’s report on page 6. We also had no group recourse debt outstanding and a net cash balance of $94 million.

Dividends have been steadily increasing since 2008. The final dividend for 2012 was 10.5 cents per share, bringing the total 2012 dividend to 18.0 cents per share, a 9% increase on 2011. The normalised dividend payout ratio was 31%, which is in line with our targeted dividend payout ratio of around 30% of normalised earnings.

Challenger aims to minimise our impact on the environment by raising awareness with our people, employing technologies that minimise our use of resources and occupying sustainable places of work.

In 2012, Challenger was recognised as a member of the FTSE4Good Index. The FTSE4Good Index has been designed to measure the performance of environmental, social and governance (ESG) practices of companies. The FTSE4Good Index includes companies that have met or exceeded globally recognised ESG standards. It is a valuable tool for fund managers, investment banks, stock exchanges and brokers when assessing or creating responsible investment products.

Challenger has also committed, through a partnership with Climate Friendly, to further reduce our carbon footprint by offsetting 100% of our power usage from our head office in Sydney. Challenger will invest in environmental projects with total carbon emission reductions equal to the annual carbon produced through our energy consumption. This will lead to a reduction of approximately 1,100 tonnes of carbon annually.

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Blair Beaton

Head of Strategy and Mergers and Acquisitions The Head of Strategy and Mergers and Acquisitions (M&A) reports directly to the Chief Executive Officer, reflecting the fundamentally important role that strategy plays in our decision making.

The team works closely with the Chief Executive Officer and the Board in establishing the strategic direction for our business over the medium and long term, including our retirement incomes strategy and Challenger’s long-term vision to provide Australians with financial security in retirement.

The Strategy and M&A team has also been responsible for some of the key transactions to position Challenger as a leader in retirement incomes, including the acquisition of annuity books from MetLife and AXA, the sale of Mortgage Management and Financial Planning operations, and the establishment of Fidante Partners. In 2012, the Strategy and M&A team played a key role in the acquisition of our eleventh boutique fund manager, MIR Investment Management.

Andrew Tobin and Blair Beaton

Chief Financial Officer and Head of Strategy and M&A

13

Risk and Human Resources

Richard Willis

Chief Risk Officer

The Chief Risk Officer is accountable for the implementation of Challenger’s Risk Management Framework, which covers all categories of risks. Individual businesses are well versed and responsible for understanding and managing their risks. The Risk Management Framework ensures all risks are managed and reported across the organisation and remain within the Board’s risk appetite. The Board’s Risk Appetite Statement outlines the level of risk that is acceptable in seeking to achieve Challenger’s strategic goals and financial objectives. This has a direct impact on culture within the organisation and provides clearly articulated boundaries on acceptable risk-taking activities across the Company.

The Chief Risk Officer role was created in 2011 and reports directly to the Chief Executive Officer and has independant interaction with the Board. The creation of the Chief Risk Officer role is a reflection of the importance placed on risk management by Challenger as we have a strong risk management culture with compliance obligations a key focus for all employees. Challenger has continued to evolve its Risk Management Framework in 2012 and has reviewed and benchmarked its framework to ensure it remains best practice.

The Chief Risk Officer is also responsible for oversight of regulatory engagement, including APRA and ASIC. There has been a high level of engagement with APRA during its Life and General Insurance Capital (LAGIC) project. The LAGIC project is well progressed and we expect new prudential capital standards for life and general insurers to be issued toward the end of 2012 and become effective from 1 January 2013.

As part of LAGIC, APRA will require life insurers to develop and maintain a rigorous and well documented Internal Capital Adequacy Assessment Process (ICAAP), with the Board of Directors required to have oversight of the ICAAP. Challenger’s risk management framework will incorporate APRA’s ICAAP requirements.

Angela Murphy

Executive General Manager, Human Resources

During 2012, the Executive General Manager, Human Resources, Jennifer Wheatley, took parental leave and Angela Murphy assumed the role of Executive General Manager, Human Resources for the period of Jennifer’s leave.

During the year, Challenger undertook an employee engagement survey to gain a better understanding of what employees value most about working at Challenger. The ‘Your Voice’ survey was administered by Aon Hewitt and allowed employees to provide honest and confidential feedback on how they feel about their work, the work environment and their experiences at Challenger. Challenger’s employee engagement was above the financial services benchmark and within Aon Hewitt’s high performance range. Based on Aon Hewitt research, companies with employee engagement in this range consistently deliver better business outcomes.

Given the importance Challenger places on our Principles, one of the highlights of the survey outcomes was that 82% of employees indicated their personal values match the Challenger Principles. The survey outcomes informed human resource planning and areas of focus.

During the year, a number of people programs and initiatives were implemented, including:

• Diversity@Challenger – an initiative to raise awareness of and provide external perspectives on challenges and potential solutions related to workplace diversity;

• Mentoring@Challenger – in its third year, the mentoring program has been extended and provides selected employees with the opportunity to learn from senior managers within Challenger; and

• Managing@Challenger – focusing on manager skills such as recruitment, performance management and developing, motivating and leading teams.

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Challenger continues to invest in the development of senior leaders through our Leadership Perspectives Program, which was developed in conjunction with the Australian Graduate School of Management (AGSM). The broad theme of ‘applying leadership perspectives for better business outcomes’ is central to this program. Based on the program’s success, an abridged version will be rolled out to the next level of leaders in the 2013 financial year.

Internal communication is another area of ongoing focus to ensure employees feel connected to what is happening across the business and understand their role in achieving our business imperatives.

Challenger is committed to making a positive and meaningful contribution to the community. Challenger operates a Community Giving Program allowing employees to make regular or one-time pre-tax salary donations to one of our community partners, with contributions matched by Challenger up to $500 per employee per year. Challenger’s community partners include Alzheimer’s Australia, Barnardos, Bear Cottage, Beyondblue, National Seniors Foundation Trust and Meals on Wheels. During the year, Challenger shareholders were also invited to support our community partners by donating some or all of their dividends through our dividend donation program.

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Angela Murphy and Richard Willis Executive General Manager, Human Resources and Chief Risk Officer

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Information for shareholders

Annual General Meeting

All shareholders are invited to attend Challenger’s 2012 Annual General Meeting on 26 November 2012.

Full details of the meeting are in your Notice of Meeting and are also available at www.challenger.com.au.

Key dates

Annual General Meeting – 26 November 2012

2013 interim results – 28 February 2013

Challenger Annual Report 2012

The information contained in this Shareholder Review has been derived from the Challenger 2012 Annual Report. A copy of Challenger’s 2012 Annual Report, which includes full details of financial performance is available at www.challenger.com.au.

Shareholder queries

If you have any questions about your shareholding, please contact Computershare Investor Services.

Computershare Investor Services Pty Limited Level 3, 60 Carrington Street, Sydney NSW 2000. Investor queries 1800 780 782 Facsimile +61 2 8234 5050

To assist with all enquiries, please quote your current address and Securityholder Reference Number (SRN) when dealing with Computershare.

If you would like to request a printed copy of the Annual Report, please contact Computershare, Challenger’s share registry.

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Directory

Principal place of business and registered office in Australia

Level 15 255 Pitt Street Sydney NSW 2000 Telephone: 02 9994 7000 Facsimile: 02 9994 7777

Directors

Peter Polson (Chairman) Brian Benari (Managing Director and Chief Executive Officer) Graham Cubbin Jonathan Grunzweig Russell Hooper Brenda Shanahan Leon Zwier

Share register

Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney NSW 2000 Telephone: 02 8234 5000 Website: www.computershare.com.au

Auditor

Ernst & Young 680 George Street Sydney NSW 2000

Website

www.challenger.com.au

Company secretaries

Michael Vardanega Suzanne Koeppenkastrop

Sydney

Level 15, 255 Pitt Street Sydney NSW 2000 Telephone 02 9994 7000 Facsimile 02 9994 7777

Melbourne

Level 19, 31 Queen Street Melbourne VIC 3000 Telephone 02 9994 7000 Facsimile 02 9994 7777

Brisbane

Level 7, 320 Adelaide Street Brisbane QLD 4000 Telephone 07 3136 5400 Facsimile 07 3136 5407

Adelaide

Level 7, 147 Pirie Street Adelaide SA 5000 Telephone 08 7071 7042 Facsimile 08 8227 0395

Perth

Level 2, 168 St Georges Terrace Perth WA 6000 Telephone 08 9261 7412 Facsimile 08 9321 5277

London

Heron Tower Level 19, 110 Bishopsgate London EC2N 4AY Telephone +44 20 7976 3300 Facsimile +44 20 7976 3301

www.challenger.com.au

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