CHALLENGER LIMITED

Challenger Limited 20 April 2021

THIRD QUARTER PERFORMANCE UPDATE

Group assets under management up 8% for the quarter and exceeds $100 billion
Life investment assets up 6% for the quarter, benefiting from
record quarterly annuity sales of $1.6 billion
record quarterly Life book growth of 9.2% for the quarter[1]
Funds Management FUM up 9% for the quarter, including $7.0 billion of net flows
FY21 normalised net profit before tax expected to be at the bottom end of $390 million to $440 million guidance range

Challenger Limited (ASX: CGF) today provided an update for the three months to the end of March 2021, with Group assets under management (AUM) increasing 8% for the quarter and exceeding $100 billion for the first time.

Growth in Group AUM was driven by record Life annuity book growth and a continuation of market leading Funds Management net flows.

Managing Director and Chief Executive Officer Richard Howes said: “Challenger’s performance in the third quarter demonstrates our strategy to diversify revenue is working. We have been investing in our distribution, product and marketing capability over recent years which is extending our customer reach and diversifying our product offering and distribution channels.

“Sales of our institutional term annuity and Challenger Index Plus have been very strong, reflecting the investment we are making to build relationships with new institutional clients.

“Annuity sales also benefited from stabilisation in the retail adviser market, with domestic retail term sales up 32%. As previously flagged, Japanese annuity sales moderated following the strong start to the year.

“Funds Management further solidified its position as the fastest growing active manager in Australia. Total funds under management rose 9% during the quarter, benefiting from industry leading quarterly net flows of $7 billion.

“Group assets under management exceeded $100 billion for the first time and Challenger is now Australia’s third[2 ] largest active asset manager.

“Challenger remains well positioned for continued growth with diversified revenue streams in the Life business and a differentiated Funds Management offering.

1 Life book growth of 9.2% for the quarter represents Life net flows divided by opening FY21 annuity and Challenger Index Plus liabilities.

2 Rainmaker Roundup – Investment managers by consolidate FUM – December 2020.

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Challenger Limited A.B.N 85 106 842 371. Level 2, 5 Martin Place, Sydney NSW 2000.

Challenger Limited 20 April 2021

“Our recently announced bank acquisition will significantly expand the role Challenger plays in helping customers achieve financial security in retirement. We are well progressed in our preparations to integrate the bank, expand its term deposit offerings and build more direct relationships with customers as we await regulatory approval.

“Challenger remains on-track to achieve its normalised profit guidance, however, reflecting the tighter credit spread environment now expects to be at the bottom end of guidance range.

“We are responding to the investment conditions through our annuity pricing to reflect the tighter credit spread environment.”

Life

Total Life net flows for the quarter were $1,377 million, including annuity net flows of $879 million and Other Life net flows of $498 million. Life’s book growth for the quarter was a record 9.2%[1] .

Total Life sales were $2,419 million, up 155% on the prior corresponding period (pcp) reflecting both higher annuity sales and higher Challenger Index Plus sales.

Total annuity sales increased by $979 million (up 165%) on the pcp to $1,572 million driven by strong growth in domestic term annuity sales, partially offset by a moderation in the contribution from Japan (MS Primary) following a strong start to the 2021 financial year.

Domestic annuity sales were $1,493 million. Domestic fixed term sales recorded significant growth and totalled $1,386 million and lifetime sales of $107 million were broadly stable on the pcp.

Domestic retail term annuity sales of $366 million increased 32% on the pcp, benefiting from the stabilisation in the retail financial advice market.

Domestic institutional term annuity sales of $1,020 million were very strong due to the investment Challenger is making to establish new institutional partnerships and client relationships. The institutional term annuities were written at lower margins during the period reflecting a strategic investment in new relationships and the impact of long sales lead times which reduced the extent to which the sharp decline in credit spreads could be passed through to clients.

Domestic lifetime annuity sales of $107 million were stable on the pcp and comprised Liquid Lifetime sales of $64 million and CarePlus sales of $43 million.

Japan (MS Primary) sales were $79 million, with the volume moderating following the strong start to the 2021 financial year. The arrangement with MS Primary provides an annual amount of reinsurance, across both Australian and US dollar annuities, of at least ¥50 billion per year (A$670 million[3] ) for a minimum of five years from FY20[4] . Japanese sales for the nine months to 31 March 2021 were $622 million.

Sales of Other Life products (Challenger Index Plus) were $847 million, with $498 million of new business sales and $349 million of maturities reinvested during the quarter.

Life’s investment assets as of 31 March 2021 were $20.8 billion, up $1.2 billion or 6% for the quarter, benefiting from record quarterly net book growth ($1,377 million), retained earnings and

3 Based on the exchange rate as at 1 July 2020.

4 This is subject to review in the event of a material adverse change for either MS Primary or Challenger Life.

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Challenger Limited A.B.N 85 106 842 371. Level 2, 5 Martin Place, Sydney NSW 2000.

Challenger Limited 20 April 2021

other movements. Retained earnings includes a positive investment experience contribution as a result of tighter fixed income credit spreads.

Life’s strong capital position and defensive portfolio settings have been maintained.

Life’s PCA ratio was 1.56 times[5] , reflecting growth in the business and is after a one-off $100 million distribution (equivalent to 4 points of PCA) to fund the recently announced bank acquisition and its initial growth. Challenger remains comfortable operating toward the top end of its target range of 1.3 to 1.6 times the minimum amount set by the Australian Prudential Regulation Authority.

Funds Management

Funds Management funds under management (FUM) was $99.7 billion, an increase of $8.5 billion or 9% for the quarter. FUM growth was driven by $7.0 billion of net flows and a positive contribution from investment markets.

Fidante Partners’ FUM was $78.8 billion, an increase of $6.9 billion or 10% for the quarter. FUM benefited from industry leading net flows of $5.5 billion and positive investment markets of $1.4 billion. Strong net flows were recorded across a range of equity and fixed income boutiques.

Earlier this month, Fidante Partners and global specialist asset manager Impax Asset Management Limited announced they had entered into a new distribution agreement, with Fidante Partners becoming Impax’s exclusive distribution partner in Australia and New Zealand. Founded in 1998, Impax Asset Management is a specialist asset manager, with £30bn[6] in both listed and private markets strategies, investing in opportunities arising from the transition to a more sustainable global economy.

CIP Asset Management FUM was $20.9 billion and increased by $1.5 billion or 8% for the quarter, reflecting an increase in funds managed on behalf of Life following very strong book growth.

Outlook

Challenger reaffirms its FY21 normalised net profit before tax guidance, however, now expects to be at the bottom end of the $390 million and $440 million[7] guidance range.

Earnings reflect the sharp decline in credit spreads over the year, which were not fully reflected in customer pricing. Challenger is responding to the investment conditions by significantly adjusting annuity pricing.

ENDS

This release has been authorised by Challenger’s Continuous Disclosure Committee.

5 PCA ratio represents total Challenger Life Company Limited (CLC) Tier 1 and Tier 2 regulatory capital base divided by the Prescribed Capital Amount (PCA) and is as at 31 March 2021.

6 As at 31 March 2021.

7 The COVID-19 situation and its impacts on markets create an inherently uncertain environment. This could, among other things, impact the speed of deployment of Life’s capital and therefore impact guidance.

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Challenger Limited A.B.N 85 106 842 371. Level 2, 5 Martin Place, Sydney NSW 2000.

Challenger Limited 20 April 2021

About Challenger

Challenger Limited (Challenger) is an investment management firm focusing on providing customers with financial security for retirement.

Challenger operates two core investment businesses, a fiduciary Funds Management division and an APRA-regulated Life division. Challenger Life Company Limited is Australia's largest provider of annuities.

For more information contact

Stuart Kingham

Head of Investor Relations +61 401 139 067

Sean Aylmer Head of External Communications +61 409 817 039

Mark Chen

Senior Investor Relations Manager +61 423 823 209

Disclaimer

The forward-looking statements, estimates and projections contained in this release are not representations as to future performance and nothing in this release should be relied upon as guarantees or representations of future performance.

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Challenger Limited A.B.N 85 106 842 371. Level 2, 5 Martin Place, Sydney NSW 2000.

Assets and Funds Under Management, net flows and sales

Life quarterly sales and investment assets

Life quarterly sales and investment assets
$m	Q3 21 Q2 21	Q1 21	Q4 20	Q3 20
Life sales
Fixed term sales	1,465 819	1,025	480	487
Lifetime sales1	107 139	208	98	106
Life annuity sales	1,572 958	1,233	578	593
Maturities and repayments	(693) (900)	(1,133)	(926)	(590)
Life annuity fows	879 58	100	(348)	3
Annuity bookgrowth2	7.0% 0.5%	0.8%	(2.7%)	0.0%
Other Life sales	847 903	344	486	356
Other maturities and repayments	(349) (366)	(330)	(783)	(322)
Other Life fows	498 537	14	(297)	34
Other Life net bookgrowth2	20.6% 22.2%	0.6%	(15.2%)	1.7%
Total Life sales	2,419 1,861	1,577	1,064	949
Total maturities and repayments	(1,042) (1,266)	(1,463)	(1,709)	(912)
Total Life net fows	1,377 595	114	(645)	37
Total Life bookgrowth2	9.2% 3.9%	0.8%	(4.3%)	0.2%
Life
Fixed income and cash3	15,996 14,821	14,260	13,971	14,571
Property3	3,309 3,316	3,303	3,292	3,320
Equity and Infrastructure3,4	569 604	398	393	392
Alternatives4	922 893	987	647	677
Total Life investment assets	20,796 19,634	18,948	18,303	18,960
Average Life investment assets5	19,924 19,323	18,625	18,393	19,696

1 Lifetime sales includes CarePlus, a product that pays income for life and specifically designed for the aged care market.

2 Book growth percentage represents net flows for the period divided by opening book value for the financial year.

3 Fixed income, property and infrastructure are reported net of debt.

4 Commencing in 1H21, Life’s investment portfolio categories have been amended to more accurately reflect Life’s portfolio composition. The equities and infrastructure categories were combined, and absolute return funds and insurance-related investments reclassified from equities to alternatives. Comparatives have been restated.

5 Average Life investment assets calculated on a monthly basis.

Life Asset Allocation

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Q3 21 Q2 21 (1H21) Q1 21 Q4 20 (FY20) Q3 20
3% 4% 3% 4% 2% 5% 2% 4% 2% 4%
16% 77% 17% 76% 18% 75% 18% 76% 17% 77%
7 7 7 7 7
Fixed income and cash Property Equity and Infrastructure Alternatives
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