CHALLENGER LIMITED - Interim / Quarterly Report 2021

1H21

Providing our customers with financial security for retirement

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Overview

Providing our customers with financial security for retirement

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1H21 business outcomes Diversification delivering strong growth Bank acquisition to accelerate medium-term growth Richard Howes – Managing Director and Chief Executive Officer

Financial results Andrew Tobin – Chief Financial Officer

Outlook

Richard Howes – Managing Director and Chief Executive Officer

1H21 – 31 December 2020

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Highlights

Providing our customers with financial security for retirement

Performance in line with expectations and on-track for profit guidance

Diversification delivering strong growth and business momentum

Bank acquisition to drive medium-term growth

Prudent deployment of Life’s cash and liquid investments to enhance future returns

Strongly capitalised and maintaining appropriate portfolio settings

1H21 – 31 December 2020

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1H21 business outcomes Diversification delivering strong growth Bank acquisition to drive medium-term growth

Richard Howes Managing Director and Chief Executive Officer

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1H21 business outcomes

Performance in line with expectations and on-track for profit guidance

Normalised Statutory Normalised Strongly NPBT 1 $196m NPAT 1 $223m ROE 2 11.5% capitalised On-track for FY21 profit Includes partial reversal Prudent capital CLC3 above top end of guidance of pandemic related deployment over FY21 target range losses Dividend – 9.5cps fully franked Group AUM FM net flows Life book Life investment $96.1bn +$6.4bn growth +4.7% portfolio +13% in 1H21 Q1 +$3.6bn Q1 +0.8% Maintaining appropriate Life +7%; FM +12% Q2 +$2.8bn Q2 +3.9% portfolio settings

1H21 – 31 December 2020

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Normalised profit framework and a reconciliation to statutory net profit after tax is disclosed in the 2021 Interim Financial Report – Operating and Financial Review Section 8. 2. Normalised ROE pre tax.
Challenger Life Company Limited (CLC).

1H21 business outcomes

Strategic progress

To provide our customers with financial security for retirement

Increase the use of secure retirement income streams Lead the retirement incomes market and be the partner of choice Maintain leading operational and people practices Provide our customers with excellent funds management solutions • Retirement Income Review report highlights importance of better solutions in retirement • Supporting super funds with retirement product design • Improved customer experience with Investor Online upgrade • Supported future reinvestments with online maturities • Progressing institutional partnerships • Significant progress for Fidante boutiques in global markets • Progressing new boutique opportunities • New CIPAM 1products • Included on Bloomberg Global Gender Equality Index for second year • Published climate change statement • Maintained high employee engagement To provide our customers with financial security for retirement	Increase the use of secure retirement income streams Lead the retirement incomes market and be the partner of choice Maintain leading operational and people practices Provide our customers with excellent funds management solutions • Retirement Income Review report highlights importance of better solutions in retirement • Supporting super funds with retirement product design • Improved customer experience with Investor Online upgrade • Supported future reinvestments with online maturities • Progressing institutional partnerships • Significant progress for Fidante boutiques in global markets • Progressing new boutique opportunities • New CIPAM 1products • Included on Bloomberg Global Gender Equality Index for second year • Published climate change statement • Maintained high employee engagement To provide our customers with financial security for retirement	Increase the use of secure retirement income streams Lead the retirement incomes market and be the partner of choice Maintain leading operational and people practices Provide our customers with excellent funds management solutions • Retirement Income Review report highlights importance of better solutions in retirement • Supporting super funds with retirement product design • Improved customer experience with Investor Online upgrade • Supported future reinvestments with online maturities • Progressing institutional partnerships • Significant progress for Fidante boutiques in global markets • Progressing new boutique opportunities • New CIPAM 1products • Included on Bloomberg Global Gender Equality Index for second year • Published climate change statement • Maintained high employee engagement To provide our customers with financial security for retirement	Increase the use of secure retirement income streams Lead the retirement incomes market and be the partner of choice Maintain leading operational and people practices Provide our customers with excellent funds management solutions • Retirement Income Review report highlights importance of better solutions in retirement • Supporting super funds with retirement product design • Improved customer experience with Investor Online upgrade • Supported future reinvestments with online maturities • Progressing institutional partnerships • Significant progress for Fidante boutiques in global markets • Progressing new boutique opportunities • New CIPAM 1products • Included on Bloomberg Global Gender Equality Index for second year • Published climate change statement • Maintained high employee engagement To provide our customers with financial security for retirement	Increase the use of secure retirement income streams Lead the retirement incomes market and be the partner of choice Maintain leading operational and people practices Provide our customers with excellent funds management solutions • Retirement Income Review report highlights importance of better solutions in retirement • Supporting super funds with retirement product design • Improved customer experience with Investor Online upgrade • Supported future reinvestments with online maturities • Progressing institutional partnerships • Significant progress for Fidante boutiques in global markets • Progressing new boutique opportunities • New CIPAM 1products • Included on Bloomberg Global Gender Equality Index for second year • Published climate change statement • Maintained high employee engagement To provide our customers with financial security for retirement	Increase the use of secure retirement income streams Lead the retirement incomes market and be the partner of choice Maintain leading operational and people practices Provide our customers with excellent funds management solutions • Retirement Income Review report highlights importance of better solutions in retirement • Supporting super funds with retirement product design • Improved customer experience with Investor Online upgrade • Supported future reinvestments with online maturities • Progressing institutional partnerships • Significant progress for Fidante boutiques in global markets • Progressing new boutique opportunities • New CIPAM 1products • Included on Bloomberg Global Gender Equality Index for second year • Published climate change statement • Maintained high employee engagement To provide our customers with financial security for retirement
	Increase the use of secure retirement income streams • Retirement Income Review report highlights importance of better solutions in retirement • Supporting super funds with retirement product design	Lead the retirement incomes market and be the partner of choice • Improved customer experience with Investor Online upgrade • Supported future reinvestments with online maturities • Progressing institutional partnerships	Provide our customers with excellent funds management solutions • Significant progress for Fidante boutiques in global markets • Progressing new boutique opportunities • New CIPAM 1products	Maintain leading operational and people practices • Included on Bloomberg Global Gender Equality Index for second year • Published climate change statement • Maintained high employee engagement

1H21 – 31 December 2020

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CIP Asset Management (CIPAM).

Provide customers with financial security for retirement Diverse product range helping customers fund their retirement

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FUNDS High alpha across all capabilities
MANAGEMENT Equities, alternatives, real assets, fixed income
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LIFE

Non-guaranteed Guaranteed Saving for Spending for retirement retirement

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Starting out Working Paying off debt Accumulating Starting Travelling Downsizing Aged care
wealth retirement
1H21 – 31 December 2020
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Diversification strategy delivering strong growth Strong business momentum in markets with long-term structural tailwinds

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Funds Management Life
Fastest growing Australian active manager #1 Australian annuity provider
Fund managers – net flows % of FUM1 Life sales
15% $3.4bn
Domestic term annuities
10% 5 year CAGR -2%
5% 36%
Domestic lifetime annuities
FUM $2.1bn 5 year CAGR +9%
$bn 20% 16%
(5%) 11% 10% Japan (MS Primary) annuities
new channel
(10%)
(15%) 69% 38% Institutional (Challenger Index Plus)
5 year CAGR +25%
(20%)
1H16 1H21
•
Market leading organic flows Maintain strong growth through period of disruption
2
• •
Very strong retail net flows – up 32% Benefiting from diversification strategy
’
• Zenith Partners ‘ Distributor of the Year • Adviser disruption stabilised (impacted term annuity sales)
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Funds Management

Fastest growing Australian active manager

Adviser disruption stabilised (impacted term annuity sales)

1H21 – 31 December 2020

Represents Australian listed fund manager net flows over the past 12 months divided by FUM 12 months ago. Peers include AMP Capital Investors, Janus Henderson, Magellan, Perpetual, Pendal, Pinnacle Investment Management, Platinum Investment Management. Data based on most recent ASX disclosures.
Fidante Partners net flows increased by 32% on 1H20.

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Provide customers with financial security for retirement Bank acquisition extending customer and product reach

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FUNDS High alpha across all capabilities
MANAGEMENT Equities, alternatives, real assets, fixed income
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BANK

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Annuities – term, lifetime, aged care
LIFE
Institutional retirement solutions
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Non-guaranteed Guaranteed Saving for Spending for retirement retirement

Starting out Working Paying off debt Accumulating Starting Travelling Downsizing Aged care wealth retirement

1H21 – 31 December 2020

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Bank acquisition

Extending customer and product reach to drive medium-term growth

Highly strategic acquisition

Increased role supporting customer retirement incomes
Attract new customers, including pre-retirees
Less reliant on retail financial advice market
Reduces capital and earnings volatility over time

MyLife MyFinance overview

Australian-based consumer savings and loans bank 1
• $35m acquisition price (net assets ~$18m) 1
• Expected to settle March 2021
2 3
Savings portfolio $146m ; Loan portfolio $116m
Online bank with contemporary IT platform

Integration priorities

Expand existing term deposit offering
offer compelling value
increase product tenors
Product innovation opportunities
Access new distribution including direct and intermediated
Leverage Challenger investment capability and brand
Separate business segment reporting
Expected to break even in FY22

Challenger term annuity rate vs Best Big 4 bank term deposit rate

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1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
Dec-17 Dec-18 Dec-19 Dec-20
1 year 5 year
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1H21 – 31 December 2020

The acquisition is subject to regulatory approval by both APRA and the Federal Treasurer and is expected to settle in late March 2021 once approval has been obtained. 2. 31 December 2020 – savings portfolio comprises at-call and term deposit products – increased by 24% CAGR since 2016.
31 December 2020 – loan portfolio comprises high quality residential home loans (loan to value ratio ~50% as at 30 September 2020).

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Financial results

Andrew Tobin Chief Financial Officer

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Group result

Performance in line with expectations

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Net income ($m)
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Expenses ($m)

Normalised NPBT ($m) EBIT margin 1 (%) Normalised ROE 2 (%)

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20.0%
423 142 143 127 80.0% 66.5% 300.0 19.0%18.0%17.0%
70.0% 61.9% 61.0% 16.0%
375 250.0 15.0%
325 60.0% 14.0%13.0% 15.2%
50.0% 200.0 12.0%11.0% 14.0%
10.0%
40.0% 279 150.0 9.0%8.0% 11.5%
30.0% 228 7.0%
196 100.0 6.0%
20.0% 5.0%4.0%
50.0 3.0%
10.0% 2.0%
1.0%
0.0% 0.0 0.0%
1H20 2H20 1H21 1H20 2H20 1H21 1H20 2H20 1H21 1H20 2H20 1H21
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Net income -$50m (-13% on 2H20)

Life COE -$50m (-17%) – Normalised growth assumptions More defensive portfolio settings FM income +$1m (+1%) –

Higher management fees Lower performance fees

Expenses -$16m (-11% on 2H20)

Life -$4m (-7%)

FM -$5m (-9%)

Corporate -$7m (-20%)

Norm. NPBT $196m (-14% on 2H20)

Lower Life COE partially offset by lower expenses

On-track to meet FY guidance of between $390m to $440m

EBIT margin 61.0% (-90pp on 2H20)

Normalised ROE 11.5%

deployment over FY21

Normalised ROE target 14.2% 3

1H21 – 31 December 2020

EBIT margin represents normalised EBIT divided by net income.
Normalised ROE pre-tax.
Through-the-cycle normalised ROE target represents RBA cash rate plus a margin of 14%. 1H21 target was 14.2% and as expected below target due to speed of capital deployment and market conditions.

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Group result On-track to meet full year normalised NPBT profit guidance Investment gains from partial reversal of pandemic related losses

Normalised NPBT $196m – down 14%1

Life – normalised growth assumptions (-$33m) and more defensive portfolio settings
Funds Management – higher FUM based fees offset by lower performance fees
Expenses – disciplined management (down 11%)

1 Normalised NPAT $137m – down 10%

Effective tax rate ~30% (down from 33% in 2H20)

Statutory NPAT $223m

Investment experience (+$87m) – partial reversal of unrealised FY20 investment experience losses
Significant items (-$1m) – bank acquisition transaction costs

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Normalised Normalised Statutory
NPBT NPAT NPAT
1 (1)
16
1
(33)
87
(17) 59
228 223
196
137
2H20 Lower Lower Higher Lower Lower 1H21 Normalised 1H21 Investment Significant 1H21
Normalised Life Life cash FM expenses interest Normalised tax Normalised experience items Statutory
NPBT normalised earning income and NPBT NPAT NPAT
growth borrowing
costs
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1H21 – 31 December 2020

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Percentage movement compares 1H21 to 2H20.

Life result

Sales and book growth benefiting from diversification strategy Earnings reflect lower normalised growth and speed of capital deployment

Total Life sales ($bn)

Life book growth ($bn)

Life COE 1 and Life EBIT ($m) Life normalised ROE 2 (%)

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3.4
3.1
1.2
1.2
2.0
0.8
1.9 2.2
1.2
1H20 2H20 1H21
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Annuity Other

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0.9
0.7
(0.6)
1H20 2H20 1H21
Annuity Other
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345
286 294
239 244
193
1H20 2H20 1H21
Life COE Life EBIT
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16.8% 16.1%
12.5%
1H20 2H20 1H21
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Life sales $3.4bn (+10% on 1H20)

Annuity sales $2.2bn (+12%)

Domestic $1.6bn (+11%)
Japan $0.5bn (+15%)

Other Life sales $1.2bn (+5%)

Life book growth +$0.7bn

+4.7% growth in total liabilities

Annuity book growth +$0.2bn

+1.3% growth in annuity liabilities

Life COE -$50m to $244m (-17% on 2H20)

Lower normalised growth (-$33m) and more defensive portfolio settings

Life EBIT -$46m to $193m (-19% on 2H20)

Lower Life COE partially offset by lower expenses

Life Normalised ROE 12.5%

Down 360bps from speed of capital deployment

1H21 – 31 December 2020

Life Normalised Cash Operating Earnings (COE).

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Life Normalised Return on Equity (ROE) pre-tax.

Life sales up 10%

Benefiting from diversification strategy Record long-term annuity1 sales

Life sales $3.4bn (+10%)

Annuity sales $2.2bn (+12%)

Domestic sales $1.6bn (+11%)
term $1.3bn (+2%)
- adviser disruption now stabilised
- 2
- – retail term sales up 14%
lifetime $0.3bn (+64%)
- 3
- – increased IFA penetration
- reinsurance of closed lifetime portfolio ($0.1bn)
Japan (MS Primary) $0.5bn (+15%)
4
• on-track for ¥50 billion minimum target
25% of 1H21 annuity sales

Other Life sales $1.2bn (+5%)

New clients and expanded product offering

Life sales ($m) and long term sales mix

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3,500 50%
41%
3,000
36% 35% 40%
2,500 31%
29%
30%
2,000
1,500
20%
1,000
10%
500
- -
1H17 1H18 1H19 1H20 1H21
Other institutional (Challenger Index Plus)
Japan annuities
Domestic lifetime annuities
Domestic term annuities
Long-term annuity sales as % of total annuity sales (RHS)
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1H21 – 31 December 2020

Long-term annuities represent domestic lifetime and Japan (MS Primary) annuities.
1H21 domestic term sales include $190m of institutional term annuity sales, down from $300m in 1H20.
Independent Financial Adviser.

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~A$670m based on 1 July 2020 exchange rate.

Life net book growth +4.7%

Benefiting from diversification strategy

Life net book growth $709m

1
• +4.7% growth in total Life book

Annuity net book growth $158m

2
• +1.3% growth in annuity book
Annuity sales up 12%
Maturity rate elevated
- 1H21: 16%
- 2H21: reducing to between 11% – 12%
- FY22: further reduction on FY21

Other Life book growth $551m

Life book growth ($m)

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948
1,000
924
843
800
709
584
600
400
200
-
1H17 1H18 1H19 1H20 1H21
Other Life (Challenger Index Plus) book
Annuity book
Total Life book
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1H21 – 31 December 2020

Calculated as 1H21 Life net flows (i.e. sales less capital repayments) of $709m divided by FY20 Life annuity book and Challenger Index Plus liabilities ($14,997m). 2. Calculated as 1H21 Life annuity flows (i.e. annuity sales less capital repayments) of $158m divided by FY20 Life annuity book ($12,581m).

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Life sales and book

Record long-term annuity sales Long-term sales reduce future maturity rates

Focus on long-term liabilities

1 • 41% of 1H21 annuity sales long-term Annuity new business tenor 2 9 years

Book continuing to shift to long-term annuities

1
• Long-term annuities exceeds term business
Japan book now $2bn
Term contribution nearly halved over last 5 years

Growing institutional book

Represents 19% of total Life book
Index Plus liabilities up 25% on 2H20

Life annuity and other liabilities ($bn)

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16.0 $15.6bn $15.8bn
$14.5bn
$13.0bn 18% 19%
15%
12.0 $11.4bn 14% 8% 10% 13%
14% 7%
31% 31%
8.0 27% 29% 33%
4.0
59% 50% 46% 41%
35%
0.0
1H17 1H18 1H19 1H20 1H21
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Other (Challenger Index Plus Fund) institutional liabilities Japan (MS Primary) annuity liabilities Lifetime annuity liabilities Term annuity liabilities

1H21 – 31 December 2020

Long-term annuities represent domestic lifetime and Japan (MS Primary) annuities.
New business tenor represents the maximum product maturity of new business sales. These products may amortise over a different period.

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Life investment portfolio

Portfolio in good shape and maintaining appropriate settings

Fixed income – unchanged at 76%

Life investment portfolio (%)

Investment grade stable at 86%
Cash down 5 points to 11% following gradual deployment
1H21 average cash ~$300m (12%) higher than 2H20
Resilient credit performance
defaults +9 bps with recovery of prior defaults

Property – down 1 point to 17%

All direct properties independently valued with stable valuations and cap rate

Alternatives – unchanged at 4%

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At balance date Half year averages
2% 3% 5% 5%
4% 4% 6% 2%
18% 17% 17%
17%
11% 11% 11%
14%
49% 54% 76% 51%
47%
16% 11% 11% 13%
2H20 1H21 2H20 1H21
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Increase in absolute return funds

Equities & infrastructure – up 1 point to 3%

Increase in low beta equities

Equities and infrastructure Alternatives Property Fixed income (sub investment grade) Fixed income (investment grade) Fixed income cash

1H21 – 31 December 2020

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Life margins

Reflects lower normalised growth and changes in portfolio composition 2H21 to benefit from further deployment of cash and liquids

1H21 Life COE margin -55 bps on 2H20

Normalised capital growth -35 bps
Change in portfolio composition and assumptions
1
• Normalised growth 7% of COE (2H20 17%)
Return on shareholder funds -6 bps
Lower interest rates (shareholder capital unhedged) and portfolio composition changes
Product cash margin -14 bps
Lower other income from one-off Life Risk fee in 2H20 (-13 bps)
Lower asset returns from lower yields and change in portfolio mix (-39 bps)
Lower interest expense (+27 bps)
Progressive deployment of excess cash (+11 bps)
- ~50% deployed

2H21 to benefit from deployment of cash and liquids

Rental abatement forecast update

$10m to $12m in FY21 to support tenants

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3.10% Product cash margin -14 bps
0.20% – 0.30%
0.52% 2.55%
(0.35%) (0.06%) 0.27% 0.11%
(0.13%) 0.17%
0.50%
0.44%
(0.39%)
2.08%
1.94%
2H20 Lower Lower Lower Lower Lower 1H21 benefit 1H21 2H21 benefit
COE normalised return on other income asset returns interest from deploying COE to investment
margin capital shareholders' (including (including asset expense cash and liquids margin yield from
growth funds 2H20 one-off mix and rental deploying
fee) abatements) cash and liquids
(forecast)
Normalised capital growth
Return on shareholders' funds
Product cash margin
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1H21 – 31 December 2020

Life Normalised Cash Operating Earnings (COE).

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Life Investment Experience

Investment gains from partial reversal of pandemic related losses

A S S E T S	Fixed income +$238m 1	• Valuation gain $200m; normalised growth +$25m; credit default experience +$13m (+9 bps) • Valuation gain from contraction in credit spreads 2– reversal of significant portion of FY20 losses • Credit default write back following recovery
	Property -$43m 1	• Valuation loss -$10m; normalised growth -$33m • All direct properties independently valued in December 2020 • Direct property valuations stable compared to normalised growth assumption of +2% p.a.
	Equities & infrastructure +$34m 1	• Valuation gain $42m; normalised growth -$8m • Equity valuation gains in line with rally in global equity markets
	Alternatives +$0m 1	• Valuation in line with normalised capital growth assumption
	LIABILITY -$104m 1	• Illiquidity premium -$172m – valuing annuities using Govt. bond rate plus an illiquidity premium 3,4 • Other movements +$68m – difference in interest rates used to value policy liabilities

1H21 – 31 December 2020

All investment experience numbers quoted pre-tax.
Refer to page 26 of 1H21 Analyst Pack for additional detail on illiquidity premium.
Non-financial corporate bond spread to Australian Commonwealth Government Securities (CGS) contracted by 56 bps in 1H21.

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Investment grade iTraxx Australia contracted by ~31bps and sub-investment grade CDX North America High Yield index contracted by ~233bps in 1H21.

Challenger Life regulatory capital

Above top end of target with flexibility to enhance returns

$1.5bn of excess regulatory capital – down $68m in 1H21

Capital base up $0.4bn
retained earnings with no group dividend
Capital Notes launch and repurchase (+$0.1bn)
1
• PCA up $0.4bn
deployment cash and liquids

$0.1bn of Group cash

S&P ‘A’ rating reconfirmed 2

Movement in Challenger Life Company (CLC) excess regulatory capital ($m)

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Regulatory capital +$379m PCA ($448m)
87 42
237 30
49
(17)
(261)
(163)
(73)
1,585 1,516
30 June 1H21 1H21 Share Increase in Other3 Increase Increase Foreign Semi- 31 Dec
2020 CLC AT1 Purchase Additional in capital in exchange government 2020
CLC excess NPAT coupons Plan Tier 1 intensity investment movements credit rating CLC excess
regulatory assets downgrade regulatory
capital capital
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1H21 – 31 December 2020

1. Prescribed Capital Amount (PCA).

In November 2020, Standard & Poor's Global Ratings (S&P) completed its annual ratings review and affirmed both Challenger Life Company Limited’s (CLC) and Challenger Limited's credit ratings. S&P ratings are as follows: CLC: 'A' with a stable outlook; and Challenger Limited: 'BBB+' with a stable outlook.
Other of $42m includes policy liability and other adjustments between financial statements and regulatory capital calculations.

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Challenger Life regulatory capital

Above top end of target with flexibility to enhance returns

PCA ratio1 1.63x down from 1.81x

Above top end of target range (1.3x to 1.6x)
PCA ratio reflects
2
– increase in capital intensity following deployment of Life cash and liquids
increase in investment assets
~$1bn of cash and liquids to be deployed in 2H21
$100m distribution to fund Bank acquisition and growth in Q321 (reduces CLC PCA ratio by ~4 points)

Expect to maintain CLC PCA ratio around top end of target range

CET1 ratio 1.09x down from 1.20x

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CLC excess regulatory capital ($m) and PCA ratio (times)
1.81x 1.90
1.63x
1.54x
1.60 CLC target3
PCA ratio 1.3x – 1.6x
1.20x 1.30
1.07x 1.09x
1.00
APRA minimum
PCA ratio 1.0x
$1,406m $1,585m $1,516m
0.70
0.40
0.10
1H20 FY20 1H21
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CLC excess regulatory capital ($m) CLC PCA ratio (times) CLC CET1 ratio (times)

1H21 – 31 December 2020

PCA ratio represents the total Challenger Life Company Limited (CLC) Tier 1 and Tier 2 regulatory capital base divided by the Prescribed Capital Amount.
Capital intensity ratio measured as CLC PCA divided by Life investment assets and increased 150bps to 12.2% at 31 December 2020.
Challenger Life Company (CLC) Limited maintains a target level of capital representing APRA’s PCA plus a target surplus based on asset allocation, business mix and economic circumstances.

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Funds Management result

Record half year results Strong net flows and FUM growth providing business momentum

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Net flows($bn)
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6.4
1.9
0.7
1H20 2H20 1H21
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CIP Asset Management (CIPAM) Fidante Partners

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Average FUM ($bn) Net income ($m)
85.9
81.1 80.4
78 80 81
5
4 11
74 69 76
1H20 2H20 1H21 1H20 2H20 1H21
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CIP Asset Management (CIPAM) Fidante Partners

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Performance fees
Net income excluding performance fees
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EBIT ($m)
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35
30 5
28
4
11
30
24
19
1H20 2H20 1H21
Performance fees
EBIT excluding performance fees
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Net flows +$6.4bn

Fidante +$5.8bn – strong fixed income and retail flows

CIPAM +$0.6bn

Average FUM $85.9bn +7% in 1H21

Fidante +9% CIPAM +1%

Closing FUM $91.2bn

Net income +$1m (+1% on 2H20)

FUM based management fees +$8m (+11%) from strong FUM growth with stable margin

Performance fees -60% to $5m

EBIT +$5m to $35m (+18% on 2H20)

Net income +$1m (+1%) Expenses +$5m (-9%)

6% higher than 1H21 average

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1H21 – 31 December 2020

Fidante Partners

Strong net flows and investment performance underpin future growth

Fidante Partners net flows ($bn)

Fidante Partners investment performance

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5.8
6
5
1.9
4
3
1.9 1.9
2 3.9
1.4
1
1.7
0.6
0
1H20 2H20 1H21
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Institutional net flows

Retail net flows

Institutional net flows

11% increase in institutional client base1

Retail net flows

32% increase on 1H20
Retail supporting Fidante Partners income margin

Total net flows

Tripled to $5.8bn

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Quartile performance2 Relative to benchmark3
13% 12%
24%
33%
30%
25%
87% 88%
76%
48%
35%
29%
1 year 3 years Since 1 year 3 years 5 years
inception
2nd quartile
1st quartlie
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% of FUM outperforming benchmark

1H21 – 31 December 2020

Increase in number of Fidante Partner’s institutional clients over past 12 months.
Mercer as at December 2020.
As at 31 December 2020. Percentage of Fidante Partners Australian boutiques meeting or exceeding performance benchmark.

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Dividend

Reflects confidence in business and capital position

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Fully franked dividends (cps) Dividend payout ratio 1
20 60%
55.6% 55.5%
52.9%
50%
No final FY20
dividend with 46.6%
10 17.5 18.0 17.5 preference to
remain strongly
capitalised 40%
during 9.5
COVID-19
pandemic
0 30%
1H19 2H19 1H20 2H20 1H21 1H19 2H19 1H20 2H20 1H21
Franked dividend Normalised dividend payout ratio
Normalised dividend payout ratio guidance
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1H21 dividend 9.5 cps

Fully franked

1H21 dividend payout ratio 46.6%

DRP in place with no discount applied
2
• DRP expected to reduce cash payout by ~2%

1H21 – 31 December 2020

Normalised dividend payout ratio based on normalised EPS.
For the interim FY20 dividend, the Dividend Reinvestment Plan (DRP) reduced the effective cash dividend payout ratio by ~2%.

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Outlook

Richard Howes Managing Director and Chief Executive Officer

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Providing financial security for retirement Extending customer reach and diversifying product and distribution

FUNDS MANAGEMENT LIFE BANK
• • • Organic growth from existing Complete program to deploy Integrate MyLife MyFinance and new boutiques excess cash and liquids • Offer compelling value and
• • Strategic focus on new Maintain appropriate portfolio expand existing TD offering global growth channels settings • Access TD broker market
• Further enhance ESG • Improve digital capabilities • Progress retail advice
capability focused on direct customer distribution
• experience Leverage leading • • Leverage bank capability to
distribution capability Partner with super funds to build direct customer base
develop retirement solutions for members

1H21 – 31 December 2020

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Guaranteed

Non-guaranteed

FY21 financial outlook On-track for profit guidance and strongly capitalised

Guidance

Normalised Net FY21 guidance range $390m to $440m Profit Before Tax ‒ 1H21: $196m – 47% of mid-point of guidance range 1 ‒ Earnings weighted to 2H with gradual deployment of Life cash & liquids over FY21 ‒ Expenses lower than FY20 (down 11% on 2H20)

Key through-the-cycle targets

RBA cash rate plus 14% margin (currently 14.1%)

Normalised pre-tax ‒ 1H21: 11.5% – below target from prudent capital deployment return on equity (ROE) ‒ 2H21: benefit from gradual deployment of cash and liquids, however below target

Dividend 45% to 50% normalised dividend payout ratio2,3 ‒ payout ratio 1H21: 47% – within guidance range CLC4 excess Remain strongly capitalised reflecting growing customer franchise regulatory capital Preference to remain around top end of target range5

1H21 – 31 December 2020

The COVID-19 situation and its impact on investment markets creates an inherently uncertain environment. This could, among other things, impact the speed of deployment of Life’s capital and therefore impact guidance.
Normalised dividend payout ratio represents dividend per share divided by normalised earnings per share (basic).
Dividend subject to market conditions and capital management priorities. 4. Challenger Life Company Limited (CLC).
CLC maintains a target level of capital representing APRA’s Prescribed Capital Amount (PCA) plus a target surplus and does not target a fixed PCA ratio. The target PCA ratio range is currently 1.3 times to 1.6 times.

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Highlights

Providing our customers with financial security for retirement

Performance in line with expectations and on-track for profit guidance

Diversification delivering strong growth and business momentum

Bank acquisition to drive medium-term growth

Prudent deployment of Life’s cash and liquid investments to enhance future returns

Strongly capitalised and maintaining appropriate portfolio settings

1H21 – 31 December 2020

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Appendix

Additional background information

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Appendix

Providing our customers with financial security for retirement

Challenger business overview	32-33
Superannuation system	34-38
Retirement phase overview	39-42
Retirement income regulatory reforms	43-44
Retirement income strategies	45-47
MS&AD and MS Primary (Japan) relationship	48-49
Life product overview	50
Challenger brand and adviser ratings	51-52

Life sales and AUM	53
Life asset allocation & portfolio overview	54-58
Life normalised profit framework	59
Life asset and liability matching	60
Funds Management sales and FUM	61-63
Funds Management managers	64
Fidante Partners model & performance	65-66
Fidante Partners manager capacity	67
CIP Asset Management	68

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1H21 – 31 December 2020

Challenger business overview

Vision and strategy A clear plan for sustainable long-term growth

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1H21 – 31 December 2020

Challenger business overview

Business overview

Two core businesses benefiting from superannuation system growth

Challenger Limited (ASX:CGF)

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Life

Funds Management

#1 market share in annuities1 One of Australia’s largest active fund managers2 Leading provider of annuities and guaranteed Fidante Partners retirement income solutions in Australia. Co-owned, separately branded,

Co-owned, separately branded, active fixed income, equity and alternative investment managers, including Fidante Partners Europe.

Products offer certainty of guaranteed cash flows with protection against market, inflation and longevity risks. Partnering with leading provider of foreign currency annuities in Japan.

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CIP Asset Management Originates and manages assets for Life and third party clients.

Central functions

Includes: Distribution, Product and Marketing (DPM) Operations, Finance, IT, Risk Management, HR, Treasury, Legal and Strategy

1H21 – 31 December 2020

Plan for Life –September 2020 – based on annuities under administration at 30 September 2020.

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Consolidated FUM for Australian Fund Managers – Rainmaker Roundup September 2020.

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Superannuation
system
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Australian superannuation system

Attractive market with long-term structural drivers

Market growth supported by

Mandatory and increasing contributions
Earnings and contributions compounding
Population growth and ageing demographics

Resulting in

1
• 11% CAGR growth over last 20 years
1
• 4[th] largest global pension market
Assets expected to increase from $2.9 trillion to $6.6 trillion over next 15 years2

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Australian superannuation growth 2 ($bn)
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8,000
6,000
4,000
2,000
-
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1H21 – 31 December 2020

Willis Towers Watson Global Pension Study 2020.
Based on Rice Warner Superannuation Market Projections Report 2020.

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Superannuation
system
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Australian superannuation system

Attractive market with long-term structural drivers

Pre-retirement (super savings) phase

Funds Management target market
Supported by mandated and increasing contributions

Post-retirement (super spending) phase

Life target market and supported by
ageing demographics
rising superannuation savings
Government and industry enhancing retirement phase

Annual transfer from pre- to postretirement phase ~$70bn1 per year

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Projected superannuation assets 2 ($bn)
7,500
5,000
2,500
-
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Post-retirement assets - superannuation spending phase Pre-retirement assets - superannuation savings phase

1H21 – 31 December 2020

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Australian Taxation Office.
Based on Rice Warner 2020 superannuation projections applied to 2018 APRA superannuation assets.

Superannuation system

Australian superannuation system Attractive market with long-term structural drivers

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1
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Mandatory and increasing contributions – increasing from 9.5% to 12.0%

Superannuation Guarantee contribution rate 1

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----- Start of picture text -----

1992 1997 2002 2015 2021 2022 2023 2024 2025
3.0% 6.0% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0%
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2
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Australians have one of world’s longest life expectancies

Demographics

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Ageing population
Medical and mortality improvements increasing longevity
Number of Australians over 65 increasing3
+32% over next 10 years
+56% over next 20 years No data<20 years 30 years 40 years45 years50 years55 years60 years65 years70 years75 years80 years>85 years
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• Ageing population

Medical and mortality improvements increasing longevity

1H21 – 31 December 2020

Percentage of gross wages required to be contributed to superannuation. Contribution rate increases to 10% on 1 July 2021 and increases by 0.5% per annum until reaching 12% in 2025.
World Health Organisation.

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Australian Bureau of Statistics population projections (Cat No. 3222.0 Series B middle projections).

Superannuation system

Australian superannuation system

High allocation to equities and low allocation to fixed income

Australia has low fixed income and high equity allocations 1

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24% 29% 13%
5%
44% 29% 38%
25% 8% 31%
9%
51% 54% 49% 55%
40%
28% 36% 32% 31% 32% 27%
Other Equities Fixed income (cash and deposits, bills and bonds)
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Fixed income allocation

Australia 15%
OECD average 45%

Equities allocation

Australia 44%
OECD average 24%

1H21 – 31 December 2020

OECD Pension Markets in Focus – 2019.

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Superannuation system

Australian superannuation system

World class accumulation system with significant retirement savings Not delivering retirees financial comfort

World class Significant Not delivering retirees accumulation system retirement savings financial comfort 7 National Seniors Australia survey (January 2020) Contribution rate 1 in 4 super dollars 84% say regular and increasing to 12%1 supporting retirement4 constant income is very important 4[th] largest global Average household 53% worried about pension market2 wealth at retirement $680k5 outliving their savings Assets increasing ~$70bn transferring 2/3[rd] of retirees expect from $2.7tr to $6.6tr to retirement each to spend their savings over next 15 years3 year6 over next 20 years

1H21 – 31 December 2020

Increases to 10% on 1 July 2021 and increases by 0.5% p.a. until reaching 12% on 1 July 2025.
Willis Towers Watson Global Pension Study 2019.
Rice Warner 2020 superannuation projections applied to 2018 APRA superannuation assets. 4. Based on APRA and ATO data.
Australian Bureau of Statistics. Includes superannuation and nonsuperannuation assets and excludes the family home.
Australian Taxation Office.
https://nationalseniors.com.au/research/retirement/retirement-incomeworry-who-worries-and-why

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Retirement phase overview

Retirement phase of superannuation Combining products provides better outcomes for retirees

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Discretionary
(wants) Funds Management
Account
Equities, fixed income
Based and alternative asset
Pension products
(ABP)
Life
Essential Guaranteed Annuity and
income stream guaranteed income
(needs)
products
1
Full age pension p.a.
Age
Single $24,552
pension Couple $37,014
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Time
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1H21 – 31 December 2020

Australian Government Department of Human Services and current as at 1 July 2020.

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Retirement phase overview

Retirement phase of superannuation

Superannuation starting to reduce reliance on age pension

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----- Start of picture text -----

1
----- End of picture text -----

Average household wealth at retirement $680,000 (excluding family home)
Age pension subject to assets and income tests
2.5m Australians receiving some age pension support
Portion of retirees on full age pension expected to reduce from 42% to 30% over next 5 years, however
number of retirees receiving support increasing
Government age pension cost increasing
Super system increasingly supplementing or substituting age pension

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Portion of retirees reliant on age pension 2
30%
44% 42%
30%
26%
29%
Fully
Fully self Fully self sufficientself
sufficient sufficient 40%
32%
27%
2010 2019 2025
Actual Actual Forecast
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Full rate Government age pension Part rate Government age pension No Government age pension

1H21 – 31 December 2020

Australian Bureau of Statistics. Includes superannuation and non-superannuation assets and excludes the family home.
Source – 2010 and 2018 Actual: Australian Government Department of Social Services and Department of Veteran Affairs; 2025 Forecast: The Association of Superannuation Funds of Australia (ASFA) projection.

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Retirement phase overview

Industry leader benefiting from long-term tailwinds With clear plan for sustainable growth

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Industry leader

Investment capability

Leading investment capability
Proven risk management approach
Significant balance sheet flexibility

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Long-term tailwinds Market growth • Natural market growth
Significant retirement savings
Super funds partnering with Life companies

Older and healthier retirees

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Relevant products

700+ Australians turning 65 every day
1 Australian annuity provider • 20-year cycle of retiring ‘Baby-Boomers’
• Contemporary products • One of world’s longest life expectancies
Increased product relevance following market volatility

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Leading distribution

Broad platform access
Rated #1 by advisers
Japanese annuity partnership

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Regulation and industry momentum

Means testing rules support longevity products
• Government enhancing post-retirement phase
Industry expanding retirement offerings

1H21 – 31 December 2020

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Retirement phase overview

Overview of age pension system

Social safety net for those unable to support themselves

Qualification age 66 (increasing to 671)
Age pension based on lower outcome under assets and income tests
Many retirees move from assets to income test through retirement
Different age pension outcomes when products held in combination (e.g. Lifetime Annuity with an ABP2)

Maximum age pension rates 2	Per fortnight Per annum
	Single $944.30 $24,552
	Couple $1,423.60 $37,014
Assets test 4	Income test
Asset limits before pension starts to reduce	Income limits before pension starts to reduce (p.a.)
Homeowner Non-homeowner
Single $268,000 $482,500	Single $4,628
Couple $401,500 $616,000	Couple $8,216
Taper rate – age pension reduces by $78 (p.a.) per $1,000 of assets above these thresholds	Taper rate – age pension reduces by $500 (p.a.) per $1,000 of income above these thresholds
Asset limit where pension reduces to nil	Income limit where pension reduces to nil (p.a.)
Homeowner Non-homeowner
Single $583,000 $797,500	Single $53,732
Couple $876,500 $1,091,000	Couple $82,243

1H21 – 31 December 2020

Age Pension eligibility age increasing by 6 months for very 2 years until aged pension eligibility reaches age 67 on 1 July 2023. 2. Centrelink rates and thresholds current as at 1 January 2021.
Account Based Pension (ABP).

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Assets test excludes the family home.

Retirement income regulatory reforms

Government enhancing post-retirement phase

Retirement Income Framework

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The retirement phase of the superannuation system is currently under-developed. There is limited availability and take-up of products that manage the risks people face in retirement, in particular the risk of outliving their savings

Federal Budget 8 May 2018

Retirement Income Framework

Boosting retirement income choices – new retirement product rules 1 July 2017
New means test rules – for lifetime products from 1 July 2019
1
1. Retirement Income Covenant – member retirement strategy by 1 July 2022
2
1. CIPRs – all funds required to offer CIPRs by 1 July 2022

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1H21 – 31 December 2020

In May 2020 the Government announced the deferral of the Retirement Income Covenant with the Covenant now starting from 1 July 2022. The deferral is to allow continued consultation, and legislative drafting to take place following the COVID-19 crisis. Deferral will also allow drafting to be informed by the Retirement Income Review Final Report.
Comprehensive Income Products for Retirement (CIPRs) – a feature of the Government’s new Retirement Income Framework and is subject to legislation.

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Retirement income regulatory reforms

Government enhancing post-retirement phase New means test rules for lifetime income products commenced 1 July 2019

Pension assets test

Example - $100,000 lifetime income stream purchase price at age 65

Pension income test

Example - $100,000 lifetime income stream paying $7,000 per year

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----- Start of picture text -----

100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
656667686970717273747576777879808182838485868788899084 85
Age
Prior assets test Assets test (from 1 July 2019)
Asset amortises down Asset value fixed at 60% until age
evenly over life expectancy 84 then fixed at 30% for life
Purchase price
----- End of picture text -----

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----- Start of picture text -----

7,500
7,000 Annual payment
6,500 ($7,000)
6,000
5,500
Annual deduction
5,000
4,500 amount ($5,000)
4,000 Assessable
3,500 income $4,200
3,000 (60% of $7,000)
2,500
2,000 Assessable
1,500 income $2,000
1,000 ($7,000 - $5,000)
500
0
6566676869707172737475767778798081828384858687888990
Age
Prior income test Income test (from 1 July 2019)
Includes payment less Includes 60% of
annual deduction amount payment as income
Annual income
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1H21 – 31 December 2020

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Retirement income strategies

Retirement income strategies – combined products Enhances income and provides longevity and inflation protection

Case study

Jenny and John

Homeowning couple
(in addition to family home)
66 years old
Approaching retirement
Target income $62,000 p.a.
1
• Status quo 100% ABP
Combined product
1
• 70% ABP ; and
2
• 30% Lifetime Annuity

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1H21 – 31 December 2020

Account Based Pension (ABP).

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Applying means test rules for lifetime income products that took effect from 1 July 2019.

Retirement income strategies

Retirement income strategies – combined products Enhances income and provides longevity and inflation protection

Case study – Jenny and John

100% Account Based Pension (ABP)

Combined product (70% Account Based Pension; 30% Lifetime Annuity)

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Provides $62k p.a. until age 90 then $37k p.a. thereafter
50% chance one is alive at age 94

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Provides $62k p.a. until age 94 then $44k p.a. thereafter
Income at least as good as 100% ABP – better the longer you live

1H21 – 31 December 2020

Assumptions – 1. Applying means test rules for lifetime income products that took effect from 1 July 2019; 2. 66 year old couple, homeowners, $300,000 each in super ($600,000 combined) drawing $62,000 per annum; 3. Account Based Pension assumptions – Growth 5.3%, Defensive 1.60% (net of fees); 4. Lifetime Annuity – Flexible income option, CPI indexation, monthly payments. Portfolio allocation of 50% growth / 50% defensive; 5. Challenger annuity pricing as at January 2021; 6. Centrelink rates and thresholds as at 1 January 2021.

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Retirement income strategies

Retirement income strategies – combined products Enhances income and provides longevity and inflation protection

Combined product (70% Account Based Pension; 30% Lifetime Annuity)

Income from combined product enhanced through

mortality credits
interaction with age pension
growth assets left to grow
likely annuity outperformance against defensive alternatives

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Provides $62k p.a. until age 94 then $44k p.a. thereafter
Income at least as good as 100% ABP – better the longer you live

1H21 – 31 December 2020

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MS&AD MS Primary

MS&AD strategic relationship

Diversifying and increasing access to Japanese market

Strategic relationship with MS&AD Group

Increases access to Japanese market through MS&AD
Opportunities for both Challenger and MS&AD
Broadens Challenger’s existing Japanese footprint

Equity placement to MS&AD

$500m or 6.3% of issued capital (August 2017)
1
• Shareholding subsequently increased to ~15% via market
Representative joined Challenger Board
MS&AD remain committed to its strategic relationship and being a major Challenger shareholder2

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1 Japanese general insurer
#1 market share
2 Japanese life insurer
#9 market share
major foreign currency annuity provider
3 International operations
operations in 49 countries
#1 ASEAN general insurer
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1H21 – 31 December 2020

Shareholding as at 31 December 2020.
MS&AD reserves the right to change its intentions and to acquire, dispose and vote Challenger shares as it sees fit.

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MS&AD MS Primary

MS Primary annuity relationship

Diversifying and increasing access to Japanese market

MS Primary

MS&AD subsidiary
leading provider of foreign currency life products
extensive distribution footprint via bancassurance channel

MS Primary annuity relationship

Reinsurance agreements with MS Primary covering A$ and US$ 20 year term annuity and A$ lifetime annuity
Australian dollar reinsurance commenced November 2016
1
• Expanded reinsurance to include US$ term annuity
commenced 1 July 2019
at least ¥50 billion (~A$670 million) in total A$ and US$ sales per year for minimum of five years2
provides reliable and diversified sales contribution

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Product overview

Term annuities – A$ and US$

Australian and US dollar single premium product
Whole-of life product with annuity payment period of 3, 5, 7, 10, 15 or 20 years plus benefit payable on death
Product provides insurance (whole-of-life) – provided by MS Primary at end of 20 year fixed annuity term
Challenger providing fixed rate amortising annuity – MS Primary assumes residual policy value at end of 20 year period

Lifetime annuity

Australian dollar single premium product
An immediate lifetime annuity delivering fixed annuity payments for life
A minimum guaranteed benefit of 80% or 100% of the single premium sum repayable via the annuity stream or as a death benefit upon early death

1H21 – 31 December 2020

Challenger Life has entered into an agreement with MS Primary to commence reinsuring the US dollar version of the 20-year term product. Challenger will provide a guaranteed interest rate and assume the investment risk in relation to those policies issued by MS Primary and reinsured by Challenger.
Subject to review in the event of a material adverse change for either MS Primary or Challenger Life. A$ amount based on 1 July 2020 exchange rate.

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Life product overview

Life product overview Providing customers with guaranteed income

Fixed term	Long term (including lifetime)	Other
35% of total book Provides regular guaranteed payments for a fixed rate, fixed term Average policy size 1~$200,000 Guaranteed Annuity • Guaranteed rate • Payment frequency options • Inflation protection options • Ability to draw capital as part of regular payment • Tax free income 3	46% of total book Provides guaranteed regular payments for life Average policy size 1,2~$120,000 Liquid Lifetime • Inflation protection options • Liquidity options • Tax free income 3 CarePlus • Designed for aged care • Up to 100% death benefit MS Primary(refer page 49)	19% of total book Institutional product providing guaranteed fixed income returns Challenger Index Plus Fund • Institutional product providing guaranteed excess return above a chosen index. Index Plus is available on traditional indices and customised indices

1H21 – 31 December 2020

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Average 1H21 annuity policy size.
Average policy size for Liquid Lifetime and excludes CarePlus and MS Primary.
If bought with superannuation money and in retirement phase.

Challenger brand and adviser ratings

Clear leader in retirement incomes

Challenger rated #1 in overall adviser satisfaction

Brand strength: Leaders in Retirement Income 1

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100%
95% 95%
93% 93%
89% 90%
80% 85%
60%
2011 2013 2015 2017 2018 2019 2020
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Wealth Insights net promoter score 3

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Challenger +20%
+ve net promotor score Peers include
Australia’s top 19
- ve net promotor score fund managers
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Challenger adviser satisfaction 2

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----- Start of picture text -----

10.0
8.0
6.0
4.0
2.0
0.0
BDM Support Technical IT / Web Adviser Image and Overall
Support Functionality Contact Reputation Adviser
Centre Satisfaction
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Challenger ranked #12

BDM Support (9[th] consecutive year)
Technical Services (5[th] consecutive year)
IT / Web Functionality (4[th] consecutive year)
Adviser Contact Centre (5[th] consecutive year)
Image and Reputation (5[th] consecutive year)
Overall Adviser Satisfaction (5[th] consecutive year)

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2020 Survey average
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1H21 – 31 December 2020

Marketing Pulse Adviser Study December 2020 (2011 to 2020).

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2020 Challenger annuities service level analysis conducted by Wealth Insights and compared to the broader Australian funds management market.

Wealth Insights 2020 Adviser Market Trends Report.

Challenger brand and adviser ratings

Customer brand journey Evolution of brand and target audience

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TOTAL BRAND AWARENESS
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62% 66% 59% 61% 64%
55%
53%
PRE-RETIREES RETIREES 2019 campaign shifted focus
13% (aged 55-64) (aged 65-74) to older audience (65-74)
with building brand familiarity
and education a priority
2011 2013 2016 2019
Real Stories Retirement on Paper Lifestyle Expectancy Look Forward with
Confidence
Focus of 2011 campaign was to Focus of 2013 campaign Focus of 2016 campaign was Focus of 2019/20 campaign was to
increase brand awareness was to increase brand to increase brand awareness & increase brand awareness, brand
amongst 55-64 year olds awareness amongst 55-64 & brand familiarity amongst 55-64 familiarity and education amongst
65-74 year olds year olds (pre-retiree target) 65-74 year olds (retiree target)
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1H21 – 31 December 2020

Source: Customer – Newspoll Consumer Study (2011) – different question & methodology used prior to 2013. Customer – Hall & Partners Consumer Study (2013 to 2020) – people aged 55 to 64 years old and 65 to 74 years old.

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Life sales and AUM

Life

Diversified distribution driving sales and AUM growth

Total Life sales ($m) 6% CAGR

Life AUM ($m) 8% CAGR

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3,438
3,324
3,139
2,758 2,740
1H17 1H18 1H19 1H20 1H21
Annuity sales Other Life sales
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19,669 19,634
18,624
17,040
14,607
1H17 1H18 1H19 1H20 1H21
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1H21 – 31 December 2020

Life asset allocation and portfolio overview

Asset allocation framework

Consistently applied with strong risk management

Risk management

Fundamental principle – assets and liabilities cash flow matched

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and liabilities cash flow matched Asset and •
Strong governance framework
• liability
Managed by dedicated team •
Risk management entrenched
matching
•
Liability maturity profile drives (ALM) in corporate culture
asset tenor •
Minimise unwanted risks such
as interest rate, currency and
Risk inflation risks
management
• Investment returns Capital •
Relative Manage asset allocation to
considered relative to &
value capital and ROE targets
base swap rates ROE
•
Investment decisions based
•
Illiquidity premium
on risk-adjusted returns
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Illiquidity premium contributes to relative value

1H21 – 31 December 2020

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Life asset allocation and portfolio overview

Life investment portfolio

High quality portfolio providing reliable income

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Life investment portfolio1 Life investment portfolio – asset allocation
General Insurance 100%
Absolute Return
Life Insurance
Infrastructure 80%
Low beta
60%
Equity beta
Offshore & other 3% [4%]
property 40%
17%
Australian
property $19.6bn 20%
76%
Investment 1H18 1H19 1H20 1H21
Non-investment grade
grade fixed income
fixed income Alternatives
Equity & infrastructure
Fixed income and cash
Property
Property
Equity & infrastructure Fixed income (sub investment grade)
Alternatives Fixed income (investment grade)
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1H21 – 31 December 2020

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As at 31 December 2020.

Life asset allocation and portfolio overview

Fixed income portfolio 1 Represents 76% of portfolio with 86% investment grade

Fixed income portfolio by asset class[1]

Fixed income portfolio by sector[1]

Fixed income portfolio by geography[1]

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Non-IG
Corporate Credit Other New Rest of
Infrastructure
7% Liquids and utilities 1% Europe Zealand World
Non-IG Asset 14% 9% Industrials 4% 4% 2%
Backed
Securities Commercial and United Kingdom
7% 14% porperty consumers 5%
7% 36%
$14.8bn $14.8bn United $14.8bn
Government
States
14%
IG Corporate 15%
Credit 86% Australia
32% IG Asset Backed 70%
Securities Banks,
40% financials & Residential
insurance property
9% 24%
Investment grade
Sub investment grade
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1H21 – 31 December 2020

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As at 31 December 2020.

Life asset allocation and portfolio overview

Property portfolio

Represents 17% of portfolio All direct properties independently valued in December 2020

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Property portfolio 1
Japanese retail, 11%
Other, 2%
11%
$3.3bn
Australian
retail, 22% Cap rate 5.6%
WALE 6.0y
89% Australian
office, 59%
Australian
industrial, 6%
Australian property
Offshore property
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Australian office 59%; industrial 6%

11 office assets; 3 industrial assets
2
• Average cap rate 5.5% (office) & 5.7% (industrial); WALE 6.6 years
50% of office rent from Government

Australian retail 22%

8 grocery anchored convenience based shopping centres
2
• Average cap rate 6.7%; WALE 4.6 years
~50% of rental income from supermarkets, major banks, discount department stores and essential services

Japan retail & retail logistics 11%

19 predominantly grocery anchored neighbourhood centres
1 retail logistics facility
2
• Average cap rate 5.0%; WALE 9.8 years
50% of rental income from supermarkets and pharmacies

1H21 – 31 December 2020

Property portfolio as at 31 December 2020. Cap rates based on independent valuations undertaken in December 2020 (excluding County Court which is valued on a depreciated replacement cost basis).
Weighted Average Lease Expiry as at 31 December 2020. Assume tenants do not terminate leases prior to expiry of specified lease terms.

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Life asset allocation and portfolio overview

Life investment portfolio

Equity and infrastructure 3% of portfolio; Alternatives 4% of portfolio

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Equity and infrastructure portfolio 1 Alternatives portfolio 1
Other 15% Other 12%
United Kingdom
Europe 7% 9% 11%
21%
31% Australia 38%
15%
United Kingdom Europe
8% $0.6bn 9% $0.9bn
74%
48% United States
70%
United States
32% Absolute return funds
Equity beta
General insurance
Low Beta
Life insurance
Infrastructure
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1H21 – 31 December 2020

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As at 31 December 2020.

Life normalised profit framework

Normalised profit framework Reflects underlying performance of Life business

Investment Experience Asset and policyholder liability valuation movements plus net new business strain

Asset and policy liability experience Difference between expected capital growth1 for each asset class compared to actual investment returns

Includes impact of changes in macroeconomic variables2 on the valuation of Life’s liabilities

New business strain

New business strain is a non-cash accounting adjustment recognised when annuity rates on new business are higher than the discount rate (risk free rate plus an illiquidity premium3) used to fair value annuities. New business strain unwinds over the annuity contract

Cumulative Investment Experience (pre-tax) ($m)

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200
-
(200)
(400)
(600)
(800)
(1,000)
(1,200)
(1,400)
(1,600)
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 1H21
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Asset and policy liability experience New business strain Cumulative total Investment Experience

FY20 normalised assumptions p.a. 1	FY20	FY21
Fixed income (allowance for credit default)	-35 bps	-35 bps
Property	2.0%	2.0%
Infrastructure	4.0%	n/a
Equities and other	3.5%	n/a
Equity and infrastructure (from 1 July 2020)	n/a	4.0%
Alternatives (from 1 July 2020)	n/a	0.0%

1H21 – 31 December 2020

Based on normalised assumptions. Normalised profit framework and a reconciliation to statutory net profit after tax is disclosed in the 2021 Interim Report - Operating and Financial Review section 8. Normalised growth assumptions have been updated in FY21 for category changes and to ensure they reflect both the nature of the investments and long-term expected investment returns.
Macroeconomic variables include changes to bond yields, inflation factors, expense assumptions and other factors.

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Annuities are fair valued using a risk-free discount rate, based on the Australian Commonwealth Government bond curve plus an illiquidity premium.

Life asset and liability matching

Asset and liability matching Unwanted risks mitigated with assets and liabilities cash flow matched

Assets deliver contracted cash flows to match liability flows
Risk appetite seeks to minimise duration mismatch
Asset and liability matching impacts asset allocation

Minimise exposure to

•
Foreign exchange risk Liquidity risk
• Interest rate risk • Licence risk • Inflation risk • Operational risk

Asset and liability cash flow matching ($m)1

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10,000
8,000
6,000
4,000
2,000
0
<= 1year 1-3 years 3-5 years 5-15 years +15 years
Liability flows Asset Flows Non-debt realisations
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1H21 – 31 December 2020

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As at 31 December 2020.

Funds Management sales and FUM

Funds Management

Strong FUM growth track record

Fidante Partners
growing multiple boutique platform
located in Australia, UK and Japan
asset class diversification
CIP Asset Management
proven track record in asset origination
strong investment performance
growing 3[rd] party credit and property offerings

Funds Under Management (FUM)($bn) 10% CAGR

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91.2
82.8
73.4 75.0 19.4
20.1
62.1
17.4 18.7
15.1
71.8
62.7
56.0 56.3
47.0
1H17 1H18 1H19 1H20 1H21
Fidante Partners CIP Asset Management
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1H21 – 31 December 2020

Funds Management sales and FUM

Fidante Partners capability Adding new managers and expanding distribution footprint

Fidante Partners FUM growth ($bn)

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70
Boutiques formed pre-Dec 2010 boutique sale1
60
50
40
30
20
10
0
Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20
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1H21 – 31 December 2020

In July 2015 Kapstream was sold and $5.4bn of institutional FUM was derecognised. Fidante Partners continues to distribute Kapstream products to retail clients.

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Funds Management managers

Funds Management – multiple brands and strategies Scalable and diversified ~$91bn of FUM

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Equities $30.2bn1
Multiple brands &
strategies
Alternatives $11.4bn1 Fixed Income $49.6bn1
1H21 – 31 December 2020
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Funds Under Management (FUM) as at 31 December 2020.

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Funds Management managers

Fidante Partners boutique managers

Diversified managers and investment strategies

	Boutique	Partnership commenced	Asset class
		Aug 2010	Boutique – Australian and global equities
		Nov 2008	Boutique – Australian fixed income
		Feb 2017	Boutique – Global equities
		Oct 2019	Boutique – Global credit & alternative portfolios
		Jun 2010	Boutique – Global credit portfolios
		Apr 2019	Boutique –Australian small cap equities
		Sep 2006	Boutique – Mid and large cap Australian equities
		Feb 2007	Boutique – Global fixed income

Boutique	Partnership commenced	Asset class
	Oct 2005	Boutique – Australian small cap equities
	Mar 2017	Boutique – Australian small cap equities
	May 2010	Boutique – Australian equities (income focus)
	Aug 2010	Boutique – Australian small and micro cap equities
	Jul 2015	Boutique – Renewable energy and water infrastructure
	Nov 2008	Boutique – Australian equities (long only & long/short)
	Jul 2014	Boutique – Global core infrastructure

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1H21 – 31 December 2020

Fidante Partners model & performance

Fidante Partners

Contemporary model with strong alignment of interests

Administration services

Investment operations
Client operations
Risk and compliance
IT infrastructure
Finance
Human Resources
Company Secretarial
Facilities

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Investment
Management
$72bn1
Co –
investment
with Life
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Distribution services

Asset consultant & research
Strategic positioning
Product development
Brand & marketing
Sales planning & execution
Investor relationships
Client services
Responsible Entity (RE)

Partnership

Equity participation and revenue share (Fidante non-controlling interest)
Business planning, budgeting, strategic development, succession planning

1H21 – 31 December 2020

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As at 31 December 2020.

Fidante Partners model & performance

Fidante Partners investment performance Strong performance underpinning FUM growth

Fidante Partners percentage of funds 1[st] or 2[nd] quartile 1

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Fidante Partners performance relative to benchmark2
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22%
33%
30%
13%
18%
25%
56%
48%
40%
35% 35%
29%
1 Year 3 Years 5 Years 7 years 10 Years Since
inception
1st quartile 2nd quartile
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5 Year 88%
3 years 87%
1 year 76%
0% 20% 40% 60% 80% 100%
% of FUM outperforming benchmark
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1H21 – 31 December 2020

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Source: Mercer as at December 2020.
Fidante Partners Australian boutiques as at 31 December 2020.

Fidante Partners manager capacity

Funds Management

Growth supported by available capacity

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Manager capacity ($bn)
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Quarterly net flows vs peers 1 ($bn)
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40
4.0
35
30 3.0
25
2.0
20
1.0
15
10 0.0
5
-1.0
0
-2.0
Equity Fixed Income Alternatives
Managers Managers Managers
-3.0
Available capacity FUM
•
~$140bn of available capacity Fidante Partners
Peer average
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• ~$140bn of available capacity

Capacity provides platform for growth

1H21 – 31 December 2020

Quarterly net flows for peers, including AMP Capital Investors, Magellan, Pendal, Pacific Current Group, Perpetual, and Platinum. December 2020 peer net flows includes only those that have reported June 2020 data by 4 February 2021.

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CIP Asset Management

CIP Asset Management Proven long-term investment track record and capability

1
• $19 billion of FUM
Investment manager for Challenger Life and third party institutions
Clients benefit from experience and market insights through breadth and scale of mandates
Trusted partner Asset specialisation Institutional clients
• • Local relationships Sovereign wealth funds
• Asset origination capability Property 25% • Government bodies • Proven track record • Australian superannuation funds Fixed
• Strong execution income • International funds • 75% • Risk management expertise International insurance companies
• Excellent client service • Pension funds • • Strong compliance culture Large family offices • Manage ~76% of Life’s portfolio

1H21 – 31 December 2020

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As at 31 December 2020.

Important note

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The material in this presentation is general background information about Challenger Limited group’s activities and is This document may contain certain ‘forward-looking statements’. The words ‘forecast’, ‘expect’, ‘guidance’, ‘intend’,
current at the date of this presentation. It is information given in summary form and does not purport to be complete. It ‘will’ and other similar expressions are intended to identify forward-looking statements. Forecasts or indications of,
is not intended to be relied upon as advice to investors or potential investors and does not take into account the and guidance on, future earnings and financial position and performance are also forward-looking statements. You
investment objectives, financial situation or needs of any particular investor. These should be considered with are cautioned not to place undue reliance on forward looking statements. While due care and attention has been
professional advice when deciding if an investment is appropriate. used in the preparation of forward-looking statements, forward-looking statements, opinions and estimates provided
in this announcement are based on assumptions and contingencies which are subject to change without notice, as
Challenger also provides statutory reporting as prescribed under the Corporations Act 2001. The 2021 Interim are statements about market and industry trends, which are based on interpretations of current market conditions.
Report is available from Challenger’s website at www.challenger.com.au. This presentation is not audited. The Forward-looking statements including projections, guidance on future earnings and estimates are provided as a
statutory net profit after tax has been prepared in accordance with Australian Accounting Standards and the general guide only and should not be relied upon as an indication or guarantee of future performance and may
Corporations Act 2001. Challenger’s external auditors, Ernst & Young, have reviewed the statutory net profit after tax. involve known and unknown risks, uncertainties and other factors, many of which are outside the control of
Normalised net profit after tax has been prepared in accordance with a normalised profit framework. The normalised Challenger. Actual results, performance or achievements may vary materially from any forward-looking statements
profit framework has been disclosed in the Operating and Financial Review section of the Directors’ Report in the and the assumptions on which statements are based. Challenger disclaims any intent or obligation to update publicly
Challenger Limited 2021 Interim Report. The normalised profit after tax has been subject to a review performed by any forward-looking statements, whether as a result of new information, future events or results or otherwise.
Ernst & Young. Any additional financial information in this presentation which is not included in Challenger Limited
2021 Interim Report was not subject to independent review by Ernst & Young. Past performance is not an indication of future performance.
While Challenger has sought to ensure that information is accurate by undertaking a review process, it makes no
representation or warranty as to the accuracy or completeness of any information or statement in this document.
Unless otherwise indicated, all numerical comparisons are to the prior corresponding period.
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1H21 – 31 December 2020

AI assistant

CHALLENGER LIMITED — Interim / Quarterly Report 2021

64641_rns_2021-02-08_0ee934dd-56e1-4695-8bd8-04d01c5e0e1f.pdf

1H21

Overview

Providing our customers with financial security for retirement

Outlook

Highlights

Providing our customers with financial security for retirement

1H21 business outcomes Diversification delivering strong growth Bank acquisition to drive medium-term growth

1H21 business outcomes

Performance in line with expectations and on-track for profit guidance

1H21 – 31 December 2020

1H21 business outcomes

Strategic progress

Provide customers with financial security for retirement Diverse product range helping customers fund their retirement

Diversification strategy delivering strong growth Strong business momentum in markets with long-term structural tailwinds

Funds Management

1H21 – 31 December 2020

Provide customers with financial security for retirement Bank acquisition extending customer and product reach

Bank acquisition

Extending customer and product reach to drive medium-term growth

Highly strategic acquisition

MyLife MyFinance overview

Integration priorities

Challenger term annuity rate vs Best Big 4 bank term deposit rate

1H21 – 31 December 2020

Financial results

Group result

Performance in line with expectations

Expenses ($m)

Net income -$50m (-13% on 2H20)

Expenses -$16m (-11% on 2H20)

Norm. NPBT $196m (-14% on 2H20)

EBIT margin 61.0% (-90pp on 2H20)

Normalised ROE 11.5%

1H21 – 31 December 2020

Group result On-track to meet full year normalised NPBT profit guidance Investment gains from partial reversal of pandemic related losses

1

Normalised NPAT $137m – down 10%

Statutory NPAT $223m

Life result

Sales and book growth benefiting from diversification strategy Earnings reflect lower normalised growth and speed of capital deployment

Total Life sales ($bn)

Life sales $3.4bn (+10% on 1H20)

Life book growth +$0.7bn

Annuity book growth +$0.2bn

Life COE -$50m to $244m (-17% on 2H20)

Life EBIT -$46m to $193m (-19% on 2H20)

Life Normalised ROE 12.5%

1H21 – 31 December 2020

Life sales up 10%

Benefiting from diversification strategy Record long-term annuity1 sales

Life sales $3.4bn (+10%)

Annuity sales $2.2bn (+12%)

Other Life sales $1.2bn (+5%)

Life sales ($m) and long term sales mix

1H21 – 31 December 2020

Life net book growth +4.7%

Benefiting from diversification strategy

Life net book growth $709m

Annuity net book growth $158m

Other Life book growth $551m

Life book growth ($m)

1H21 – 31 December 2020

Life sales and book

Record long-term annuity sales Long-term sales reduce future maturity rates

Focus on long-term liabilities

Growing institutional book

Life annuity and other liabilities ($bn)

1H21 – 31 December 2020

Life investment portfolio

Portfolio in good shape and maintaining appropriate settings

Fixed income – unchanged at 76%

Property – down 1 point to 17%

Alternatives – unchanged at 4%

Equities & infrastructure – up 1 point to 3%

Life margins

Reflects lower normalised growth and changes in portfolio composition 2H21 to benefit from further deployment of cash and liquids

1H21 Life COE margin -55 bps on 2H20

CHALLENGER LIMITED Interim / Quarterly Report 2021