Challenger Fact Pack – February 2010 Group overview · Asset allocation weighted towards ... Single A to Swap iTraxx Australia ... spreads Australia US UK EU 14. Asset portfolio

Challenger Fact Pack – February 2010Group overview

Contemporary investment managerContemporary investment manager

• Operating in the fast growing retirement income and superannuation market >10%

• Leveraging Challenger’s core investment management capabilities. Focused on simple, quality products that deliver value for money; distributed via a large network of 3rd party intermediaries/IFAs

• Operations are underpinned by centralised and scalable technology l tfplatforms

Contemporary investment manager across Life and Fiduciary funds• Contemporary investment manager across Life and Fiduciary funds businesses producing returns on net assets > 18%

2

Business overview

Challenger Financial Services GroupChallenger Financial Services Group G F tiG F tiChallenger Financial Services Group

(CGF.AX)

Challenger Financial Services Group

(CGF.AX)Group FunctionsGroup Functions

LifeLife Funds ManagementFunds Management

I t l I t M tI t l I t M tB ti & AlliB ti & AlliChallenger Life CoChallenger Life CoChallenger Life Co Internal Invest. MgmtInternal Invest. MgmtBoutiques & AlliancesBoutiques & Alliances

Specialised FundsSpecialised Funds

Challenger Life Co. Limited


APRA regulated Life Company




Manufactures and distributes quality investment products –Manufactures and distributes quality investment products –

Funds ManagementFunds Management

Structures and manages direct in estments in global assets

Structures and manages direct in estments in global assets

LifeLife

primarily listed securities for both institutional and retail clients including specialised funds

primarily listed securities for both institutional and retail clients including specialised funds

investments in global assets generating long term guaranteed

income streams

investments in global assets generating long term guaranteed

income streams

3

Shared capabilitiesShared capabilities

Funds Management

• Distribution

Life

• Balance sheet Distribution Capabilities

• Product development • Direct asset

risk management capabilities

• Core client for Funds

Business Services • Shared asset and liabilities

management capabilities

• Equity management

Funds Management

• Management and distribution

Shared asset and liabilities platforms

• Shared back office functions

capabilities and distribution fees

4

Life

5

Challenger businesses Life

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue

Drivers Key FactsKey Facts

LifeLife

Macro Backdrop

BusinessModel

ValueDrivers Key Facts

Life

Challenger businesses - LifePercentage of Business

EBIT – 31 Dec 09Percentage of Business

EBIT – 31 Dec 09Challenger Life Company Limited – a prudentially

regulated entity managing a portfolio of assets delivering long term guaranteed income streams

to annuitants and predictable over-the-cycle returns to shareholders

Challenger Life Company Limited – a prudentially regulated entity managing a portfolio of assets

delivering long term guaranteed income streams to annuitants and predictable over-the-cycle

returns to shareholders

LifeLife

$6.7bn of AUM at 31 Dec 2009$6.7bn of AUM at 31 Dec 2009 Clear investment strategy and focus on risk and capital management

Clear investment strategy and focus on risk and capital management

Market leader in annuities 60 000+ polic holders

Market leader in annuities 60 000+ polic holders

75%

$6.7bn of AUM at 31 Dec 2009$6.7bn of AUM at 31 Dec 2009 on risk and capital managementon risk and capital management60,000+ policy holders60,000+ policy holders

Spread (asset returns less liability costs)

Spread (asset returns less liability costs)

Book Size(AUM)

Book Size(AUM) = Life Net IncomeLife Net Income

Current FocusCurrent Focus

(asset returns less liability costs)(asset returns less liability costs) (AUM)(AUM)

Continue to grow a retirement incomes franchise – organically and

via M&A

Continue to grow a retirement incomes franchise – organically and

via M&A

Asset allocation weighted towards fixed income – capturing wider

spreads / risk premium

Asset allocation weighted towards fixed income – capturing wider

spreads / risk premium

Focus on potential benefits from raising the profile of annuities /

retirement income streams / capital guaranteed products

Focus on potential benefits from raising the profile of annuities /

retirement income streams / capital guaranteed products

6

Significance of demographic change

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue


LifeLife

Macro Backdrop

BusinessModel


Life

Significance of demographic change

• At present, developed countries on p paverage have about four people of working age for every person over 65. By 2050 this reduces to only two workers for every pensionerworkers for every pensioner

• Australia faces similar demographic changes to other OECD nations

– When pension at 65 yrs was introducedWhen pension at 65 yrs was introduced in 1909 average male life expectancy was 55 yrs – today it is 80 yrs

– 2010 is the first year that baby boomers retire (1945 + 65 = 2010)retire (1945 + 65 = 2010)

– 1969 (8%); 2009 (13%); 2049 retiree segment to almost double (22%) in 40 years

• Total cost of managing an aging population is far greater than the cost of the GFC

Source: The Economist; Australian Treasury IGR 37

International Developments Macro

BackdropMacro

BackdropBusiness

ModelBusiness

ModelValue

DriversValue


LifeLife

Macro Backdrop

BusinessModel


Life

pPension products advised in other jurisdictions

Country Full L S

Partial Lump-S

Deferred A it Annuity Pension Programmed Payment or

A t B d P iy Lump-Sum Sum Annuity y Account Based PensionAustria

Belgium

Germany

Ireland

ItalyItaly

Netherlands

Sweden

UK

Canada

USA

Chile

Colombia

8

OECD 2009 Report

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue


LifeLife

Macro Backdrop

BusinessModel


Life

OECD 2009 Report

5. Scale of impact of the crisis on retirement–income provision by age group

Age Group

Younger/prime-age Nearing retirement Retired

Strong i

Individuals with long periods in d fi d ib i i l

Individuals who did not take an annuity iimpact defined-contribution, private plans on retirement

Especially if heavily exposed to riskier assets

Especially if heavily exposed to riskier assets

Moderate impact

Individuals in defined-benefit, private plans Retirees in schemes with automatic adjustment of benefits

Especially if plan have solvency problemsproblems

In some public schemes

Especially where public pension spending is high

Also where old-age safety nets are weak

Little impact

Most individuals Many individuals Most retirees (with public or private pensions)p

Source: OECD report “Pensions and the crisis” - 20099

Glide path to retirement

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue


LifeLife

Macro Backdrop

BusinessModel


Life

80%

Glide path to retirement

2050

70%50%50%

41%

59%

2045

50%

60%

Wei

ght

26%

63%

37%

2010 b b b

2035

2040

30%

40%

Fixe

d In

com

e W

13%14%15%

17%

80%

20%

74%

• 2010 baby-boomers begin retiring

• Risk appetite is changing

• Reduced equity focus

2010 2015 2020 20252030

10%

20%87%86%

85%

83%

Equity

q yin retirement

• Increased awareness of the importance of ‘glide-path’ to retirement &

0%

10%

Age 25 30 35 40

25

45

20

50

15

55

10

60

5

65

0

EquityFixed/Guaranteed Income

appropriate asset allocation

Years to Retirement 40 35 30 25 20 15 10 5 0

10 Source: McLean Budden

Key value drivers of earnings

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue


LifeLife

Macro Backdrop

BusinessModel


Life

Key value drivers of earningsAnnuity flowsAnnuity flows

HistoricalHistorical

Assets Under Management Assets Under Management

Historical asset returns

Historical asset returns

Yield on assets (%)Yield on assets (%)Yield on assets (%)Yield on assets (%)

Cash spread earnings

Cash spread earnings

NormalisedCash Operating

Earnings

NormalisedCash Operating

EarningsAnnuity rates and sub-debt interestAnnuity rates and sub-debt interestsub-debt interest

expense (%)sub-debt interest

expense (%)

Capital GrowthCapital Growth

Normalised capital growthNormalised capital growthNormalised returns -target asset classes

Property; Infrastructure;

Normalised returns -target asset classes

Property; Infrastructure;

11

Infrastructure; Fixed Income and

Equity & Other

Infrastructure; Fixed Income and

Equity & Other

Summary financials

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue


LifeLife

Macro Backdrop

BusinessModel


Life

Summary financials

Financial 1H10 6 2H09 1H09 2H08

Financial Performance

175 40%Performance 1H10 6 2H09 1H09 2H08

Assets Under Management (AUM) –CLC

$6.7bn $5.8bn $6.1bn $5.2bn

5075

100125150175

mill

ion

20%

30%

40%

Net Income $154m $129m $122m $113m 02550

2H08 1H09 2H09 1H10

$

0%

10%

Normalised COE ExpensesExpenses $14m $11m $12m $10m

Normalised EBIT1 $140m $118m $110m $103m 8 200

Assets Under Management

pCost to income ratio (RHS) RONA (RHS)

RONA annualised 31% 26% 24% 21%

Net Assets2 $906m $909m $909m $981m 2

4

6

$ bn

50

100

150

$ m

Net Assets $906m $909m $909m $981m

0

2

2H08 1H09 2H09 1H100

50

CLC Assets Normalised COE (RHS)

1 – excluding investment experience and significant items2 – opening net assets

12

Asset portfolio Fixed Income

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue


LifeLife

Asset portfolio – Fixed Income

$4 5bn portfolioCash Bond spreads versus synthetic indices

• ~$4.5bn portfolio – 13% cash and cash

equivalents% 300

400

500

600

CBA Spectrum 5-yearSingle A to SwapiTraxx Australia

– 33% AAA rated securities– 82% investment grade

• Average life of 4 years 0

100

200

300

g y• Significant mark to market

unwind, due to spread contraction, contributing to CLC fixed income portfolio by S&P equivalent rating

Source: CBA, Bloomberg

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

AA

A

BBB

50%

60%

70%

80%

90%

100%

Por

tfolio

contraction, contributing to the large statutory profit

• Managed by experienced fixed income fund managers

Cash & AAA

BBB

Unrated

0%

10%

20%

30%

40%

Investment Grade Non-Investment Grade

% o

f fixed income fund managers within Life

*

13 *

* ~90% relates to unrated component of Mortgage Management NIM transaction

Asset portfolio fixed income

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue


LifeLife

Asset portfolio – fixed income

• Well diversified portfolio Sovereign

Fixed Income Portfolio by asset type

• Well diversified portfolio across industry and asset typeM th 800 iti

Cash & Equivalents13%

Offshore Corporate Credit5%

Offshore Asset Backed Securities

10%

g7%

• More than 800 securities • Maintained a higher

allocation to investment

Domestic Corporate Credit23%Alternative Finance

6%

5%

grade assets• Returns enhanced by

addition of mortgage

Domestic Asset Backed Securities

36%

Fixed Income Portfolio by currency

50%

60%

70%

80%ol

io

g gmanagement residual income notes and continuing favourable

y y

0%

10%

20%

30%

40%

% o

f Por

tfo

co t u g a ou ab espreads

Australia US UK EU

14

Asset portfolio – fixed income

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue


LifeLife

Asset portfolio fixed income

Security Rating Current valuation $m % of portfolio Average Life of Security Rating Current valuation $m % of portfolio gSecurities

Cash & cash equivalents 596 13% N/A

AAA 1,453 33% 6 years

AA 417 9% 4 years

A 400 9% 7 years

BBB 790 18% 4 years

BB 351 8% 4 years

B 251 6% 4 years

Unrated* 208 5% 6 years

Total 4,464 100% 4 years

15

* ~90% relates to unrated component of Mortgage Management transaction

Asset portfolio property

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue


LifeLife

Asset portfolio – property

Direct property exposure 65%

Lease Tenant Quality – Direct Property Portfolio December 2009

• Direct property exposure – 65%• Indirect property exposure – 35%• Post 31 December, portfolio of

J t h d

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Japanese property purchased (CKT), will be consolidated and held at NAV going forward

• Overall property portfolio at the AAA AA A BBB BB B and below NR• Overall property portfolio at the more conservative end of the spectrum

– More than 50% of tenants are

Challenger composite Cap Rate versus Market8.50%

CLC Avg Composite Cap RateMore than 50% of tenants are AAA rated

– 90% of leases have fixed increases or CPI adjustments

7 00%

7.50%

8.00%

%

Avg Market Composite Cap Rate

– Weighted average life of ~8 years– Cap rate is significantly higher

than market cap rate 6.00%

6.50%

7.00%

Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09

16

Source: Challenger December 2009, IPD/PCA Australian Composite Weighted Average Cap Rates / June 2009

Asset portfolio infrastructure

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue


LifeLife

Asset portfolio – infrastructure

P i i f t t60% Wales and West

• Primary infrastructure exposure via Challenger Infrastructure Fund (CIF)

T di t i ifi t

40%

Sold for £56.4m, 36% premium to NAV

Northern Gas sold

Remaining portion of Southern Water

ld f £169

Stake in Southern Water is sold for £ 100m, at NAV

– Trading at a significant discount to NAV

– All recent asset sales have been at or above 0%

20%

ount)

to N

TA.

for £49m, 20% premium to NAV

sold for £169m, at NAVArqiva

sold for £ £129.8m, at NAV

have been at or above NAV

– Debt has been repaid– Significant cash on

-20%

0%Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09

ng pr

emium

/(disc

oSignificant cash on balance sheet

– Solid capital structure in place

-40%CIF

tradin

– Discount to NAV closing – Poised for future

opportunities

-60%CIF trading premium / (discount) to NAV

Asset Sale implied NAV premium / (discount)

17

Funds Management

18

Challenger businesses Funds

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue



Macro Backdrop

BusinessModel


Funds Management

Challenger businesses - FundsPercentage of Divisional

EBIT – 31 Dec 09Percentage of Divisional

EBIT – 31 Dec 09

A fiduciary funds management operation manufacturing and distributing quality

investment products – for both institutional and retail clients

A fiduciary funds management operation manufacturing and distributing quality

investment products – for both institutional and retail clients

Funds ManagementFunds Management4%

$19.2bn of AUM at 31 December 2009

$19.2bn of AUM at 31 December 2009

Internal teams, external alliances & boutique partnerships

Internal teams, external alliances & boutique partnerships‘End-to-End’ Funds business‘End-to-End’ Funds business20092009 q p p

Specialised funds – listed/unlistedq p p

Specialised funds – listed/unlisted

Fees / Margin(base performance & transaction)

Fees / Margin(base performance & transaction)

Book Size(FUM)

Book Size(FUM) = Funds Mgmt Net IncomeFunds Mgmt Net Income

Current FocusCurrent Focus

(base, performance & transaction)(base, performance & transaction) (FUM)(FUM)

Driving expense savings via internal consolidation of fiduciary funds

management operations; synergies from combined front office product

& distribution

Driving expense savings via internal consolidation of fiduciary funds

management operations; synergies from combined front office product

& distribution

Opportunities created via industry consolidation

Opportunities created via industry consolidation

Building out stable of boutique partnerships to increase scale &

diversify alpha

Building out stable of boutique partnerships to increase scale &

diversify alpha

19

Attractive macro environment

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue



Macro Backdrop

BusinessModel


Funds Management

Attractive macro environment

• Australia is the largest funds Global superannuation assets growth ratesgmanagement market in Asia-Pac and 5th largest in the world

5 year (Dec 04 – Dec 09)

10 year (Dec 99 – Dec 09)

• Assets under mgt - A$1.1 trillion1 a significant decrease over the GFC

• Australia has 9% compulsory superannuation contribution underpinning the flow into p ginvestable assets

• Australia’s long term growth in the superannuation pool is stillthe superannuation pool is still among the world’s highest

Source: Watson Wyatt and various– January 2010 – compound annual growth rates in local currency terms

20 1Source: Towers Watson 2010 Global Pension Asset Study

Underlying FUM growth remains

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue



Macro Backdrop

BusinessModel


Funds Management

Underlying FUM growth remains

• Australia is the second fastest

Australian projected growth in superannuation assets

Australia is the second fastest growing country in the superannuation/pension funds space over the longer termspace over the longer term

• Deloitte projects that by 2028 Australia will have $7 trillion of assets in the super systemassets in the super system

• Australia has the 5th largest superannuation asset pool globally

Global Superannuation assets as a percentage of GDP

Source: Deloitte, Dynamics of the Superannuation system

150% 30%2009 % of GDP 10 year changeglobally

• Australia’s proportion of superannuation assets to GDP has increased steadily since

100%

150%

0%

10%

20%

30%

has increased steadily since 1999

0%

50%

Australiang Kong

GermanyFrance Japan

d Statesd Kingdom

therlands-20%

-10%

0%

21Source: Watson Wyatt, 2009 Global Pension Assets Study

AustrHong K Germ Fra Jap

United StaUnited King

Netherla


Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue



Macro Backdrop

BusinessModel


Funds Management


Net flowsNet flows

Brand FranchiseBrand Franchise

Net flows

Brand Franchise

Net flowsNet flows

Assets Under MgtAssets Under Mgt

AlphaAlpha

Ability to sourcecapital


Funds under Mgt (FUM)Funds under Mgt (FUM)

Net flows

Assets Under Mgt

Alpha


Funds under Mgt (FUM)

Market performanceMarket performance

Asset mix Asset mix

Asset returns Asset returns Market performance

Asset mix

Asset returns

G M iG M i

PROFITPROFIT

Asset class Asset class

Channel mix Channel mix

B ti fB ti f G M i

PROFIT

Asset class

Channel mix

B ti f Gross MarginGross MarginBoutique fees Boutique fees

Management fees Management fees

Performance/Transaction fees


Gross MarginBoutique fees

Management fees


Margin on FUM Margin on FUM

ExpensesExpensesFTE FTE

gg

Margin on FUM

ExpensesFTE

g

22Cost to income ratioCost to income ratioTechnology Technology Cost to income ratioTechnology

Summary financials

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue



Summary financials

Financial

Financial Performance

100 100%Financial Performance 1H10 6 2H09 1H09 2H08

Funds Under Management* $19.2bn $16.0bn $16.8bn $21.9bn

20

40

60

80

$ m

illio

n

20%

40%

60%

80%

Net Income* $48m $52m $62m $84m

0

20

2H08 1H09 2H09 1H100%

20%

Net Income Expenses

Cost to income ratio (RHS) RONA (RHS)

Expenses* $40m $47m $49m $53m

EBIT* $8m $5m $13m $31m

Funds Under Management

25 100

RONA annualised* 18% 9% 22% 40%15

20

$ bi

llion

2040

6080

$ m

illio

n

Net Assets*~ $93m $117m $117m $157m

* Restated figures following November 2008 merger of all fiduciary operations

~ Opening net assets

102H08 1H09 2H09 1H10

0

Funds under management Net Income (RHS)

23

p g

Expanding our footprintMacro

BackdropMacro

BackdropBusiness

ModelBusiness

ModelValue

DriversValue



Macro Backdrop

BusinessModel


Funds Managementp g p

Researcher/Asset Consultant Positive Ratings for Challenger and Boutique / Alliance StrategiesResearcher/Asset Consultant Positive Ratings for Challenger and Boutique / Alliance Strategies

van Eyk /Adviser

Edge

Lonsec S&P Morningstar Zenith Dealer Groups

Platforms Asset Consultants

Ch llChallenger

Australian Equities

FixedFixed Income/Mortgages

Property/Infrastructure

B tiBoutiques

Australian Equities

I t ti l E itiInternational Equities

Fixed Income (Institutional only)

24

Remain positioned to deliver FUM growth

Macro Backdrop

Macro Backdrop

BusinessModel

BusinessModel

ValueDriversValue



Remain positioned to deliver FUM growth

• Mixed investmentInternal Investment Mgmt - 6 months performance

• Mixed investment performance in FY09 as a result of market volatility

40.0%

50.0%AlphaBenchmark

volatility• Fund performance

returning over the period The majority

20.0%

30.0%

period The majority internal of funds with first or second quartile performance -10 0%

0.0%

10.0%

performance • Continued

diversification provides buffer for performance

-10.0%Aus. Share Smaller

Co'sMicro Cap Aus. Share

IncomeAREIT Hybrid

PropertyHigh Yield Mortgages

buffer for performance in tough market conditions

25

Funds under managementMacro

BackdropMacro

BackdropBusiness

ModelBusiness

ModelValue

DriversValue



FUM by asset class – December 2009FUM by channel – December 2009

26

Change in market shareFunds ManagementFunds Management

BusinessModel

BusinessModel Key FactsKey FactsValue

DriversValue

DriversMacro

BackdropMacro

Backdrop

Change in market share

27

Strong growth in Boutique FUM / flowsFunds ManagementFunds Management

BusinessModel

BusinessModel Key FactsKey FactsValue

DriversValue

DriversMacro

BackdropMacro

Backdrop

Strong growth in Boutique FUM / flows 5,000

FUM $ (LHS)

4,000

FUM $m (LHS)

3,000

2,000

0

1,000

-1,000

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

* Includes FUM previously managed by HSBC Asset Management (Australia) and transitioned to Kinetic Investment Partners in March 2005; and includes FUM managed by WaveStone Capital

28

* Includes FUM previously managed by HSBC Asset Management (Australia) and transitioned to Kinetic Investment Partners in March 2005; and includes FUM managed by WaveStone Capital prior to Challenger’s partnership with the business in November 2008.

Challenger – Governance

29

Governance and risk management frameworkGovernance and risk management framework

Other Board Committees

Challenger Financial

Services Group Limited Board

Challenger LifeCompany Limited

Board

Trustee/ Responsible

Entity/ SubsidiaryBoards

Board Audit & Compliance Committee

Board Audit & Compliance Committees

Audit & Compliance Committees

Credit Risk, Market Risk,

Committees (as appointed)

Investment Committees

Asset Liability Committee

Capital, Risk & Strategy

Liquidity Risk &Investment Decisions

Committees(as appointed)

CommitteeStrategy Committee

Compliance & Operational RiskManagement

Group Compliance & Operational Risk

30

Normalised Cash Operating Earnings

31

N li d h ti i LifNormalised cash operating earnings – Life

• Normalised cash operating earnings (‘COE’) – supplementary disclosure to existing statutory reporting framework

P id l it th ti b t th di t bl d l i• Provides clarity on the separation between the predictable underlying cash spread, normalised capital growth each year and the more volatile market linked movements

• Disclosure enhances transparency around operating spread within the prudentially regulated Life balance sheet

• Enable forecasting of cash flow and growth assumptions and better reflect the underlying performance

G id f li d COE f 20101 d d 30% f 2009• Guidance for normalised COE for 20101 – upgraded 30% from 2009 to $325m

32

COE – Life

ACash ‘spread’ earningsCash and accrued investment yield net of interest & commissions / fees

B

fees

Normalised Capital GrowthM di t th t t ll ti

C

Medium term growth rates x asset allocations

Investment experienceC Realised / unrealised mark to market gains and losses net of

normalised capital growth and actuarial assumptions

A B+ = Normalised Cash Operating Earnings

33

COE – Life

ACash ‘spread’ earningsCash and accrued investment yield net of interest & commissions / f

Spread earnings will be accounted on a cash and accruals basis

fees

• Investment yield will account for net rental income, dividends received and accrued, interest as it is earned and discounts/premiums on fixed income securities amortised on a straight line basisstraight line basis

• Interest expense accrued at contracted rates paid to annuitants and subordinated-debt note holders

• Commission and fees accounted for when paid or accrued

34

COE – Life

Normalised Capital GrowthB

Normalised Capital GrowthMedium term growth rates x asset allocations

• Challenger’s medium term capital growth expectationsof the portfolio through the cycle

• Property 2.0%Infrastructure 4 0%• Infrastructure 4.0%

• Equity and Alternative 6.0%• Debt and Fixed Interest (0.35%)

• Normalised assumption for property has now changed, with the purchase of a portfolio of Japanese property assets (CKT) Challenger now expects to make a blended 2% capital growth on

t th h th lproperty through the cycle• Growth expectations multiplied by investment asset allocation

derives Normalised Capital Growth

35

COE – Life

CInvestment experienceRealised / unrealised mark to market gains and losses net of normalised capital growth and actuarial assumptions

• Investment experience accounts for all realised and unrealised gains and losses. Investment experience is net of the normalised

normalised capital growth and actuarial assumptions

gains and losses. Investment experience is net of the normalised capital growth.

• This provides a reconciliation to audited statutory financial profits

• Also includes all actuarial valuation assumption adjustments

36

Investment Experience 1H10Investment Experience – 1H10

250

300 Aggregate hedging impact –currency/interest ratesContraction

in debt spreads

150

200 Increase in listed

infrastructure values

Gain on CIF hedge (pre-sale

of Southern holding)

Policy Holder Liabilities mvmt

l d t

50

100 lower due to CPI impact

100

-50

0

-100Debt Equity &

InfrastructureProperty FX Hedges Interest Rate

HedgesPolicy Holder

Liabilities Total

1H10Mvmt Normalised Growth Expectations

37

1H10Mvmt Normalised Growth Expectations

Source: Fair valuation movements as per 1H10 Interim Financial Accounts – Note 3 Revenue

Historical comparatives normalised COEsto ca co pa at es o a sed CO

$140 $7 000

$100

$120

$140

$5,000

$6,000

$7,000

$40

$60

$80

$m

$2,000

$3,000

$4,000

AUM

$m

A-G

AA

P

$0

$20

1H 04 2H 04 1H 05 2H 05 1H 06 2H 06 1H 07 2H 07 1H 08 2H 08 1H09 2H09 1H10$0

$1,000

• While extreme volatility in markets has been experienced over the last 18 months, cash flow and spread generation has steadily increased unaffected by a severe market

AUM ave. (RHS) HC spread COE spread COE normalised gains Historic normalised gains

flow and spread generation has steadily increased, unaffected by a severe market dislocation

• COE – supplements existing robust statutory reporting whilst maintaining consistency with prior management presentations

38

• Spread income has grown through time in alignment with growth in AUM

2004 figures on AGAAP basis

Disclaimer: The material in this presentation is general background information about Challenger Financial Services Group activities and is current at the date of the presentation. It is information given in summary form and does not purport to be complete. It is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives financial situation or needs of any particular investor These shouldnot take into account the investment objectives, financial situation or needs of any particular investor. These should be considered with or without professional advice when deciding if an investment is appropriate.

Documents

Challenger Fact Pack – February 2010 Group overview · Asset allocation weighted towards ... Single A to Swap iTraxx Australia ... spreads Australia US UK EU 14. Asset portfolio