Challenger Ltd (ASX: CGF) has just reported its result for the six months to 31 December 2017.
Challenger is Australia's leading annuity provider with a dominant market share, below are highlights of its results compared to the prior corresponding period.
The headline figure for Challenger is that group assets under management (AUM) increased by 18% to $76.5 billion. Life AUM increased by 17% and funds under management (FUM) increased by 18%.
Challenger removes the investment performance of its assets and liabilities to produce 'normalised' profit figures.
Normalised net profit before tax (NPBT) increased by 8%, it increased by 13% if the one-off Life Risk fee is excluded. Normalised net profit after tax (NPAT) increased by 6%, it increased by 10% if the one-off Life Risk fee is excluded. The higher effective tax rate hurt the NPAT figure.
The statutory NPAT decreased by 3% due to the negative investment experience of $17 million.
Normalised pre-tax return on equity (ROE) dipped to 16.8% and was below the 18% target. However, Challenger said this was expected as it currently has higher levels of capital after the MS&AD placement in August 2017.
The AUM and normalised profit growth figures were driven up by the ever-increasing annuity sales. 'Life' sales were up 21% to $3.3 billion, annuity sales were up 4% and 'Other Life' sales were up 84% to $1 billion.
Long-term annuity sales were up 20%, which represents 'Lifetime' and MS Primary annuities. Long-term annuity sales made up 36% of total annuity sales, Lifetime represented 19% of annuity sales and MS Primary represented 17%.
The dividend increased by 3% to 17.5 cents per share and is fully franked. The dividend payout ratio is 49.7% and the overall cash payout is expected to be reduced by 2% due to the dividend re-investment plan.
Outlook
Challenger re-iterated its FY18 profit guidance of normalised net profit before tax of between $545 million to $565 million, which represents growth of between 8% to 12%.
The company expects to achieve its 18% return on equity target in the medium-term, but FY18 (and perhaps beyond) will be impacted until the higher levels of capital are fully deployed.
Management will maintain the normalised NPAT dividend payout ratio of 45% to 50%.
Foolish takeaway
Overall, I thought this was a solid result from Challenger. The moves it's making to increase its distribution channels should help long-term profit and profit margins because of how scalable the business is.
The fall in statutory profit was slightly disappointing with almost all asset prices at all-time or multi-year highs at the end of December. As long as Challenger's long-term investment experience shows growth then it's not an issue.
Personally, I was pleased with Challenger's result and I'm glad that it's one of my biggest holdings. I will likely buy more shares if any opportunities present themselves to buy more at a discounted price if market volatility hurts the share price.
