The Challenger Ltd (ASX: CGF) share price opened down nearly 5% at $7.60 this morning after it reported a quarter of significantly falling annuity sales compared to the prior corresponding period.
For the quarter ending March 31 2019 total annuity sales of $662 million were down 13% on the prior corresponding quarter driven largely by Japanese annuity sales collapsing nearly in half.
The group blamed this shock result on rising interest rates in the U.S. meaning Australian dollar denominated annuities are less attractive to Japanese investors, which makes sense and goes to show how the macro environment can extinguish any tailwinds supporting this business.
Fortunately for Challenger shareholders Japanese annuity sales only make up a small part of the business, but Australian annuity sales were still down 7% or $45 million to $607 million.
Challenger blamed the falls on uncertainty as a result of financial planning and advice ructions after the Royal Commission with the March quarter right after the commission's conclusions.
The question for investors now is whether Japanese annuity sales face ongoing falls given the macro outlook for stronger rates in the US, while the fall in Australian annuity sales could also be linked to many other factors other than the fallout from the Royal Commission.
Challenger also runs a significant funds management business that grew FUM 4% to $78.1 billion over the quarter due to a strong quarter for equity markets, but actually recorded a disappointing $37 million in net outflows.
The one positive is that Challenger maintained guidance for full year profit to come in between $545 million to $565 million in fiscal 2019.
Foolish takeaway
For full disclosure I am a Challenger shareholder and I am increasingly bearish on the business after a series of disappointing updates. As such if anything I'll be looking to sell my shares over the 12 months ahead.
However, others may still think the long-term outlook for the business is strong thanks to the ageing population and ever-increasing superannuation pools supporting it. Arguably, the retreating share price also means much of the disappointing news is now priced in.
