Challenger’s Capital and Regulatory Challenges Ahead Despite Earnings Growth
Challenger Limited reported a 9% increase in normalised net profit after tax for FY25, driven by strong Life business cash earnings and resilient Funds Management performance despite net outflows. The company also announced an 11% dividend increase and provided positive FY26 EPS guidance amid ongoing regulatory reforms.
- Normalised NPAT up 9% to $456 million
- Life business NPAT rises 6%, annuity sales stable at $5.2 billion
- Funds Management NPAT up 41% despite $11.6 billion net outflows
- Strong capital ratios maintained with PCA ratio at 1.60 times
- FY26 normalised basic EPS guidance of 66-72 cents, dividend up 11%
Robust Financial Performance Amid Market Challenges
Challenger Limited has reported a solid financial year for FY25, with normalised net profit after tax (NPAT) increasing by 9% to $456 million. This growth was underpinned by the Life business, which saw a 6% rise in normalised NPAT to $461 million, supported by higher cash operating earnings and stable annuity sales of $5.2 billion. Meanwhile, the Funds Management division delivered a remarkable 41% increase in normalised NPAT to $53 million, despite experiencing net outflows of $11.6 billion.
The company’s statutory net profit after tax surged 48% to $192 million, reflecting a combination of strong underlying earnings and the impact of accounting adjustments. Challenger’s normalised basic earnings per share (EPS) rose 9% to 66.3 cents, signaling improved shareholder returns.
Life Business, Leading Retirement Income Provider
Challenger continues to cement its position as Australia’s largest provider of annuities, offering retirees guaranteed income streams that provide financial security and confidence. The Life business achieved record retail lifetime annuity sales, up 26%, and Japanese annuity sales increased by 39%, reflecting the strength of its reinsurance partnership with Mitsui Sumitomo Primary Life Insurance Company Limited.
The company’s strategic focus on longer-duration annuity products is enhancing the quality and returns of its Life book, with the tenor of new business sales averaging 6.3 years. Institutional partnerships with major superannuation funds such as UniSuper and NGS Super are expanding Challenger’s footprint in the retirement income market, aligning with regulatory reforms aimed at improving retirement outcomes for Australians.
Funds Management, Navigating Net Outflows with Fee Growth
Despite net outflows of $11.6 billion, Funds Management delivered a strong financial performance, with net fee income rising 8% to $188 million. This was driven by growth in average funds under management (FUM), higher transaction and placement fees, and increased performance fees. The division’s cost discipline contributed to a reduced cost-to-income ratio of 60%, down from 69% the previous year.
Fidante, Challenger’s affiliate investment platform, saw net outflows primarily in fixed income and equity strategies but maintained strong long-term investment performance, with 77% of funds outperforming benchmarks over five years. Challenger Investment Management (Challenger IM) also contributed positively, benefiting from higher fee margins and expanded whole loan origination activities.
Capital Strength and Regulatory Engagement
Challenger maintained a robust capital position with a Prescribed Capital Amount (PCA) ratio of 1.60 times, slightly down from 1.67 times in FY24, and a Common Equity Tier 1 (CET1) ratio of 1.19 times. The company’s capital intensity increased modestly due to currency depreciation and a shift towards higher-risk assets, but remains well above APRA’s minimum requirements.
Challenger is actively engaged with the Australian Prudential Regulation Authority (APRA) on proposed reforms to capital settings for annuity products. These reforms aim to introduce a more market-sensitive illiquidity premium, which Challenger believes will foster innovation and growth in the retirement income market by reducing pro-cyclicality and enhancing financial resilience.
Technology and Strategic Partnerships Fuel Growth
The company is advancing its technology capabilities through partnerships with Accenture and State Street, re-platforming its Life customer registry and transitioning investment administration and custody services. These initiatives are expected to improve customer experience, operational efficiency, and integration with superannuation funds and wealth platforms.
Challenger’s strategic collaborations extend to new retirement income solutions with superannuation funds and financial advisers, including the launch of MLC Retirement Boost and the Adviser Council, which aims to foster innovation and thought leadership in retirement income products.
Outlook and Dividend
Looking ahead to FY26, Challenger has provided normalised basic EPS guidance in the range of 66 to 72 cents, representing a 4% increase at the midpoint compared to FY25. The company remains committed to a dividend payout ratio between 30% and 50% of normalised EPS and has declared a fully franked final dividend of 15 cents per share, bringing the full-year dividend to 29.5 cents, up 11% from the prior year.
Challenger’s outlook reflects confidence in its market leadership, ongoing regulatory reforms, and strategic initiatives designed to capture growth opportunities in Australia’s expanding superannuation and retirement income sectors.
Bottom Line?
Challenger’s FY25 results reinforce its leadership in retirement income, but investors will watch closely how regulatory reforms and technology upgrades shape its growth trajectory in FY26.
Questions in the middle?
- How will APRA’s final capital reforms impact Challenger’s annuity product offerings and capital requirements?
- Can Challenger sustain Funds Management fee growth amid ongoing net outflows?
- What is the potential market impact of Challenger’s technology platform upgrades on customer acquisition and retention?
