Challenger Limited (CGF) – Confidence boost

Challenger Limited is a life insurance and investment management group with a focus on retirement services such as annuities and distribution deals in various countries. Challenger Limited was founded in 1985 and is based in Sydney.

Challenger (CGF) narrowed its guidance range for FY25 net profit, implying 10% growth on a year ago, and reported a stronger-than-expected capital position in a March-quarter trading update that left Ord Minnett with greater confidence in the life insurance and annuity provider’s outlook.

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The positive report came despite a net outflow in its annuity business, where its book contracted $180 million, or almost 1%, in the period, and a 5% fall in funds under management in what was a volatile quarter for markets of all stripes.

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Challenger’s annuity book did, however, show qualitative improvement – sales of its retail lifetime product grew 22%, underpinned by a 33% larger contribution from its Japanese-market distributors that proved greater than the minimum required under their contracts. Sales of longer-duration products, as opposed to shorter fixed-term offerings, improve returns for Challenger while also strengthening its book.

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Earnings upgrades and the removal of the share overhang following the sale of MS&AD Insurance’s 15.1% stake to Dai-Chi Life Holdings, meant we raised our target price to $8.00 from $7.00. We reiterate our Buy recommendation given the stock’s appealing valuation and the prospect of government changes to Australia’s retirement policies that will make annuities a more attractive option for more people.