Slides
Page 1
APRA’s proposed capital standards – market update Nick Hamilton – Managing Director & Chief Executive Officer Alex Bell – Chief Financial Officer Anton Kapel – Chief Executive, Insurance 5 NOVEMBER 2025
Page 2
Acknowledgement of country Challenger acknowledges the Traditional Owners of Country throughout Australia and we pay our respects to Elders past and present. We recognise the continuing connection that Aboriginal and Torres Strait Islander peoples have to this land and acknowledge their unique and rich contribution to society.
Page 3
Strategy delivering a business ready for the future Business model supporting sustainable long-term growth 3 Investment excellence including asset origination Scalable operating model FINANCIAL STRENGTH GROWTHSIMPLIFICATION Capital strength & flexibility ROE target & investing for growth Sales remix improving book quality Customer & partner focus delivering Simpler, contemporary business Aligned to achieve strategic goals Implement new capital standards Lower capital intensity with more stable spread-based earnings Retirement innovation & great customer experience Integrated industry partnerships delivering retirement solutions at scale 1 2 3 PAST 3-YEARSFUTURE
Page 4
Improved customer outcomes Excess capital to create strategic optionality Capital resilience Platform for growth APRA’s objectives Creating the settings for a more innovative and competitive retirement income market Significant benefit to retirees POTENTIAL BENEFITSAPRA OBJECTIVES 1 Ensuring capital requirements for life insurers are not a disincentive to the development and competitive pricing of annuity products 2 Maintaining the financial resilience of life insurers 3 Improving alignment with comparable peer jurisdictions 4
Page 5
APRA’s proposed capital standard changes 5 Principles-based approach to the illiquidity premium IMPACTS 1. Commonwealth Government Securities. 2. Can include international indices. Must be corporate or government bond index rated by APRA-recognised rating agencies, calculated by independent provider, published daily. CURRENT STANDARDS PROPOSED STANDARDS Illiquidity premium (ILP) formula Standard ILP = 33% x (A-rated yield 3-year – CGS1 yield 3-year) Advanced ILP = Spread on ILP reference portfolio less Risk allowance (greater of either cost of default and downgrades or 45% of long-term average spread) Benchmark / reference portfolio 3-year Australian A-rated spreads Single reference index or weighted average of up to 3 indices2 Long-term rate implementation 10-years Last point insurer can achieve cashflow matching Long-term (ultimate) rate 20 bps Subject to a cap of 50 bps Cap 150 bps No cap during cashflow matching period Asset Risk Charge – Credit Spread Stress (LPS 114 change) 30 bps increase in ILP in first 10 years Portion of the increase in ILP to flow through to credit spread stress charge in LPS 114 Cashflow matching requirement Not applicable Cumulative cashflow test with Appointed Actuary attestation
Page 6
6 Capital resilience Capital position is significantly more resilient to market shocks under proposed standards Risk of management actions needing to be taken is materially reduced REFERENCE CURRENT STANDARDS PROPOSED STANDARDS 30 June 2025 Regulatory capital base A $4.5b $4.5b Prescribed Capital Amount (PCA) B $2.8b $2.6b PCA ratio3 A / B 1.60x 1.77x Impact of instantaneous shock (no management actions) Change in Capital Base (Asset Impact) C -$1.3b -$1.3b Change in Capital Base (Liability Impact) D +$0.1b +$1.0b Change in PCA E -$0.2b -$0.2b Regulatory capital base F = A + C + D $3.3b $4.2b PCA G = B + E $2.6b $2.4b PCA ratio3 F / G 1.28x 1.74x Change in PCA ratio (0.32x) (0.03x) Management actions De-risking Required Not required Impact of market recovery Profit foregone Full benefit ILLUSTRATIVE EXAMPLE OF HOW CAPITAL POSITION RESPONDS TO A MARKET STRESS EVENT 1,2 1. Refer to Appendix A for assumptions. 2. Stress event is assumed to occur before any asset allocation changes are made in response to the proposed capital standard changes. 3. The PCA ratio represents total Tier 1 and Tier 2 regulatory capital base divided by the Prescribed Capital Amount.
Page 7
Impact upon implementation of proposed standards 7 Credit spread environment drives quantum of impact 1.60x PCA Ratio 30 June 2025 Current tight spread environment 1.77x Pro forma PCA Ratio 30 June 2025 PCA RATIO – CURRENT STANDARDS CLC total regulatory capital CET1 stable as Standard ILP approach applies due to tight credit spread environment and risk allowance floor of 45% PCA requirement Lower Asset Risk Charge driven by increase in liability offset within credit spread stress charge CLC total regulatory capital CET1 would increase in a normalised credit spread environment as Advanced ILP approach would apply PCA requirement Lower Asset Risk Charge driven by increase in liability offset within credit spread stress charge If spreads matched long-term average spreads 1.83x Pro forma PCA Ratio 30 June 2025 PRO FORMA PCA RATIO – PROPOSED STANDARDS 1 1. Refer to Appendix B for modelling assumptions used.
Page 8
Excess capital to create strategic optionality 8 Excess capital comprises both CET1 and AT1/T2 • Further work needed to confirm impact of changes on target PCA range • Assuming no change in target PCA range, ~3/4 of Capital Base benefit would arise as excess CET1 (with the balance being excess AT1/T2) ILLUSTRATIVE IMPACTS OF PROPOSED STANDARDS CURRENT STANDARDS PROPOSED STANDARDS 30 June 2025 Regulatory capital base $4.5b $4.5b PCA $2.8b $2.6b PCA ratio 1.60x 1.77x Illustrative impact of reverting to 1.60x Regulatory capital base $4.1b Potential excess CET1 ~$0.3b Potential excess AT1/T2 ~$0.1b
Page 9
Book growth to be backed by fixed income Changes to existing portfolio over time 74% 11% 13% 2% Fixed income Property Alternatives Equity and infrastructure Platform for growth 9 Greater investment in fixed income over time to reduce capital intensity Positioned for growth in longer duration annuity products IMPACTS LIFE INVESTMENT ASSETS – 30 JUNE 2025 $25.6bn GROWTH ASSETS 26% LIFE INVESTMENT ASSETS –1 JULY 2026 ONWARDS 30% - 40% 25% - 30% 3% - 12% 25% - 30% Capital intensity GROWTH ASSETS 11.1%Challenger Life Fixed income assets Growth assets Capital intensity Capital volatility Earnings volatility FIXED INCOME
Page 10
• Respond to APRA’s consultation • Undertake further detailed strategic assessment of the changes • Conduct actuarial governance, risk appetite and capital management review • Assess operational readiness and reporting requirements • Review investment strategy and forward-looking impacts on asset portfolio • FY27 scenario modelling and business planning to include a review of the normalised reporting framework and guidance metrics Next steps 10 Structured approach to internal planning and implementation IMPACTS $
Page 11
Appendix
Page 12
Appendix A - Assumptions 12 Capital resilience illustrative example IMPACTS Item Comment Asset Portfolio No changes to actual asset portfolio at 30 June 2025 (including no allowance for any potential return of capital) Capital Standards Aligned to Draft Standards Assumed that criteria to apply Advanced Illiquidity Premium are satisfied Note: to satisfy Cash Flow Matching criteria, small modifications to asset portfolio may be required Choice of Reference Index Bloomberg US Corporate Statistics Index (LUACSTAT) Market Shock Parameters Aligned to 1-month market performance from 24/02/2020 to 23/03/2020 IG spreads (A/BBB) +250bps HY spreads +600bps Equity -35% Property -7% Absolute Return Funds -3%
Page 13
Appendix B - Assumptions 13 Assumed application of draft capital standards as at 30 June 2025 IMPACTS Item Comment Standard Illiquidity Premium Illiquidity Premium: 0.29% (Yrs 0-10); 0.20% (Yr 10+) Advanced Illiquidity Premium Reference Index Bloomberg US Corporate Statistics Index (LUACSTAT) Credit spread = 0.83% Risk Allowance Long-term LUACSTAT spread = 1.29% (based on year 1990 onwards) Risk allowance = 45% x 1.29% = 0.58% Illiquidity Premium 0.83% - 0.58% = 0.25% (subject to a floor of the Standard Illiquidity Premium) Standard Illiquidity Premium dominates over the first 10 years, with Advanced Illiquidity Premium dominating beyond that point Long-term illiquidity premium implementation period Maximum cashflow matching term = 30 years Advanced Illiquidity Premium cap of 0.50% after 30 years does not apply at 30 June 2025 Asset Risk Charge (LPS 114) Calculation based on the credit ratings of index constituents Average credit spread increase of index = 1.37% Credit spread increase with LPS 114 Adjustment Factors = 0.81% Products included All illiquid products including lifetime and fixed term annuities
Page 14
The material in this presentation is general background information about Challenger Limited group’s activities and is current at the date of this 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 should be considered with professional advice when deciding if an investment is appropriate. Challenger also provides statutory reporting as prescribed under the Corporations Act 2001. The 2025 Annual Report is available from Challenger’s website at www.challenger.com.au/about-us/shareholder-centre. This presentation is not audited, and any financial information in this presentation which is not included in the Challenger Limited 2025 Annual Report has not been subject to independent review by Challenger’s external auditors, Ernst & Young. This document may contain certain ‘forward-looking statements’. The words ‘forecast’, ‘expect’, ‘guidance’, ‘intend’, ‘will’ and other similar expressions are intended to identify forward-looking statements. Forecasts or indications of, and guidance on, future earnings and financial position and performance are also forward- looking statements. You are cautioned not to place undue reliance on forward looking statements. While due care and attention has been used in the preparation of forward-looking statements, forward-looking statements, opinions and estimates provided in this announcement are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Forward-looking statements including projections, guidance on future earnings and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance and may involve known and unknown risks, uncertainties and other factors, many of which are outside the control of Challenger. Actual results, performance or achievements may vary materially from any forward-looking statements and the assumptions on which statements are based. Challenger disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or results or otherwise. Past performance is not an indication of future performance. While Challenger has sought to ensure that information is accurate by undertaking a review process, it makes no representation or warranty and (to the maximum extent permitted by law) accepts no liability as to the accuracy or completeness of any information or statement in this document. Unless otherwise indicated, all numerical comparisons are to the prior corresponding period. IMPORTANT NOTE