Challenger (ASX:CGF) reported first-half FY2026 results showing earnings growth, returns above target, and record annuity sales, while outlining strategic initiatives tied to an expected shift in Australia’s capital regime for annuity providers from July 1, 2026. Management also announced a higher interim dividend and a proposed on-market buyback, citing a strong capital position and balance sheet flexibility.
First-half financial performance and shareholder returns
Chief Financial Officer Alex Bell said the first half was characterized by “consistency” despite a challenging reinvestment environment, with credit spreads “near cyclical lows.” Challenger delivered normalized earnings per share of AUD 0.333, up 2%, and normalized net profit after tax (NPAT) of AUD 229 million, also up 2%.
Challenger’s normalized return on equity (ROE) was 11.4%, above its full-year target of 10.7%. Bell noted outperformance against the ROE target increased to 70 basis points from 40 basis points in the prior comparative period.
The company increased its fully franked interim dividend by 7% to AUD 0.155 per share. Management also announced an intended initial on-market buyback of AUD 150 million, subject to market conditions and regulatory approval.
Record annuity sales drive book growth
Chief Executive Officer Nick Hamilton and Bell both highlighted strong sales momentum in the life business. Total life sales increased 11% to AUD 5.1 billion, driven by record annuity sales of AUD 3.8 billion, up 32%.
- Domestic annuity sales rose 37% to AUD 3.1 billion.
- Offshore reinsurance annuity sales increased 13% to AUD 0.7 billion, also a record.
- Lifetime annuity sales were AUD 0.7 billion, up 12%.
Bell said book growth of 5.8% and annuity book growth of 7.4% supported a 5% increase in average investment assets, which she said would underpin future earnings and returns.
In Q&A, Hamilton addressed investor questions about increased short-duration institutional business, saying the company continues to prioritize longer-dated retail sales but had seen a switch where institutional business typically written in Index Plus “has been coming in to the term annuity side.” He said pricing in institutional term had been “more attractive… than it has been for a long while,” and that Challenger was matching pricing dynamics with liquid-market investment opportunities, while running the business to meet ROE targets.
Margins, portfolio positioning, and cost discipline
Bell reported group net income increased 1% to AUD 487 million, driven by life cash operating earnings and funds management fee income supported by higher non-FUM-related revenue. Total expenses were flat at AUD 154 million, with inflationary pressures—particularly technology costs—offset by efficiencies. The cost-to-income ratio improved 30 basis points and was below the company’s 32%–34% target range for the period, which Bell said was the “lowest we’ve ever delivered for a half.”
Life normalized NPAT was AUD 226 million, up 1%. Bell said Challenger delivered “reliable spread earnings” even as credit spreads remained tight. The cash operating earnings margin moderated to 2.95%, which management linked to historically tight credit spreads reducing reinvestment spreads.
To support sales mix changes, Challenger increased its allocation to liquid assets. Bell said cash and equivalents were AUD 3.3 billion at December 31, up 27% (AUD 700 million). She described the strategy as providing flexibility to deploy into higher-yielding assets as opportunities arise, and said the company was not taking undue risk to achieve returns.
On portfolio composition, Bell said the balance sheet remained stable by asset class, but with an increase in higher-quality fixed income. Over the last year, Challenger invested AUD 1.6 billion of additional fixed income, “almost all… deployed into cash and triple-A securities,” positioning the portfolio for any repricing.
Funds management: flows, diversification, and affiliate changes
Funds Management delivered normalized NPAT of AUD 29 million, up 7%, driven by higher net fee income and cost efficiencies. Bell said average funds under management were lower period-on-period, but emphasized focus on “flow, quality, and margin sustainability.”
Bell said the period had been difficult for active equity managers, but Fidante recorded total net flows of AUD 1.5 billion in the half, with 83% of strategies externally rated as recommended or highly recommended. During the half, Challenger recognized AUD 12.6 billion of FUM from adding Fulcrum Asset Management to the affiliate platform and de-recognized AUD 2.9 billion upon completion of the Ares distribution agreement. Alternatives rose to 15% of Fidante’s FUM, which Bell said reflected diversification progress.
Challenger Investment Management’s third-party FUM grew to AUD 3.1 billion, which Bell said equated to a 38% four-year CAGR, supported by investor demand for credit and income strategies and the listed LiFTS notes launched in the period.
Capital position, APRA reform, and strategic initiatives
Management repeatedly pointed to capital strength. Bell said S&P upgraded the capital rating for Challenger Life Company (CLC) and Challenger Limited by one notch to A+ and A-, respectively. At December 31, the life company had AUD 1.7 billion of capital above APRA’s minimum requirements, with a PCA ratio of 1.58 times under current standards.
Bell outlined expected impacts from APRA’s proposed capital standard changes effective July 1, 2026. Using the December 31, 2025 balance sheet, the reported PCA ratio of 1.58 times is expected to rise to 1.74 times on a pro forma “day one” basis. She added that if spreads were at long-term averages, pro forma PCA could be around 1.82 times.
Management said the reforms should reduce capital procyclicality and support retirement income innovation. Bell also said Challenger anticipates a shift in asset allocation over time toward more fixed income and fewer growth assets, reducing capital intensity and earnings volatility, while expanding “capital-light fee income streams.” She also flagged that the company may revisit its normalized cash operating earnings framework in FY2027 and expects to evolve reporting toward a more integrated group view rather than separate business unit segments.
Hamilton highlighted strategic momentum including partnerships with superannuation funds and advice technology providers, the transformation of customer and data platforms, and plans to launch a new customer technology platform before the end of the financial year. He said partnerships with BT and MLC would support innovation in retirement solution delivery, including the ability for advisers to model retirement plans incorporating guaranteed lifetime income through IRISX Plan and iPlan planning tools.
On offshore reinsurance, Hamilton said Challenger is working with the Bermuda Monetary Authority to expand its offshore reinsurance business beyond its current limited Bermudan license. In Q&A, he said the company has been working on this expansion for two to three years and expects licensing progress “this half,” subject to regulatory approvals. He said there would be no capital implications, as capital backing would be more or less equivalent to what is held today for those liabilities.
Regarding asset origination, Hamilton said Challenger raised AUD 5.9 billion in origination volumes in the half, including AUD 2.5 billion of private credit originations. Management also reiterated that it is in talks with Pepper Money regarding a potential equity stake of up to 25%, though Hamilton said there is “no certainty” a transaction will occur. In Q&A, management emphasized that the AUD 150 million buyback is independent of any Pepper Money transaction and that it has “no intention of raising fresh common equity” for such a deal, if pursued.
For FY2026, Bell reaffirmed guidance for normalized EPS of AUD 0.66 to AUD 0.72, with AUD 0.333 delivered in the first half. She said variability in items such as performance fees, transaction fees, distributions, and some seasonality were factors underpinning the range, and reiterated that pricing is being set against the current ROE target while the existing capital standards remain in place.
About Challenger (ASX:CGF)
Challenger Limited is a publicly owned investment manager. The company also provides retirement services to its clients. It manages equity mutual funds. The firm invests into the public equity markets across the world. Challenger Limited was founded in 1985 and is based in Australia, Asia and United Kingdom.
