Shares in Challenger Ltd (ASX: CGF) are up around 6 per cent to $9.07 this morning after the company revealed annuity sales of $575 million for the third quarter of FY2016, up a bumper 29% over the prior corresponding quarter.
This is a superb result for Challenger and the market has responded by lifting the stock to a record high as it benefits from stronger distribution channels and some powerful tailwinds.
On a broad level the group is a beneficiary of the baby boomer generation as retirees continue to seek guaranteed income from a company like Challenger that has built market-leading annuity products based on a strong brand.
Notably, the highlight of Challenger’s result was the growth in sales of lifetime annuities (compared to fixed-term), which were up 63% and now represent around a quarter of all annuities sold.
The rocketing growth is partly a consequence of the increased longevity of retirees as the median life expectancy in Australia continues to rise and Australians take a more conservative approach to planning for retirement. The company commonly advertises with slogans such as “What’s your lifestyle expectancy?” And likes to play on the understandable fears of many Australians that their savings could run out in retirement.
The firm also stated that it is benefiting from stronger sales via a distribution agreement with giant financial planner Colonial First State, which is part of the Commonwealth Bank of Australia (ASX: CBA).
The past year has also seen the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) return just 2%, while it actually fell around 4% over the period for which Challenger is reporting the strong growth in annuities sales.
The moderate returns from equities unlikely to diminish the painful memories of the GFC for many baby boomers who prospered on property, but suffered from the equity meltdown just as they approached retirement age.
Challenger also has a funds management business, which performed respectably for the quarter with total funds under management of $54.6 billion.
However, the real game remains the annuities business, which retains a strong outlook based on the aforementioned tailwinds.
The group reaffirmed full year guidance for operating earnings between $585 million to $595 million for its annuities business with a targeted return on equity of 18%.
Challenger still trades on a reasonable valuation and in my opinion has all the hallmarks of a solid long-term investment opportunity.
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