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Challenger Ltd’s sales of key annuity predicted by broker to fall

Challenger Ltd (ASX: CGF) is Australia’s leading annuity provider, it has a dominant market share of existing and new annuities. It sells a variety of annuities with different offerings for different clients.

Today, broker Morgan Stanley has reduced projections for Challenger’s Liquid Lifetime by 20% each year from January 2019, which equates to $200 million.

According to an article in the AFR, Daniel Toohey, an analyst at Morgan Stanley, believes that changes to social security rules will mean this particular type of annuity will see falling sales as it can’t be restructured enough to provide social security benefits.

Of course, Challenger has more products than just the one that Morgan Stanley are referring to, liquid lifetime sales only represent 19% of the total annuity sales.

Indeed, a Challenger spokesman said “The Morgan Stanley report refers to our regular lifetime annuity, which is one of five products in our liquid lifetime range, which also includes enhanced and flexible lifetime options, CarePlus and Deferred Lifetime Annuities. We are confident the current DSS process will result in settings that are sustainable for a broad range of pooled lifetime products.”

It’s a function of the market to have some people negative about a business and some people positive about a business. Perhaps the loss of franking credits will make Challenger’s annuities more attractive to retirees. It’s hard to say.

Even if Challenger loses a smallish portion of its annuity sales it has a large tailwind of people hitting retirement age to drive its long-term annuity sales upwards.

Foolish takeaway

I believe that Challenger is the best finance stock on the ASX and has a very beneficial tailwind. It’s currently trading at 16x FY19’s estimated earnings, which I think is a reasonable price to pay for a growing business.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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