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Challenger share price charges higher on trading update

The Challenger Ltd (ASX: CGF) share price has started the week on a very positive note.

At the time of writing the annuities company’s shares are up over 4% to $3.76.

What did Challenger announce?

Investors have been buying Challenger’s shares this morning after it confirmed that it remains strongly capitalised and is on track to achieve its revised guidance for FY 2020. This is despite the continued significant investment market volatility caused by the coronavirus pandemic.

According to the release, Challenger Life’s Prescribed Capital Amount (PCA) ratio is currently estimated at 1.55 times. This means it is toward the top end of its target range of 1.3 times to 1.6 times APRA’s minimum requirement.

This target surplus is a level of excess capital that the company seeks to carry over and above APRA’s minimum requirement in order to provide a buffer against adverse market conditions.

Financial flexibility.

In addition to the above, management notes that Challenger has additional financial flexibility and liquidity. This includes a group banking facility of $400 million, which has been fully drawn and is being held in cash outside of Challenger Life. The company has the option to inject $250 million of this facility into Challenger Life as Common Equity Tier 1 regulatory capital, and APRA has confirmed no objection to this.

Challenger’s managing director and chief executive officer, Richard Howes, said: “Challenger Life has successfully adjusted its investment portfolio given the significant market sell-off in order to maintain capital strength well in excess of APRA’s requirements. While conditions remain extremely volatile, we have the capability and flexibility to successfully navigate through this period.”

Mr Howes explained that the company has positioned its portfolio defensively to reflect the current conditions, with a high weighting to investment grade fixed income.

In fact, 64% of its funds are now invested in investment grade fixed income assets, with 13% in sub-investment grade fixed income assets, and 17% in property. Challenger has whittled down its investments in equities and infrastructure to just 5% and 1%, respectively.

Guidance maintained.

Looking ahead, management advised that Challenger remains on track to achieve its revised normalised net profit before tax guidance of between $500 million and $550 million for FY 2020.

It notes that this guidance fully reflects the impact of changes to Life’s investment portfolio and lower Funds Management earnings from lower funds under management following the equity market sell-off.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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