Challenger Ltd (ASX: CGF) shares are on the slide on Friday.
In morning trade, the annuities company's shares are down 3% to $7.71.
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Why are Challenger shares falling?
Investors have been selling the company's shares this morning in response to the release of an announcement after the market close on Thursday.
According to the release, Challenger has welcomed "APRA's consultation on capital settings for annuity products, and its direction in moving towards a more market sensitive illiquidity premium with appropriate risk controls."
Management believes that this is an important regulatory reform. It thinks that it will help to develop Australia's retirement income market by promoting innovation and supporting greater take up of lifetime income products and enabling greater choice and certainty for retirees.
It also notes that the proposals outlined in the consultation represent a "significant improvement" on Australia's current prudential capital settings. This is through closer alignment between asset and liability cashflows, which it believes creates a more appropriate environment for the provision of annuity products through lowering the levels of required capital.
APRA's proposal states the following:
The Australian Prudential Regulation Authority (APRA) has issued a consultation paper on modifying the capital framework for annuities. The proposed changes would allow reduced capital requirements for annuity products in return for enhanced risk management by life insurers, including closer matching of assets and liabilities. This should help life insurers to offer more competitively priced annuities without unduly increasing risks to policyholders.
The proposals respond to industry calls to better align APRA's requirements with those of other jurisdictions, creating a more favourable environment for the provision of annuity products. Over time this initiative has the potential to improve annuity offerings to Australian retirees.
Isn't this good news?
According to a note out of Citi, its analysts believe the proposals are a net positive for Challenger.
However, they concede that the full impact is still unclear and that no changes will be made until at least 2026. As a result, investors will have to wait and see if this is a boost for the company.
Nevertheless, Challenger's chief executive, Nick Hamilton, was pleased with the news. He said:
Challenger welcomes progress on this important initiative that will improve annuity offerings for all Australians and support guaranteed income being an integral part of the retirement planning process. "The proposals will also improve the financial resilience of life insurers and establish a more favourable environment to grow the annuity market and provide reliable, guaranteed income streams in retirement.
Following today's gain, Challenger's shares are up 15% over the past 12 months.
