Challenger Ltd (ASX: CGF) shares have risen 8% in response to the company’s news about its strategic relationship with MS&AD Insurance.
Challenger is Australia’s largest provider of ‘annuities’, which are financial products typically sold to retirees who seek reliable income. Challenger was established in the mid-80’s and listed on the ASX in 1987. In 2018, Challenger managed more than $90 billion between its investment portfolio, which is the sum of the money invested by retirees who buy annuities, and its fund management business.
Here’s What Challenger Announced
Challenger has expanded its strategic relationship with MS&AD Insurance Group.
Challenger will also commence a quota share reinsurance of US dollar denominated annuities issued in the Japanese market by Mitsui Sumitomo Primary Life Insurance Company and is expected to commence from 1 July 2019.
MS Primary will provide Challenger Life an annual amount of reinsurance across both Australian and US dollar annuities of at least $640 million per year for at least five years. Challenger did say this is subject to review in the event of a materially negative change for either MS Primary or Challenger Life.
MS&AD also intends to increase its holding to more than 15% and wants representation on the Challenger board, assuming it gets Australian regulatory approvals.
New Challenger CEO Richard Howes said: “Today’s announcement reflects the success of the strategic relationship Challenger and MS&AD commenced three years ago. This expanded alliance leverages the strengths of both businesses to create opportunities for continued growth.”
Challenger said that the foreign currency fixed annuity market in Japan is continuing to grow strongly and has increased by 70% over the past three years and now represents 3.6 trillion yen in annual sales.
The recent shift in interest rates has increased the attractiveness of US dollar annuities compared to Australian dollar annuities.
Challenger Life has entered into a new agreement with MS Primary to commence reinsuring the US dollar version of the 20-year term product.
Challenger will provide a guaranteed interest rate and assume the investment risk in relation to those policies issued by MS Primary and reinsured by Challenger.
The two businesses will also work together to explore new growth opportunities.
Is This Good For Challenger?
This seems good for Challenger to expand its product offering and diversify its earnings. However, it does suggest that Challenger’s existing products with MS Primary aren’t going as well as initially hoped.
Challenger is trading a lot of cheaper, around 33%, than it was a year ago. Challenger still boasts that it has good tailwinds due to the ageing population and growing superannuation pool of assets.
However, some people question whether Challenger can create sustainable long term growth for both shareholders and annuity holders.
There are other less complex growth shares on the ASX.
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Disclosure: At the time of writing Jaz owns shares of Challenger, although this could change at any time.
