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Mark Chen: Good morning, everybody, and a warm welcome to those in person and online to Challenger's 2026 Half Year Results Briefing. I'm Mark Chen, Challenger's General Manager of Investor Relations. We're pleased to come to you today from 5 Martin Place in Sydney. Before we begin, I would like to acknowledge the Gadigal people of the Eora Nation, the traditional custodians of the land on which we are hosting this event today and pay my respects to both elders past and prison. Today's presentation will be delivered by our Chief Executive Officer, Nick Hamilton, and Chief Financial Officer, Alex Bell. It will then be followed by a Q&A session. You can ask a question either in person via the online portal or through the telephone. As you'll see from today's presentation, we've made a great start to 2026. That demonstrates both resilience of our earnings and the progress we're making in positioning Challenger for the next phase of growth. In the half, we've delivered earnings growth and returns above target alongside book growth, driven by rising demand for income and financial securities as retirement income tailwinds continue to strengthen. This performance is underpinned by disciplined capital management and a very strong balance sheet. Our capital position remains a clear differentiator providing flexibility to support growth and deliver shareholder returns as reflected in increased dividend and on-market buyback we have announced today. Overall, this is a result that Challenger -- it shows the Challenger is in great shape. It's delivering consistency through the cycle, and it is strongly capitalized and strongly positioned to capture the growth opportunity ahead. I'll now pass to Nick to take you through the results.
Nick Hamilton: Thank you, Mark, and thank you for everyone for joining us. So this year, it marks a significant moment for Challenger, as we step into a new era of opportunity and growth for our business and more broadly, Australia's retirement income market. We are a business that's been committed to providing -- to supporting financial confidence for those approaching or entering retirement for more than 4 decades. Our experience and quality reputation as a leader in guaranteed retirement income has made us a trusted voice with the industry, government and regulators on ways to develop Australia's retirement income market. After many years of seemingly waiting, the industry is now moving and the difference in a year is stark. Retirement is fundamentally different and the decisions an individual makes into and through retirement, requires something distinct to what we have today, and that is now recognized. We are months now from entering a new capital regime for annuity providers. And for Challenger, this is a very material moment. Any way that you look at the changes, they will be extremely positive for our business. Today, we've announced our first half results, a buyback for our shareholders and more details on the growth opportunity that has arrived for our business. We'll talk through each of these this morning, and I'm joined by our CFO, Alex Bell, who will provide more details on our first half 2016 financials. Let me start with an overview of the 3 key points in our announcement today. First, we're financially strong. We've grown earnings, maintained our disciplined expense management approach and increased returns to shareholders. Second, we have the capital flexibility we need to grow and deliver returns. And third, we are positioned to grow due to strong momentum behind our strategic initiatives, including our contribution to APRA's review of capital standards, which will see some of the biggest changes for providers of longevity products in a generation. Establishing key partnerships with super funds and advice technology platforms, expanding our offshore reinsurance partnership and delivering our transformation program across customer investment and data platforms, which will usher in a very contemporary and digitally enabled business model. Looking at the first half headline numbers. At the halfway point for the year, very pleasingly, we are delivering earnings growth in an environment where credit spreads are at historically tight levels. Alex will say more on this in her presentation. The significant increase in our statutory result reflects our positive asset experience and gains across our investment portfolio. Strong book growth in the period was driven by a record level of annuity sales. Domestic annuity sales were up 37% to $3.1 billion, and offshore sales up 13%, also to a record level. Our longer-term annuity sales also increased, driven by higher domestic Lifetime and MS Primary volumes. Our group return on equity at 11.4% is above our full year target of 10.7%. We're extremely well capitalized, providing us flexibility to support our growth and deliver returns to shareholders. Our performance demonstrates the strength of our fundamentals, and we've continued to build for growth. Today, our growth opportunity is underpinned by unique demographic and industry tailwinds. We have a world-class accumulation system that is projected to see retirement assets grow nearly fourfold to $4 trillion during the next 20 years. An aging population is one of the most significant trends, around 780 Australians retire every day, or the equivalent of a city the size of Wollongong retiring every year. However, as Australians move from accumulation to decumulation, the vast majority are not transitioning to solutions designed for this stage of life. This is despite our own research, showing 78% of people would be happier with at least partial guaranteed income for life. Unlocking demand for retirement solutions is core to our focus and where we have been driving changes during recent years. At the same time, we're seeing significant increases in demand for income from higher net wealth investors, particularly through private credit strategies as more people search for investment options that provide higher income. Our other major tailwind is a growth in offshore reinsurance markets, particularly in Japan and more broadly Asia. More than 35% of the population in countries, including South Korea, Hong Kong and Japan, will have populations aged over 65 in 2050. This year, we'll mark 10 years of our reinsurance business with MS Primary in Japan where we have recently surpassed $7 billion worth of new business cumulatively written. The strength of the partnership will see us further expand how we deliver offshore reinsurance, including a significant opportunity for growth. As a leader in retirement income over 4 decades, Challenger has developed unique competitive advantages that will allow us to shape the future of retirement in Australia. We have competitive advantages across our customer proposition, distribution capability, asset origination and as a manager of long-term insurance investments and capital. On customer we have invested to maintain our strong brand awareness for retirement income. The future customer experience will deliver simple end-to-end integration into the financial ecosystem. The replatforming of our customer technology to a modern registry and new customer interfaces will put Challenger in a unique position in the retirement market. This half, we delivered the first phase of our customer technology uplift and Phase 2 is now well advanced. And once complete, we'll open our business to customers in entirely new ways. And as we say here, it will be on customer time. We have an expansive distribution footprint, and our partnerships will drive new momentum as the market develops on the premise of a retirement income system. We have established partnerships with some of the largest superannuation funds, platforms and advice technology providers in the country. Our 2 recently announced platform and superannuation partnerships with BT and MLC will launch real innovation in how retirement solutions are delivered at scale. And through the design of new retirement advice in the Iress Xplan and iff planning tools, for the first time, financial advisers will be able to model retirement plans, which incorporate guaranteed lifetime income. We're continuing to discuss partnerships with a number of other providers in the retirement sector, and we're very optimistic about further partnership opportunities over the coming months. We're also remaining focused on the offshore opportunity as our annuity sales reached record levels. Challenger has operated with a limited Bermudan license since 2016. We are working with the BMA to expand our offshore reinsurance business, which will allow us to reinsure products more broadly than we can today. Our asset origination capability remains key as we look ahead. Quality asset origination supports our life business, and it will also enable us to expand fee-related earnings under the Challenger brand. We recognize that the market environment has changed. Demand for Australian credit has risen. Our own demand is growing and will be driven by changes to our asset allocation and our growth. During the first half through the strength of our fixed income asset origination capability, including our whole loan transaction team, we raised $5.9 billion in origination volumes, which included $2.5 billion of private credit originations. And as noted in our announcement on Monday, 9 February, we are in talks with Pepper Money on a potential transaction to acquire an equity stake of up to 25% as part of our broader asset origination strategy. Whilst there is no certainty of a transaction at this stage, we will keep the market informed on any material developments. On investment excellence, we are focused on delivering superior returns to customers and meeting their evolving needs. A key part of this is continuing to innovate the retirement and savings products we offer. In September, we launched our LiFTS income notes platform, the first of its kind in the market. And we acquired an equity stake in London-based Fulcrum Asset Management, a leading liquid alternatives manager. We are focused on being disciplined managers of capital. As part of our capital management framework, we're making Challenger a less capital-intensive business that is pointed for growth and has capital flexibility. Today's announcement of a proposed $150 million buyback is an initial step ahead of the changes to capital standards. This action demonstrates our strong capital position. We will continue to look at our capital management initiatives as the standards come into effect. And with that, I'll now hand to Alex to present our first half financials.
Alexandra Bell: Thank you, Nick, and a very good morning to everybody. I'm delighted to now present to you our financial performance and outlook for the first half of the 2026 financial year. At a time when credit spreads remain near cyclical lows and market conditions are tight, we're delivering exactly what investors look for in this environment. We have grown earnings, we have generated returns above our targets, and we have increased dividends, all supported by a strong balance sheet and disciplined capital management. The key message for this half is consistency. We are delivering earnings growth despite a challenging reinvestment environment. By holding a more defensive portfolio at this point in the cycle, we can take advantage of attractive opportunities when they arise, and we're not taking undue risk to achieve higher returns. We achieved a normalized earnings per share of $0.333, representing a 2% increase. with normalized net profit after tax of $229 million, also up 2%. Statutory NPAT reached $339 million, a particularly strong result, reflecting positive total return across each asset class in the Life investment portfolio. We've increased value creation for our shareholders with normalized return on equity of 11.4%, which remains above our target. Outperformance against this target increased to 70 basis points, up from 40 basis points in the prior comparative period, reflecting the Board's confidence in our outlook, we have increased the fully franked interim dividend by 7% to $0.155 per share. These outcomes highlight our ability to generate consistent returns through the cycle, maintaining capital strength and flexibility. Turning to the key drivers of our earnings result. Group net income increased 1% to $487 million driven by Life cash operating earnings, which benefited from higher average investment assets and funds management fee income supported by higher non-FUM-related revenue. Importantly, we're continuing to demonstrate strong cost discipline, with total expenses flat on the prior period at $154 million. Inflationary pressures, especially on technology costs were offset by realized efficiencies in our operating model. As a result, the cost-to-income ratio improved 30 basis points and outperformed the target range of 32% to 34% for the period, the lowest we've ever delivered for a half. For the Life company, we delivered reliable spread earnings despite cyclical dynamics in credit spreads. Life normalized NPAT was $226 million, up 1% and supported by higher average investment assets and ongoing pricing discipline. Book growth of 5.8% and annuity book growth of 7.4% resulted in a 5% increase in our average investment assets, which will underpin future earnings and returns. This slide highlights the cyclical dynamics impacting COE earnings. This half, our margin has moderated to 2.95%. Credit spreads across the fixed income spectrum remain historically tight, which has reduced reinvestment spreads in the near term. Our disciplined approach to pricing has moderated the impact of this effect. To support the change in sales mix this period, we've deliberately increased our allocation to liquid assets with cash and equivalents of $3.3 billion at 31 December, up 27% or $700 million on the prior period. This strategy reflects attractive opportunities in liquid assets to back some of the shorter-duration institutional business we've written this half as well as providing flexibility to deploy capital into higher-yielding assets as opportunities arise. Like many insurers globally, this approach ensures we are not prioritizing short-term yield at the risk of long-term value. Sales momentum in life was particularly strong this half. Total life sales increased 11% to $5.1 billion, driven by record annuity sales of $ 3.8 billion, up 32%. Domestic annuity sales rose by 37%, supported by strong institutional demand and continued demand for guaranteed income solutions. Lifetime annuity sales of $0.7 billion were up 12% for the period. Our offshore reinsurance annuity sales also reached a record, increasing 13% to $0.7 billion, further diversifying our liability book and demonstrating our strong relationship with MS Primary, the expansion of which is a strategic priority for future growth. The balance sheet continued to exhibit a stable composition by asset class. What has evolved is the increase in high-quality fixed income assets within the portfolio. In the last year, we have invested $1.6 billion of additional fixed income, almost all of this being deployed into cash and AAA securities. This move up in quality ensures we are well positioned for any repricing. As evidence of our commitment to investment excellence, we've achieved a strong scorecard this period with total return across all asset classes significantly exceeding the COE investment yield that we include in our normalized result. This generated a substantial after-tax asset experience of $105 million for the period, which supports a strong statutory earnings result. Now turning to Funds Management. Funds Management delivered normalized NPAT of $29 million, up 7%, driven by higher net fee income and continued cost efficiencies across the platform. While average funds under management were lower period-on-period, the focus here is flow, quality and margin sustainability, not just headline fund. 2025 and the start of 2026 has been one of the most difficult periods for active equity managers domestically and globally. Fidante continues to showcase the strength of its multi-affiliate model with total net flows of $1.5 billion for the half. The platform remains one of Australia's largest active managers with 83% of strategies externally rated as recommended or highly recommended. During the half, we recognized $12.6 billion of FUM from adding Fulcrum Asset Management to the affiliate platform. and derecognized $2.9 billion upon completion of the Ares distribution agreement, demonstrating the success of our diversification strategy, alternatives now represent 15% of Fidante's FUM. This shift demonstrates the platform's ability to adapt to evolving investor preferences and broaden its investment offering. A strategic priority for Challenger has been to grow our Challenger Investment Management business and to scale originations for Challenger Life and third parties. Challenger Investment Management continues to deliver on its mandate to grow third-party capital and scale origination for the Life company balance sheet. This investment team will form part of our group investment capability under our new group CIO, going forward. Third-party FUM has increased at a 38%, 4-year CAGR to $3.1 billion, supported by investor demand for credit and income strategies and by the listed CIM LiFTS notes launched this period. For our Life company balance sheet, the originations remain well diversified with $5.9 billion of new originations across public and private opportunities. Our capital strength remains a key differentiator. This period, S&P upgraded the capital rating for CLC and Challenger Limited by 1 notch to and A+ and A-, respectively. S&P noted that the upgrade in ratings reflects CLC maintaining its market leadership position in the Australian annuity market, better regulatory settings and strong retirement savings trends that will support earnings. At 31 December, the Life company had $1.7 billion of capital above APRA's minimum requirements, with a PCA ratio of 1.58x based on the current capital standards. This capital position supports ongoing organic growth, continued dividend growth and disciplined capital management initiatives such as an undertaking to do an initial buyback of $150 million. This slide serves as a reminder of our capital allocation framework and the progress that we have made to maximize shareholder returns. In addition to supporting meaningful organic growth this period, we have announced a $0.155 per share fully franked interim dividend that is up 7%. In respect of capital returns, we intend to undertake an initial on-market buyback of $150 million, subject to market conditions and regulatory approval. This reflects our confidence in our ability to support organic growth and return excess capital to shareholders. Last Monday, we announced that we were exploring an investment in Pepper Money. Whilst not finalized a modest minority stake like this would require no integration and would be just one of the ways to accelerate the expansion of our asset origination capability. Importantly, we are maintaining a strong and resilient balance sheet through these actions and remain disciplined and focused on delivering shareholder value, demonstrating that we are good allocators of capital. Although not yet effective, I wanted to spend a couple of minutes reminding investors why APRA's proposed changes to capital standards are so important and what to expect from the 1st of July 2026. Using our 31 December '25 balance sheet, our reported PCA ratio of 1.58x is expected to increase 16 basis points to a pro forma of 1.74 on day 1. If spreads were at their long-term average, the improvement in PCA ratio from applying the new standards would be even greater, equivalent to an increase in pro forma PCA to around 1.82x. These numbers reflect the lower PCA requirement from the enhanced liability offset within the credit spread stress and the interaction of the standard and advanced illiquidity premium approaches on CET1 through the cycle. We view these reforms as very supportive of financial resilience reducing capital procyclicality and creating a more favorable environment for retirement income innovation, consistent with the objectives that APRA has outlined and the sector's policy focus. Then as we move forward with the implementation of APRA's capital standard changes, we anticipate a meaningful shift in our asset allocation mix over time with an increased emphasis on fixed income assets, and a corresponding decrease in growth assets. This change is expected to lower capital intensity of our portfolio and reduce earnings volatility throughout the economic cycle. By adopting a higher proportion of fixed income, we aim to achieve more predictable spread income, which will then be further supported by the expansion of capital-light fee income streams. Although investment gains will continue to vary over time, we expect them to remain positive through the cycle. The overall effect of these changes will be a relative improvement in return on equity as we gradually shift away from capital-intensive assets that currently yield lower relative ROEs. In managing our equity base, earnings per share will remain a key focus, guiding our efforts to optimize earnings with the most efficient use of our equity capital base. The proposed changes to APRA's capital standards in FY '27 will be an opportunity to revisit our existing normalized cash operating earnings framework that we use for management reporting and ensure that it is fit for purpose as Challenger evolves. With the appointment of Damian Graham as Group Chief Investment Officer, we are aligning our investment capability under a single leadership structure. So consistent with this, we intend to evolve our internal and external reporting away from separate business unit segments to a more integrated Challenger group view. Looking ahead, we reaffirm our FY '26 normalized EPS guidance of $0.66 to $0.72 per share, with $0.333 delivered in the first half. Our through-the-cycle targets for ROE, cost-to-income and capital remain unchanged, and we continue to see strong structural tailwinds across retirement income, advice integration and asset origination. In summary, the first half of FY '26 was characterized by solid financial delivery and continued strategic momentum. During the period, we've delivered earnings growth and returns above our target. Our focus on disciplined capital management allows us to maintain significant capital flexibility, ensuring that we remain well positioned to respond to market opportunities and challenges as they arise. I will now hand back to Nick, and I look forward to taking your questions as part of Q&A.
Nick Hamilton: Thank you, Alex. I'll now cover our key focus areas as we look ahead. So we have a clear strategy that meets a significant demographic and retirement tailwinds. Launching our new customer technology platform before the end of this financial year will deliver simple end-to-end integration into the financial services ecosystem for our customers. We're embedding partnerships with some of the largest superannuation platform and advice technology providers, which will help to deliver retirement advice and sales at scale. And we're actively expanding our reinsurance business in partnership with MS Primary to capture the growth opportunities we see offshore. We will continue to expand our asset origination capability through the scaling of our private credit functions to underpin our long-term growth. We're driving innovation and investment excellence, and we're targeting our second LiFTS note issue in the next 6 months. In Fidante, we have an impressive global network of investment firms. We're focused on supporting their ongoing growth and the investment capabilities they provide to customers. And against the backdrop of the APRA capital standards reform for retirement income products, we're becoming a less capital-intensive business. To close, a reminder of our key points today. We have financial strength, and in the first half, we've continued to deliver our key initiatives. Our capital position is enabling strategic flexibility and growth while delivering returns to shareholders. And finally, we've done the work to position Challenger as a growth-enabled business with a significant opportunity that has arrived in the retirement income market. We'll now move to Q&A.
Operator: [Operator Instructions]
Mark Chen: Just a reminder of the process, we'll take questions first in the room. We'll then go over to the telephone and via the online portal. In terms of protocol, can I please ask you, when you ask your question, please introduce yourself and if possible, because there's a number of people in the room asking questions, just ask all your questions at once, and you'll just enable an efficient process. We'll start off in the room. So we start off with Simon over there first.
Simon Fitzgerald: Simon Fitzgerald here from Jefferies. I'll ask the 3 questions at once then just really quickly. Firstly, I wanted to just take you back to the slide that you put up when we talked about the capital changes, which I understand still haven't come into place. But the $150 million buyback, and I know that's independent of those changes. But just wanting to know if you wanted to point out that any other uses of that excess capital such as perhaps repayments of hybrid capital or anything like that, that you might want to point out? Secondly, just on the short-dated sales. There's now 2 big lumps that you've done in the first quarter and the second quarter. So just wanting a little bit of help in terms of how dilutive that would be to the margin, but also in terms of -- it doesn't seem like you had the assets there to begin with, given that we've seen an increase in the cash as well in terms of the investments. So interested to know a little bit more about the dynamics of that. And then lastly, a little bit more on the margin in terms of any effects you might want to call out -- sorry, about any cap bonds or ILS securities that didn't turn up this time that we normally see in the second half. Anything you could add to that?
Nick Hamilton: Thanks, Simon. I might -- let me just kick off on the sales one to start with, and then we can come the uses of capital and margin. So I think what you -- if you step back from the sales, what you're seeing is we're continuing to focus on longer-dated sales, like that is a priority. The message to the team as we move towards our new technology that will integrate into the system where it doesn't today is just continue to drive longer-dated sales through the retail market. We're benefiting from strong growth that MSP is seeing, and you're seeing that coming through the reinsurance volumes. Over the course of this period, there's been a bit of a switch in the institutional business where sales that you've typically seen in Index Plus have been coming in to the term annuity side, institutional term side. And there's explanations for that. But what I want to make absolutely clear is we're right in this business to meet our returns. So with our Liquids team have identified some opportunities in markets that they can deploy capital into. The pricing environment in institutional term has been more attractive to us right now than it has been for a long while. And so we have been able to map attractive pricing dynamics with investment opportunities there for that shorter-dated business. So very much consistent with meeting the ROE. But our focus is bridging through to the new technology, driving longer-dated sales as we can, and then the strategic partnerships running into to step change at medium term. But your comment there on dilutive, it's clearly it has to be because it goes into the denominator. And that's just an out working. But as we've said many times, we run the business, particularly around pricing. We run the business to meet the ROE target and pleased with that. On the first question, which was uses of capital...
Alexandra Bell: Yes, I can take it, yes. It's all good. So obviously, we do have the new APRA capital standards coming up, and that presents an opportunity on day 1 where we expect to have excess capital. I think hopefully, what you've seen today is that we're thinking about capital in a lot of dimensions. It's not binary. It's not one thing or another. We're trying to satisfy a number of different options from a capital perspective. You called out specifically any considerations for our Challenger Capital Notes 3. So we do note that those come up for their optional exchange date in May this year. But you'll understand from an APRA perspective, it's important that we don't set any expectations around our intentions for that. But you can rest assure that it's clearly a consideration for us as we think about the optimal capital stack. From a buyback perspective, look, what we've signaled today is $150 million. We recognize that that's not large. That's not what we're saying the capital excess is on day 1 of the capital standards. We're operating under the current capital standards today. So it's something sort of really modest and executable that we can do today. And what we're hoping investors will take away is a signal of our intent around ensuring that we are optimizing the uses of capital and doing that in advance of those changes to capital standards. And then I think you had a last question just around the margin. So look, there is sometimes a little bit of seasonality between the first half and the second half. We've seen cat bond distributions typically more slightly weighted to the second half. But I think if you take a step back, Nick's point are right, what we should be focusing on is meeting the ROE. So we have written some shorter duration business this period, but at good ROE. So what you should hear is that the business we're writing is meeting or exceeding those ROE targets.
Mark Chen: Can we go to Freya and then to Sid?
Freya Kong: Freya Kong from Bank of America. Can you help me reconcile the higher liquids holding in the portfolio versus a higher PCA capital intensity this period? Anything I'm missing in that? Second question on you're talking about offshore market opportunities. You've talked about Japan, but Asia more broadly, which regions are you looking at? And I guess, what's the strategic rationale for expanding this business versus focusing on the opportunity that you have domestically? Do you have enough bandwidth for both domestic and international growth? And then just lastly, clarifying, should we be viewing this buyback completely independent of any acquisition of Pepper Money stake?
Nick Hamilton: Okay. So there's 3 questions there. Thank you, Freya. So I might -- let me start with offshore and give some context there because in many ways, this isn't new, new for us. I mean, we have -- since December 2016, we have been reinsuring business with MSP. And if you look at the volumes that we've been reinsuring even in the last 2 or 3 years, have almost doubled. And so our partnership with them is excellent. What we do note there are some products that we would like to reinsure which out of Australian jurisdiction are difficult. And by taking what is already -- we've got a long relationship operating with the BMA and expanding or building the platform to expand the products that we're able to reinsure is a really sensible adjacency for us. Now this is not new. You're not -- this is not something we're announcing we've just looked at in the last recent period. Members of the team have been working on this for coming up 2 to 3 years. So the capabilities that we have inside Challenger today, whether it be on the investment side, the LLM side, the actuarial teams, they are able -- and because they do it today anyway across for MSP, able to support the delivery of the new licenses that we'll achieve and consistent with new product development we've done for many years with MSP, new products that we'd look to reinsure. So it's a very sensible strategy because the partnership and it gives us a beachhead and an opportunity then without needing to make a business case on any grand business case. It gives us the opportunity to look at other markets. Because of the stability of that relationship, Challenger being a trusted brand in the region, well regulated, domiciled in Australia. There are just other opportunities that we believe in the fullness of time, we will be able to unlock but very much built around what we do with MSP today. Then we might go to -- do you want take the PCA one?
Alexandra Bell: Yes. So I'll take the PCA one. So again, I'm sort of happy to take the PCA on offline too in terms of showing the insights of the calculation. But if you look at the capital intensity, the capital intensity of the balance sheet has remained roughly the same, particularly if you look at the asset risk charge and the overall composition of the balance sheet is steady. That cash balance was higher at 30 June too. So that increase is really comparing us now versus where we were at 31 December 2024 in terms of that increment. But there's no increase in capital intensity. And obviously, as we have written lots of new business over time, we have also invested in some alternative assets over that period, which is still highly capital intensive. So the relative capital intensity has stayed about the same. And then you had a question around the buyback as well. And so yes, we should definitely view that as completely independent of any considerations we might have around the proposed transaction with Pepper. The buyback is being done with a view to our long-term view around capital management as well as how we're feeling about APRA's new capital standards coming in. So yes, not contingent at all.
Siddharth Parameswaran: Siddharth Parameswaran from JPMorgan. A couple of questions. Firstly, just on your Slide 22 where you show us an indicative view on what the ROE would look like under the new standards. I just wanted to firstly check, is that to scale and scale starting from 0 and at the bottom? And if that is the case, I mean, it would suggest that economically speaking, it makes a lot of sense under the new standards to just reallocate the capital that's backing the real estate alternatives and equity right to fixed income? It looks like it'd be like a 50% increase in your ROE from what you're getting at the moment on those assets. It suggest that's what we should be growing into. Is that the strategy rather than giving it back to shareholders. That seems economically what would make sense based on that chart. Am I reading that correctly? So that's question one. Question two is just around the guidance. I just wanted to make sure that I'm reading what you're -- where do you think you're likely to end up? You've kept the guidance range the same on EPS, but the midpoint would imply a 7% step-up from the first half levels. The top end would imply an even much bigger step up again. It seems like they're quite big step-ups given that the first half was -- saw quite a lot of margin contraction. So I just want to check where do we sit versus that guidance? And maybe just a final one, just on asset origination. Just wanted to check. Obviously, you're talking about geographic expansion in terms of product sales. Are you thinking about geographic expansion also in terms of asset origination.
Nick Hamilton: Maybe just close off the last one first. We're not. We -- I mean, to the extent that organically, we have built out capability in London today, which has been in place for 5-plus years to manage access to assets, but we've got a number of really good partnerships across the world with global leaders in credit origination, which we use to support the balance sheet today, and will continue to do so in any growth environment, including to support growth in the offshore reinsurance, which is just stepping up from what we do today in any event. So there's no plans there to do more offshore there.
Alexandra Bell: And maybe I'll take your other 2 questions, Sid. So on Slide 22, I was expecting the question about scale. I wondered if you bring a ruler. So it's not to scale the graph that we've done but it's intentionally there to try and show a directional impact. So it doesn't include expenses, for example, and how we've done the calculation, and it can be imperfect to come up with a perfect ROE by asset class because you've got to allocate target surplus across them. So the idea is to give you an indicative relative sense of what we're currently thinking about as the relative value and relative returns that we're earning on those asset classes. And it does then lead to the right conclusion that you've drawn, which is that if the current conditions around those relativities persist, you should see us swapping out growth assets like real estate, although doing that in a careful way, and we've sold 4 properties this period, selling out real estate and to some extent, some of the alternative assets too and putting those towards fixed income. Now you got to do that in a way that protects the EPS outcome for shareholders. And so you've got to manage that equity denominator at the same time in doing that.
Nick Hamilton: The second one was on guidance.
Alexandra Bell: And the second one was on guidance. So yes, from a guidance perspective, so $0.333 for the first half, reiterating the full range of $0.66 to $0.72 per share. And maybe just a reminder, of why we set that range. There's a number of headwinds and tailwinds that we think about in terms of where the business could go in the period and some of the contributors to our final outcomes are still variable. So things like performance fees and transaction fees can move us around that range. So can some of the distributions on our asset returns. There is a little bit of seasonality, which we spoke about before. But that's just to give you a sense of why we're stuck with the full range.
Mark Chen: Just to remind on that chart, Sid, I mean, obviously, we have a footnote there. That is a pretax ROE target, that line, and its pre-expenses. So when you're doing your comparisons. I can see either Kieren or Nigel has the microphone.
Nigel Pittaway: Nigel Pittaway here from Citi. Okay. A few questions. First of all, cost-to-income ratio, it looks like your guidance actually implies that goes up second half. So is that just conservatism? Or is there more sort of cost to come through second half to drive that ratio up? Secondly, probably overly simplistic view of the capital would be leasing $400 million from day 1 as a result of the new standard, $150 million is going on the buyback and $280 million is earmarked for Pepper Money. I presume that's overly simplistic, but if so, why? And then given you're going to need so much fixed income moving forward, whether or not the Pepper Money deal goes ahead, do you expect to have to do more such deals to guarantee your supply? And why does a minority stake in Pepper Money get you what you want?
Nick Hamilton: Well, let me -- thanks, Nigel. Let me start. We'll go work from the back up again. So I guess first comment to say about Pepper, for the avoidance of doubt, is clearly the news flow was taken out of our hands. And the deal remains very much incomplete and there's no certainty that we'll execute an agreement. But if you went back to slides that we've put up since '22, we've talked about expanding the aperture of our asset origination capability. And in so doing, we have built out our own internal team further. We've also created a new whole loan servicing and origination capability. So we look at Pepper, likely look at our other partnerships where it gives us a whole lot of optionality about growth in the future. That is a really well-run business. It's a big originator, its growth has been really strong, and it's a business that we know well. So as you would expect. And the opportunity, to the extent anything was to -- we were to execute any agreements there, it would give us strategic access to assets not just for now but long into the future across a whole lot of lending verticals that Pepper today originate across. So that's the sort of the premise to it. And I would make a comment that we have, to this moment in time, being able to, as an incredibly reliable funder into the non-bank lending market and other originators in the domestic here in Australia, we have been able to meet our requirements. But we recognize that whilst supply of asset is growing, demand for assets will continue to grow over time, and our demand is going to continue to grow over time for the reasons not just the capital standard changes, but also the expectations on book growth through time. So we we're not flagging any other transactions here. That's definitely not the message. The news flow has been taken out of our hands. We really do look forward to the extent it's appropriate to update the market on that to provide more context on the sort of the structure in the agreement.
Alexandra Bell: So maybe moving to cost-to-income ratio, Nigel. We're sitting just below the range of 32% to 34% for the first half. Again, there is some seasonality to our cost spend. So we do expect some of our project spend to be weighted towards the second half, but I don't expect that to move it materially. So being at or around the very bottom of that range is the right way to think about the cost-to-income ratio for the second half. And then your question around capital. Look, we've spoken about this a little bit. what's really important to take away is this idea of looking at the capital options and the uses of capital in their entirety and how to best ensure that we are sort of meeting the requirements of everybody equally, recognizing that organic growth for us is obviously a primary focus to the extent to which we are realizing the growth of the business, having capital to back that is a primary importance. But with the capital standard changes, returning any excess capital to shareholders is equally important to us. And so that $150 million, you should think about it as initial. We certainly are not thinking about it in the context of the remaining being for Pepper there. If that transaction were to complete, there are a number of funding options that we could look at. We were really explicit in our release last Monday that we definitely have no intention of raising fresh common equity, but the options are broad.
Nigel Pittaway: [indiscernible]
Alexandra Bell: So that's the -- yes. So I think Nick touched on that. A minority stake gives us a seat at the table with Pepper would, if it were to complete. And I think importantly, that gives us a level of access to assets that you would not be able to do just by an ordinary flow arrangement, many of which we have already today.
Mark Chen: Can we go to Kieren?
Kieren Chidgey: Kieren Chidgey, UBS. A couple of questions. I might just circle back to the Life margin trajectory, Alex, the credit spread compression you talked about, can you just be clear whether or not given you mark-to-market your entire book every half if we've seen the full impact of this lower credit spread environment in your margins yet? Or if there is a sort of flow through yet to sort of come through into the future period? Secondly, I guess, a follow-up question on Sid's guidance question. I'm just interested in what are the scenarios that land you in the top half of that range. Is it plausible? Or are we now sort of looking more at a sort of a best estimate that is in the lower half of the range for this year? And then thirdly, on the APRA capital changes, you've had some time to digest these. Now interested in your thoughts around where your target ratios are likely to land.
Alexandra Bell: Okay. All right. I'll take you to those in turn. So I guess coming back to the COE margin. I won't reiterate the drivers in terms of where we've got to for this half. But we don't, as you know, guide to a particular exit rate in terms of how we're thinking about the second half, and that is fundamentally because it is just about working of the mix of the business that we write as well as the credit spread environment that we're in. To your point around how much of it has come through. Like credit spreads have been really tight for quite some time now. So if you think about the duration of our fixed income book, it's about 3 years. And depending on when you think it started being low, like it's been low for 18 months at least. So there is -- most of it is in that COE margin now. A lot of the higher-yielding fixed income has started to roll off as we think about the impact that, that has on that COE margin. So as I said, there's a little bit of seasonality to it, but it will more be a function of the book growth and the mix of the sales that we write, Remembering, of course, that some of that shorter duration institutional business as long as we're getting good pricing for it and it's meeting our ROE is still good business to write. And you will probably remember me sitting here last time talking about Index Plus in that way. It can be -- as long as it's meeting our ROE, it can be accretive to margin, but good for ROE and that's the right economic and rational decision for us to make from a management perspective. Coming back to the range, look, there are things that can move us around that range quite a lot, particularly some of the funds management variables. For the first half, that $0.333 per share is about 48% of the midpoint. I think last year, at this point, we've done 49% at the midpoint. So it's not a huge delta. So I wouldn't be pointing to any particular exact specific point within the range at this stage. And then from a capital standard perspective, look, we've looked at the outcomes in terms of kind of day 1. We've got an Investor Day coming up in May, and we'll provide much clearer guidance around the impact that it has on our ranges and metrics I spoke very briefly about the mention of maybe thinking about how our own COE framework evolves, too. And so we'll make sure that there's an education of the market around any changes we make to metrics and targets.
Mark Chen: Okay. It looks like there's no more questions in the room. We'll move to the telephone. Operator, can we move to the first question?
Operator: Your first question comes from Lafitani Sotiriou with MST Financial.
Lafitani Sotiriou: Just one follow-up on the reinsurance update. Can you just go into a little bit more color on the expanded products that the expanding footprint in Asia, the language. I know you've been working on it for a few years. You've seen like quite a big step for you guys? And can you also add some color around what conversations or any, if any, that have occurred with Dai-ichi about reinsurance arrangements there?
Nick Hamilton: Laf, thank you. Let me just try to bring it back a little bit to how we got here. So 10 years of reinsuring with a major Japanese group like MSP. Over that time, we have periodically, I think it was probably 2 years ago we moved to a new product. So we're probably reinsured about 4 to 5 different products with MSP. Within the Japanese market, demand and preferences change through time. And so our team have been able to work with them to meet the designs of new products and you're seeing the benefit of that coming through the sales. What we note, though, and starting to take offline, is there's certain of the products we're now limited from being able to in the Australian market reinsurer into Japan. And that is too -- that is a limitation. And it's something that if we can solve, which we are going to now solve with an extended license in Bermuda, that will allow us to use the MSP relationship as our beachhead to support a build-out of that capability, leveraging our own internal systems and capabilities. And then it gives us optionality around growth. So the first growth we would seek is through new product reinsurance with our existing partner in MSP. And I'll probably just round off, I mean, make the comment around Dai-ichi. I'd put Dai-ichi in the same category as other Japanese insurance. There is significant demand for panel reinsurers in the Japanese market. We think we offer a differentiated proposition. We've been able to prove how we can build through strong relationships with MSP, what is now a 10-year partnership. And so we do think there are other opportunities, and we wouldn't limit it just to one name or another. I make mention of the other markets simply because there are other opportunities in those markets. Challenger operates globally. We have an office in Japan. We have team members up and down all the time. So it's not a -- I would just not characterize it as a huge new, new for us. It's an exciting evolution of an existing business strategy that we have today.
Lafitani Sotiriou: And just the timing of it. So how long do you think will license comes through? And will there be any other additional capital considerations?
Nick Hamilton: So on the licensing, it will be this half, we're working towards. It's obviously subject to the BMA regulatory approvals, but it's something that we've been at for a while now. And the next steps there would be transitioning the portfolio with MSP, the statutory fund assets across. There'd be no implications to capital because it would use with the sort of almost convergence of Australian standards with international standards, the amount of capital that we would back up with is more or less equivalent to that, which we have today backing those liabilities.
Operator: The next question comes from Julian Braganza with Goldman Sachs.
Julian Braganza: Can I just ask, firstly, what is baked in your guidance just for book growth going into the second half. Are you expecting that to continue to be strong, consistent with the first half trend? Maybe I'll start with that one.
Alexandra Bell: Thanks, Julian. So look, we don't talk explicitly around the book growth assumptions that we make. Remembering that the sales that we deliver in the second half of any year have very small impact on the actual profit outcome for the year. And so the 2 would not be that linked in any event.
Julian Braganza: Okay. Okay. And then maybe just in terms of the pricing for growth. Are you setting this against your current ROE target? Or are you expecting this against potentially a lower ROE target under the new capital standards? Just want to be very clear how you are pricing for growth today.
Alexandra Bell: Yes. Both very easy question for that. The pricing today is to our existing ROE target, not least because we are still very much operating under the existing capital standards until we're not on the 1st of July.
Julian Braganza: Okay. Got it. And then just in terms of the funds management business, can you maybe just clarify how you're thinking about flows from here given the pressures that we've seen as well as the sustainability of the margin that we've seen over the first half?
Nick Hamilton: Thanks, Julian. We'll give Alex a break there. So in terms of funds management, you break apart our 2 businesses. We have our Challenger investment management in the Fidante platform. Alex has a great slide in the pack there just showing the growth of Challenger Investment Management and as you'll be aware, that's been a strategic priority over the last number of years. We've seen, obviously, demand for income and higher income products really increase. I think the approach we've taken to growing it has been really strong and the announcement of the launch of our new LiFTS platform just gives us a pathway to support different channels within that domestic market. So really exciting what we're seeing coming through the CIM team. Within Fidante, you've really got to look at -- there's a broad range of strategies in there. The announcement around Fulcrum, which increases the alternatives business there at about 13% of FUM is very exciting because you were seeing really strong growth in alts managers, liquid alts managers globally as allocators are shifting between passive and active or thinking about the shift, I should say, from active and whilst they'll have significant exposure to passive, a lot of them are finding halfway houses in liquid alt strategies to provide portfolio diversification. So it's very much in line with where market dynamics are right now because the corollary of that is clearly the -- and it's not contained just to our business, but active equity fund management has found it very difficult in the last number of years to produce excess returns to the passive benchmarks. And you can find an argument on both ends of the spectrum here pretty -- depending on what your perspectives are. I think what we would say is when we look at our managers, they're incredibly highly regarded. They're well rated. They're sticking to their investment processes. And to the extent that we see a normalization across markets, they'll benefit materially in that environment. So there's a lot of support going on around the customer bases there. But then within the fixed income managers on the platform, there's some really strong performance in Fidante there and should be supportive of flows going forward. All of that comes to margin and mix is always a little bit hard to read. We've seen some benefits from a large denominator simply because we had some very large low-value money sitting in that book. which came out over the last 12 months. So there's always going to be a mix of things, but we're prioritizing clearly growth in those strategies and protecting margin across that book.
Operator: Your next question comes from Andrei Stadnik with Morgan Stanley.
Andrei Stadnik: Can I ask my first question around the last COE margin? Can you talk a little bit about the impact of tighter spreads isolated from the impact of lower cash rates?
Alexandra Bell: Yes, sure. Thanks, Andrei. So the COE margin is, if you think about the math of it, you've got the earnings and the numerator and you've got your average investment assets in the denominator. So the first thing to say is we did grow earnings. Those earnings -- the numerator is up 2% period-on-period, but the average investment assets grew by more than that. So that's why you've got the margin coming down, and that's because of the book -- the strong book growth that we had during the period. That numerator then includes the investment yield that we are earning on assets, less the funding cost that we pay away to our annuitants. And so from a cash rate perspective, the cash rate impact, particularly of small movements and particularly in the short term, is really netted off between those 2. The impact on the investment yields then felt equal and opposite on the interest expense. So those sort of net off. The credit spread environment, though affects really just that investment yield. And so to the extent to which there is increased competition for assets more tricky reinvestment spreads to get that puts pressure on that investment yield, recognizing that a meaningful part of our balance sheet is in fixed income.
Andrei Stadnik: Just to check on that. So I thought the earnings on shareholder funds went through there, so the impact of lower cash rate does have an impact. I appreciate it's not overly large. But how should we think about that and particularly going into the second half in terms of any lag, the impact of the rate cut versus the benefit of the rate increase that came through in February?
Alexandra Bell: Yes. So I think the shareholder funds revenue does go through there, too. I guess that's the first thing to say. But the shareholder funds are made up of the same composition as the policyholder funds. That's also got 75% of fixed income in there. So there are assets that are more exposed to that cash rate like property over time, but small movements of 25 basis points here and there. And in 1 half, you're not going to see any big impacts from cash rates.
Mark Chen: The other thing as well, Andrei, it will take a little bit of time to season through as well. So obviously, you're not going to get the full benefit come through from a cash rate increase over the last year in the current financial year.
Andrei Stadnik: That's helpful. And look, for my other question, can I just follow up on what I think you were replying to Freya. I think the analyst pack, Page 48 shows a small increase in capital intensity. But how do we reconcile a small increase in capital intensity versus the move to hold more in liquid during the half?
Alexandra Bell: Yes. Thanks, Andrei. So maybe we can show you the detailed calculation offline, too. If you look at Slide 48 of the analyst deck, you'll see the compositional parts of PCA. If you actually just look at asset risk charge over investment assets, it is flat. So the increase is really coming in the combined stress, where the biggest movement is actually in deferred tax assets. So there were larger deferred tax assets this period than they were in the previous period, which means we have to hold slightly more PCA. So it's not a function of the actual asset mix at all, but happy to show you that in detail.
Operator: There are no further questions on the phone line at this time. I'll now hand the conference back.
Mark Chen: Okay. Unless there's any further questions in the room, I think that closes today's briefing. Irene and myself, we're both on the phone today. So if there's any other questions, feel free to call through. Thanks again for your time and your interest in Challenger.