Challenger Financial Group (CHF) and wealth manager AMP (AMP) have confronted some difficult years.

Challenger’s annuity business was impacted with the record low interest rates of previous years and was further burdened with a loss-making bank.

High profile executive staff departures plagued AMP as the business also confronted loss in its advice network.

However, an insight into their fiscal results this earnings season has highlighted a better outlook for both businesses.

Downside risks 'more than priced in'


While the 34% drop in AMP’s underlying net profit missed Morningstar’s expectations, analyst Shaun Ler believes that the downside risk for the business is pretty much already priced in.

“Numerous forecast improvements underpin our view that earnings prospects are positive over the long-term,” Ler says.

However, he acknowledges that it is a patience game for investors with AMP.

“I imagine shareholders will be frustrated by the slow progress towards profitability. But there are reasons to be patient.”

On this front, Ler notes that good progress has been made operationally. He notes that AMP’s simplification of its master trust products is largely complete while work in reversing the advice business losses is progressing well as practices are consolidated.

Ler also believes that AMP could also garner higher bank margins from the rate rises by suppressing deposit rates – a strategy used by the big banks.

The wealth manager also needs to continue to improve investor inflows into its products and focus on cutting costs from the loss-making advice business.

“If AMP executes well on these fronts, we see the room for underlying net profit to compound over the longer term,” Ler says.

A turnaround story?


Ler also has an optimistic assessment for Challenger, albeit the firm faces an even brighter future.

The annuity giant posted a 5% lift in net profit for its full year results, underpinned by the strong performance of its annuity business.

Indeed, sales surged by 11% and with the rising interest rate environment, Challenger also reported increasing demand for guaranteed income with advisers recommending longer term annuities.

The result was dragged down by sluggish earnings in its funds management unit (in part because of the volatile markets), however Challenger has since offloaded its dud bank.

According to Ler, the company’s fundamentals are strengthening despite these challenges.

"The long-awaited turnaround in Challenger’s earnings is playing out," Ler said.

The business is also well positioned amid rising interest rates.

"Rising rates will likely keep driving the life business’ growth, improving both volumes and margins," Ler said adding that annuity sales to new clients continued to grow.

Margins expanded from higher investment yields, and reinvestments from existing clients were strong.

"We like that retail annuities are growing as a proportion of fixed-term product sales, and lifetime annuity sales are picking up pace. They are higher-margin and longer-dated than Challenger’s institutional products. Stronger earnings growth is likely if this favourable mix shift persists."

He also sees some upside to Challenger’s struggling funds management business.

“We think funds management’s net outflows are cyclical. The division’s strong performance and distribution efforts are likely to help it regain its lost mandates when appetite for listed assets returns over the medium term.”

Morningstar last week raised its fair value estimate for Challenger marginally to $7.90 per share (from $7.80), due to the time value of money and higher expected annuity sales, partly offset by narrower earnings margins in the future.