Challenger has launched an equity raising of $300 million as a response to the ongoing market uncertainty and to provide flexibility to enhance earnings, it announced to the Australian Securities Exchange (ASX).
The announcement said the equity raising would strengthen Challenger Life Company (CLC’s) capital position and be comprised of:
- A fully underwritten institutional placement (Placement) of $270 million; and
- A non-underwritten share purchase plan (SPP), targeting to raise up to $30 million, (together, the equity raising).
Challenger said the capital raised would primarily back investment grade fixed income opportunities that were expected to be return on equity accretive for shareholders.
The firm’s managing director and chief executive, Richard Howes, said: “Challenger is in a strong capital position with the raising further strengthening CLC’s balance sheet, and providing the opportunity to seek out compelling ROE accretive investment opportunities over time.
“In response to the impact of ongoing market volatility, we have reduced capital intensity and maintained a strong capital position by repositioning the portfolio to more defensive settings. This has increased the cash and liquids we have on CLC’s balance sheet to over $3 billion.”
Howes said following the market sell-off induced by the pandemic, fixed income asset risk premiums had widened significantly that there were opportunities in investment grade.
“We are now seeing opportunities, primarily in investment grade, to selectively invest this cash and liquids balance and generate pre-tax ROEs in excess of 20% on the capital backing these investments,” he said.
“This is well above our pre-tax ROE target of the Reserve Bank of Australia cash rate plus a margin of 14%. Importantly, we can capture these opportunities, while maintaining our current defensive portfolio settings, with a high weighting to investment grade fixed income.”
He noted the equity raising would allow the business to withstand and respond to further market volatility and take advantage of selective investment grade opportunities with “attractive returns”.
“The retirement market in Australia continues to grow and we expect to see an increase in demand for guaranteed income products, including annuities, over the medium term. Our business remains well positioned to capitalise on these opportunities,” he said.
Its funds management business, Howes said, was up 7% in funds under management since March.
