Challenger (ASX:CGF): A hidden winner from the CGT changes? Apollo’s loss has been other investors’ gain!

When we last did a deep dive into Challenger (ASX:CGF), in September 2024, investors were panicking because Apollo (a global fund manager that had a fair stake in the company) sold $460m worth of shares, taking its stake from over 20% to under 10%.

The concern was not just over the lack of confidence it showed as an investor, but also as a partner – Apollo provided certain products Challenger distributed and we believe investors thought this relationship was under threat. The irony is that Apollo did end up selling more of its shares (at least enough to take it below 5% and perhaps all of its stake) and it lost its board representation, but is still a distributor of Challenger products. Some of those shares were reportedly purchased by TAL Dai-ichi Life which also acquired Challenger shares from a fellow Japanese life insurance distributor MS&AD.

But since the share price bottomed out in March 2025, Challenger has rebounded over 70%. And even though the changes to CGT make any kind of investment less appealing…this company (or at least its investment products) could be an exception.

Challenger (ASX:CGF): A fundie for retirees

Challenger’s specialty is lifetime annuities, providing retirees with guaranteed regular income payable for life – from lump sums given up front. These are the perfect solution because they accelerate with inflation, along with beneficiary needs. They also don’t crash when the stock or bond markets do. 3-year fixed annuities are priced attractively and tend to outperform conventional Term Deposits. It is mostly focused on Australia, but since 2016 has serviced Japan’s retirement market too.

Challenger also provides allocated pension and superannuation products. This is a terrific space to be in, not just because the Baby Boomers are retiring but because they will live longer than previous generations, and also because they have among the highest life expectancies globally.

Don’t take our word for it – by 2030, one in five Australians will be over 65; By 2041, the number of Australians over 85 will grow 140 %; and even Today, 285,000 Australians retire each year, and many will spend 30 years in part or full retirement. Challenger’s Managing Director Nick Hamilton captured the moment succinctly declaring at the company’s Investor Day yesterday,“ We have passed the inflection point for the retirement system in Australia.”

Oh, and did we mention Australia’s superannuation system? This ensures there is some money to splash around in retirement, although the challenges is managing it. And Australia’s superannuation assets are expected to nearly triple to over US$9tn by 2042.

Challenger is recording good results

In FY24, Challenger made a $608m profit before tax and a $130m profit after tax (up 17% and down 24% respectively compared to restated FY23 results, although the company’s EPS was up 14%). It closed the year with $127bn Assets Under Management and a 15.6% Return on Equity.

The company had told investors to expect an FY25 post-tax profit of $440-480m on a normalised basis and a $640-700m profit before tax, assuming a 31.3% tax rate. It set an ROE target of the RBA cash rate plus a margin of 12%, and told investors this would be achieved in FY25.

Challenger delivered the goods with a $456m underlying post-tax profit (up 9%). Its statutory profit was only $192m but up 48% from the year before. Its ROE was 11.8% and its AUM was $123.9bn. Annuity sales totalled $5.2bn ($984m of which came from Japan) and total life sales were $8.6bn.

Its 1H26 results showed even further momentum. Lifetime annuity sales were tracking above A$1bn for FY26, a milestone that signalled both adviser adoption and customer demand. Originations reached A$5.9bn in the half, demonstrating the strength of the investment engine that underpins the Life book.

The long term looks good, but the shorter term is uncertain

As any company does, Challenger has told investors it has a lot to look forward to. In case the evidence we provided earlier was not enough, here’s another datapoint: 8.9m Australians will be over 60 in the next 20 years – 780 retire every single day. And (no surprises here but) 78% of Australians would be happier with a guaranteed income for life.

You may be wondering: Who are the 22% who wouldn’t be happier?! We wonder that too, because retirees consistently express fear of running out of money, uncertainty about how much they can safely spend and regret about being overly frugal. Challenger’s Retirement Happiness Index shows that financial security is one of the strongest drivers of wellbeing in retirement. The Investor Day quoted one of its customers saying, “Guaranteed regular income regardless of how long I live really resonates with me,” and Challenger’s products are designed to provide for that.

Challenger is already a major industry player but is still going for more growth. New partnerships with super funds, wealth platforms, and more institutional clients, plus new product forms (such as income notes), could widen the customer base beyond traditional retirees.

The company is embedding annuities and retirement income modelling into advice technology platforms such as Xplan and Ignition, enabling advisers to model guaranteed income for the first time. It is partnering with major super funds including CFS, BT and Insignia, giving it access to more than half a trillion dollars in platform assets and over 2m super customers, including 600,000 aged 65+. And it is expanding its decade‑long reinsurance partnership with MS Primary to create an offshore reinsurance platform for growth in Asia.

This ecosystem strategy matters because the retirement market is not won through product alone. It is won through distribution, advice integration and the ability to sit inside the workflows of institutions that manage the majority of Australians’ retirement savings. Challenger’s ~90 % share of the annuities market gives it a dominant starting position, but the real advantage lies in becoming the default provider of guaranteed income solutions across the system.

APRA could be a help rather than a hindrance

If APRA’s proposed reforms to annuity-product capital requirements go through this could reduce capital costs and volatility for Challenger, potentially boosting its profitability and capacity to expand. For those wondering what we’re talking about, APRA has proposed taking the illiquidity premium needed for longevity products from a one size fits all for all providers to permit insurers to provide a more risk-sensitive premium.

Specifically companies could apply a higher discount rate if they could show strong risk controls, governance and if the standard rate wouldn’t reflect a company’s annuity liabilities and cash flow from backing assets could apply a higher discount rate which would lower the liability valuation and reduce the amount of capital needing to be held against those assets. This could come with the trade off of updated risk-control requirements, but this could be a price Challenger is willing to pay. But we digress.

Challenger is facing some challenges, particularly in its Funds Management division that has seen net outflows recently. Also keep in mind that annuity profitability depends in part on yields/returns on underlying assets; if interest rates or bond yields fall, that could pressure margins.

Also, no matter what Gen Z stereotypes about Boomers may suggest to the contrary, economic stress can be a thing amongst older generations and this may reduce retirees’ capacity or appetite to commit substantial upfront lump sums for annuities.

Although Challenger dominates the annuity space, changes in regulation, competition, or consumer preferences (e.g., toward flexible drawdown rather than fixed income) could pose threats.

The CGT changes could help this company

The current debate around capital gains tax settings adds another dimension to Challenger’s positioning. If CGT concessions are reduced or replaced with indexation, the relative attractiveness of income‑generating investments increases. Retirees, who already value predictability, would have an even stronger incentive to favour guaranteed income over growth‑heavy portfolios. Advisers would adjust their models accordingly, and super funds would need to demonstrate retirement income outcomes more explicitly under the Retirement Income Covenant.

Challenger is already embedded in the advice and superannuation ecosystems that will respond to these shifts. Its products sit directly in the slipstream of a tax environment that may tilt toward income. And the new capital framework means the company can write more annuities at higher margins just as demand for income products structurally increases. The CGT debate is not central to Challenger’s strategy, but it strengthens the tailwinds behind it.

Challenger is anticipating more growth in FY26, but modest growth

For FY26, it has given the same ROE target of the RBA cash rate plus 12% after tax. Its EPS guidance is $0.66-0.72 with the midpoint being 4% higher than FY25. This would translate to a profit of $455-495m.

Consensus estimates call for $0.65 EPS on a normalised (i.e. underlying basis) and for $1,018.4m revenue, up from $977.7m the year before. FY27 is expected to be another nuanced year with $1,073.7m revenue and $0.70 EPS projected. Then for FY27, $1,131.1m revenue and $0.74 EPS.

Analysts’ mean target price is $9.47, up 5% from the current price. Its multiples are reasonable with 12.9x P/E and 0.6x PEG. Nonetheless, this has to be compared to the more nuanced growth of the business.

Conclusion

This could be a good stock for investors wanting slow and steady returns, just like that which Challenger claims to offer customers. But investors wanting quick growth would be better off sticking with other sectors.