Australia's largest provider of annuities, Challenger Financial (ASX: CGF) has blamed political uncertainty and market volatility for its 97 per cent plunge in profit for the first-half of fiscal 2019.

Net profit fell from $195.4 million a year ago to $6.1 million, against a backdrop of poorly performing equity markets and policy liabilities in its life division, which provides annuities, the company said on Tuesday.

Challenger flagged the result last month in a trading update, which saw 17 per cent wiped off the company's share price in a single day.

This prompted a 14 per cent downgrade in the company's fair value estimate by Morningstar equity analyst Chanaka Gunasekera. He dropped his FVE to $10.80 a share, from $12.60, warning of regulatory uncertainty stemming from a Productivity Commission report.

Challenger ASX Result 2019

Yesterday's reported 21 per cent drop in revenue, to $893.5 million, reaffirmed the downgrade, on the back of what management called "challenging operating conditions".

"Our results for the first half have clearly been impacted by the difficult operating environment we're experiencing, with increased market volatility, industry disruption and political uncertainty playing out across the sector," said Challenger chief executive Richard Howes.

"While some of these factors are beyond our control, the fundamentals underpinning our business remain supportive."

Domestic annuity sales were up 4 per cent, but down 7 per cent overall due to a decline in Japan sales, which fell 55 per cent. Challenger attributes this to reduced Japanese demand for Australian products, as higher US interest rates held prices at elevated levels.

Morningstar's Gunasekera said the result aligned with market guidance, but warned the impact from the banking royal commission could last longer than anticipated.

"Challenger's annuity sales were heavily impacted by the royal commission, as financial advisers are a major source of distribution," he said. "Organisations like AMP have been more focused on compliance and systems, as opposed to selling annuities."

Gunasekera said profit falls were exacerbated by lower than expected margins, as market volatility resulted in lower asset returns from one of Challenger's absolute return funds.

In the short term, Gunasekera sees risks for investors, but argues allocation to annuities is likely to increase in the long term given the transition of Australia's baby boomers into the pension phase.

He expects a delay in the government’s proposed new comprehensive income product for retirement legislation, as emphasis is instead placed on implementing the banking royal commission and productivity commission recommendations.

Challenger also confirmed its expected cut to full-year normalised profit guidance, now between $545 million and $565 million, from between $590 million and $612 million.

It does not expect to reach its 18 per cent normalised return on equity before tax target.
The company will pay an interim dividend of 17.5 cents, fully franked, unchanged from last year.

Challenger closed the day up 1.14 per cent at $7.92, but down 38 per cent from $12.94 in February 2018.

Headline figures

• Total assets under management up 2 pc to $78.4 billion
• Statutory net profit after tax down 97 pc to $6 million
• Normalised net profit before tax down 2 pc to $270 million
• Interim dividend unchanged at 17.5 cents per share, fully franked