Financial Players -CGF, IAG riding high on ASX amid Coronavirus Outbreak

Coronavirus pandemic has convulsed the market around the globe. It has produced a material impact on listed hybrid market, equity market, derivative market, currency market and a lot more. A substantial impact is felt on the financial market as well.

In the race of surviving and sustaining themselves amid the coronavirus pandemic, entities are utilising their capabilities to balance the repercussions of COVID-19 disease. Companies around the globe are contributing their bit to uplift the falling bar of the market in their own respective ways.

Let’s have a look at two players from the Financial sector listed on ASX – CGF and IAG; their business updates and key initiatives to lift the bar.

Challenger Limited (ASX: CGF)

An ASX-listed investment management Company, Challenger Limited (ASX: CGF) offers financial security to its clients for retirement. It has two investment businesses, namely, APRA regulated Life division and a fiduciary Funds Management division. Challenger Group entails Challenger Life Company Limited (Challenger Life), Challenger Investment Partners, Fidante Partners and Accurium. Challenger Life is Australia's largest annuity provider and manage CGF’s investment portfolio.

As at 31 December 2019, CGF managed $86 billion in assets under management.

Capital Notes:

Under the prevailing situation arising from COVID-19, the Company has been exploring options to ensure its strong capital position while maintaining a balance with the interests of CGF’s noteholders, as pe CGF’s update to the market on 30 March 2020.

Further, CGF stated that it issued Challenger Capital Notes (ASX: CGFPA) that are unsecured and subordinated convertible notes. As per the terms of its capital notes, the Company possesses the option to convert and resell or redeem these Notes on the Optional Exchange Date which is 25 May 2020. Additionally, Challenger mentioned that in-case these Notes are not converted, resold or redeemed on the mentioned date; they will be converted into CGF’s ordinary shares on 25 May 2022. The total value of Notes is $345 million.

FY 2020 Guidance:

Despite the prevailing uncertainties, the Company assures its strong capital position with normalised profit guidance for FY 2020. On 30 March 2020, CGF projected its Normalised Net Profit Before Tax guidance to remain on track and lie between the range of $500 million to $550 million for FY 2020.

CGF has additional liquidity and financial flexibility including $400 million of group banking facility which is held in cash outside of Challenger Life. From this facility, the Company has the capacity to infuse $250 million into Challenger Life as Common Equity Tier 1 regulatory capital.

Capital Position and Investment Portfolio:

Prescribed Capital Amount (PCA) ratio for Challenger Life is projected at 1.55 times which is towards the higher end of the Company’s target range of 1.3 - 1.6 times APRA’s minimum requirement.

To support Challenger Life’s PCA ratio and excess regulatory capital position, CGF has reduced the capital intensity ratio from 13.3 percent (at 31 December 2019) to 10.9 percent.

Challenger Life holds more than $3 billion of cash and liquid fixed income. The Company intends to redeploy this cash once the markets are stabilised and relative value opportunities emerge. As a result, it is expected that life’s asset composition and allocation may change materially by 30 June 2020.

S&P ratings update:

One of the major drawbacks from situations induced by coronavirus is the diminishing confidence of S&P Global Ratings (S&P). On 27 March 2020, S&P had removed the positive outlook of the Company and instead reverted to a stable outlook. The newly declared ratings are as follows.

  • Challenger Limited - BBB+ rating (with a stable outlook).
  • Challenger Life Company Limited - A rating (with a stable outlook)

Interesting video: Challenger Exploration Ltd. (ASX:CGF) Invest-Nest 2020

On 30 March 2020, CGF last trade at $4.020, rising up by 11.667% from its last close.

Insurance Australia Group Limited (ASX: IAG)

A general insurance group, Insurance Australia Group Limited underwrites more than $12 billion of premium per annum. IAG sells insurance under numerous brands including CGU, NRMA Insurance, SGIC, SGIO, WFI and Swann Insurance in Australia. New Zealand brands include NZI, State, AMI and Lumley. The Company has operations in both Australia and New Zealand.

IAG has been taking steps to mitigate the risk arising from coronavirus and assures a positive outlook for future.

Strategic move to increase IAG’s capital position:

On 30 March 2020, IAG announced the completion of the sale of 26 percent interest in SBI General in India. The related transactions were first announced on 17 October last year.

As an outcome of this sale transaction of SBI General, the Company’s regulatory capital position received a boost of approximately $450 million. IAG will book a net profit on the sale of nearly $310 million in the second half of FY 2020.

Capital Position:

The sale of the Company’s interest in SBI General (India) had reinforced to retain IAG’s strong capital position.

The targeted range for Insurance Australia Group’s Common Equity Tier 1 (CET1) ratio is 0.9 to 1.1. Owing to several natural perilous events in the last few months, the ratio had varied and are as mentioned below.

  • CET1 ratio stood at 1.15 on 31 December 2019
  • By the end of February 2020, the ratio reduced to 1.09
  • As at 27 March 2020, the ratio is projected to be at the top end of above-mentioned targeted range.

COVID-19 Response:

The Company adopted several measures across its operations in Australia to support suppliers and customers, as mentioned below.

  • Small businesses which are facing financial hardship have been allowed with deferred premium payments for up to six months.
  • In-case small businesses cancel their insurance, full refunds with no cancellation or administration fees are allowed.
  • Payment times to suppliers were reduced from a maximum limit of up to 30 to 15 business days.

Guidance FY 2020:

With a strong underlying business performance, the Company mentioned that its FY 2020 guidance would remain unchanged, as follows.

  • Reported margin to lie between 12.5 and 14.5 percent
  • ‘Low single digit’ GWP growth

This guidance is based on the assumption that there are no material movement in investment income or foreign exchange rates in 2H FY 2020.

Since 31 December 2019, the Company had incurred an unrealised loss of nearly $100 million pre-tax on technical reserves investment income from widening credit spreads, mainly in March. On a positive note, Insurance Australia Group foresees that this unrealised loss would be regained as the securities mature.

Reschedule of Investor Day:

Owning to the challenges being faced due to coronavirus pandemic, the Company has postponed its investor day which was scheduled to take place on 14 May 2020 in Sydney.

Also Read: Financial stocks up today - CNI, IAG

On 30 March 2020, IAG last traded at $6.400, moving up by 10.919% from its previous close.


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