Investment management firm, Challenger Limited (ASX: CGF) has taken a significant step in supporting its strategy for growth in Australia and internationally by expanding its strategic relationship with MS&AD Insurance Group Holdings Inc, a leading Japanese insurance company.
In an announcement made on 26 March 2019, Challenger announced that it has further progressed its strategic relationship with MS&AD which will help both the companies to explore new growth opportunities for both groups.
Under the new arrangement, it will start a quota share reinsurance of US dollar-denominated annuities issued in the Japanese market by Mitsui Sumitomo Primary Life Insurance Company Limited (MS Primary), a subsidiary of MS&AD. Since November 2016, Challenger has partnered with MS Primary to reinsure Australian dollar-denominated annuity products.
It is expected that the quota share reinsurance will commence from 1 July 2019, subject to necessary approvals including regulatory, compliance and contractual requirements.
Challenger Life is going to get an annual amount of at least ¥50 billion (currently ~A$640 million) as reinsurance from MS Primary each year for a minimum of five years.
Japanese insurance company, MS&AD is also planning to increase its Challenger shareholding to more than 15% of issued capital and seek representation on the Challenger Limited Board and once MS&AD’s Challenger shareholding exceeds 15%, and the reinsurance of US dollar annuities with MS Primary has commenced, it will nominate one non-executive director to join the Challenger Limited Board.
Challenger Life has entered into a new agreement with MS Primary to commence reinsuring the US dollar version of the 20-year term product. Currently, Challenger is having around 15 percent of its fixed-income portfolio in US dollar assets and will hedge any residual foreign currency risk in relation to the agreement.
While commenting on the expansion of this strategic relationship between Challenger and MS&AD, Challenger’s CEO Mr. Richard Howes told that this announcement reflects the success of the strategic relationship between Challenger and MS&AD which started three years ago. He further told that this expanded alliance leverages the strengths of both businesses to create opportunities for continued growth.
While commenting on the same, MS&AD President and CEO Yasuyoshi Karasawa told that this expansion of MS&AD and Challenger relationship is going to cover a wider range of annuities.
In Japan, the foreign currency fixed annuity market is growing strongly. The market has increased by around 70% in the past three years and it now represents ¥3.6 trillion in annual sales. Recently, the relative attractiveness of US dollar annuities has increased which reflects the changes in the US and Australian interest rates. As a result, the mix of foreign currency annuity sales in Japan has shifted away from Australian to US dollar products.
In the past six months, the share price of Challenger decreased by 34% as on 25 March 2019 and it is trading at a PE multiple of 33.24x. CGF’s shares are trading at $7.865 with a market capitalization of circa $4.45 billion as on 26 March 2019 (12:58 PM).