Good morning. I'm Stuart Kingham and welcome to Challenger's first half 2022 financial results. We're coming to you today from Martin Place, Challenger's head office and today's briefing will be conducted online. I'd like to begin today by acknowledging the Gadigal people of the Eora Nation, the traditional custodians of the land on which we're meeting today and I'd like to pay my respects to elders past and present. Today's presentation will be undertaken by Nick Hamilton, Challenger's Chief Executive Officer and Rachel Grimes, Challenger's Chief Financial Officer. The presentation will be followed by a question-and-answer session. You can ask a question via the webcast or via the telephone service. I'll now pass over Nick to get us underway. Thanks, Nick.
Thank you, Stuart and good morning. Thanks for joining us for today's presentation. I look forward to meeting many of you face-to-face as soon as conditions allow. It's a pleasure to present our first half results and a privilege to be taking the role of Chief Executive Officer at such an important time for the company. I'm pleased to report that 40 days into the role, I'm more confident and excited than ever about Challenger's future. Challenger is a unique business with an extraordinary opportunity to improve the financial outcomes of even more Australians in retirement while delivering for our shareholders, our people and the community. We have a powerful brand in Challenger, one that is regarded as a leader in retirement income. We have one of the fastest-growing active fund managers in the country.
Our recent acquisition with MyLife MyFinance provides us with a scalable digital bank. This further expands our potential to reach more customers and provide them with relevant products. For today's presentation, I will start by providing a summary of our performance and key achievements for the half. Rachel will present the financial results in more detail and I'll finish with some comments on our priorities and outlook for the rest of the year. We'll then be happy to take your questions. Challenger delivered a strong result this half, benefiting from our successful strategy and disciplined execution that has provided significant current and ongoing business momentum. The performance of our market-leading life and funds management businesses drove group AUM through AUD 115 billion.
We're well-placed to continue this growth trajectory and the acquisition of our new bank will broaden our business, our customer base and product offering. Regionally, we have maintained stable margins in both Life and Funds, with AUM growth translating into strong earnings growth. We remain on track to achieve our full-year guidance and targets and I'm committed to delivering improved shareholder returns. From where we are today, we have a significant opportunity to drive growth, meet the needs of more Australian retirees and continue to deliver on our purpose of providing financial security for a better retirement. To achieve this, our experienced and talented team will focus on delivering five immediate priorities, which I'll take you through later in the presentation.
Today's result demonstrates the success of our diversification strategy and our focus on driving growth and building momentum across our business. Both Life and Funds Management delivered standout performances. Challenger achieved record Life and annuity sales totaling AUD 4.9 billion. Funds management also delivered another strong result, outperforming the market with net flows of AUD 0.9 billion, benefiting from strong momentum in domestic, retail and offshore. Group assets under management were up 20%, driven by the strong growth across both life and funds management. Normalized net profit before tax increased by 21%, benefiting from AUM growth and stable margins. Statutory net profit after tax increased to AUD 282 million and includes significant investment gains.
Reflecting confidence in our business and strong capital position, the board declared an interim dividend of AUD 0.115 per share, up 21% and in line with earnings and AUM growth. Life delivered a record-breaking half across life and annuity sales, as well as strong book growth. Of note is the momentum in our institutional business, which delivered exceptionally strong sales growth of over 90%. In line with our diversification strategy, we're focused on building new and extending existing relationships with a wide range of institutional clients. The results highlight the success of this approach. Institutional sales accounted for over two-thirds of total life sales in the half and our institutional client base has more than doubled in the past five years.
Institutional term annuities are priced at similar economics to our retail business and performed particularly well, up 2.5 times on the prior corresponding period. We see an exciting opportunity to drive growth in this area as we focus on offering innovative solutions that cater to the needs of superannuation funds, insurance companies and multi-managers. Meeting the needs of even more retirees through developing innovative solutions and contemporary retirement products is something that I'm passionate about and also provides a further opportunity to diversify and grow our business. During the half, we launched our new market-linked annuity that complements our existing offering. It's attractive to a wider client base, with exposure to investment markets combined with the benefit of a lifetime income stream. We're in the process of making the market-linked annuity available for sale by advisors.
Marketing activity commenced earlier this month and you may have started to see some of the campaigns in the press. Pleasingly, initial feedback from advisors and clients has been positive. Challenger has been a strong advocate of retirement income reform for many years and the passage of the Retirement Income Covenant through Parliament last week is an important step in enhancing the retirement phase of the Australian super system. We've been engaging with super funds around the needs of their members and look forward to partnering with them over time to deliver innovative solutions as Australians plan for and enter retirement. We have achieved today's result having built a strong and diversified life business, key to delivering book growth of 8.4%, one of the strongest halves that we have recorded.
Our retail and institutional clients and customers enjoy the confidence that our innovative range of products provide to meet their retirement needs. Funds Management has delivered another very strong result. A focus on diversifying our distribution channels, growing our contemporary range of products and services and our offshore expansion have all contributed to a strong performance. In the half, FUM grew by 20% to AUD 109 billion, supported by net flows of nearly AUD 1 billion. Business momentum continued into the start of the second half with a EUR 1 billion fixed-income mandate funded in early January, demonstrating that our international growth strategy will continue to deliver growth in the years ahead. Fidante Partners was also recognized as the number one active asset manager for retail flows in Australia and impressively, was second overall across both active and passive managers.
Our retail business continued its exceptional growth, with flows of AUD 2.6 billion and our strongest ever half-yearly sales result, driven by an increasingly diversified client base and innovative products. We were pleased to be awarded Zenith Distributor of the Year for the second consecutive year. In the institutional market, 90% of the top 50 Australian super funds are clients. We're also starting to see the results of our diversification strategy to expand offshore. Ardea has now opened a U.K. office to establish its presence and is off to a fantastic start, securing new investors in Europe and the U.S. In Singapore, we now have a highly capable team on the ground to build our presence in this rapidly growing market, providing a distribution hub to access investors across Southeast Asia.
Reflecting our focus on diversifying our product range, Fidante Partners welcomed Ox Capital, an emerging markets boutique. Alphinity also launched its new global sustainable equity fund that invests in global companies supporting the transition to a more sustainable future. Also in the half, CIP Asset Management maintained its standing as a market leader in domestic private lending with the launch of a new offering for sophisticated and wholesale clients. We also saw pleasing flows in a range of third-party credit funds and are very well positioned for the future. Overall, an impressive performance from our funds management business. This was achieved by a contemporary product line up, the strength of Australian distribution, as well as our offshore expansion. Now to the bank. I'm pleased to report that integration is well progressed following regulatory approvals received in July.
The bank is important to our growth strategy, providing us with a digital platform that allows us to reach more customers. The integration is focused on building out our lending and asset origination capability, system integration, expanding our team and our distribution strategy. In this initial phase, our distribution strategy is focused on building early momentum and customer reach via a range of channels. Our term deposits, which now range from one to five years, are available on the most widely used bank-specific comparator sites and will shortly become available via the retail broker channel. Our term deposits have initially been marketed under the MyLife MyFinance brand, which has been crucial in ensuring speed to market.
The bank and its products will transition to the Challenger brand by the end of the financial year, allowing us to leverage our position as the brand leader in retirement incomes. To date, the majority of our term deposit sales have been to customers over the age of 50. This highlights the potential of this product for the pre-retiree market and aligns with our goal to provide solutions to help customers for and in retirement. We're in a very strong position with significant momentum delivering wins across our business. As I mentioned in my opening remarks, I believe that Challenger is a unique business and we have an outstanding team. Today's strong result is a reflection of their hard work in what has been unprecedented times.
I look forward to taking you through the immediate priorities after Rachel's presentation.
Thank you, Nick and good morning, everyone. It's great to be here today to deliver Challenger's first half financial results for 2022. Our half year results show continued strength and momentum across both Life and Funds Management, with earnings in line with expectations and shareholder returns improving. We remain on track to achieve our full year normalized net profit before tax guidance, with a first half profit of AUD 238 million, being 52% of the midpoint of our full year guidance range. Statutory profit after tax was significantly higher than normalized profit at AUD 282 million, with positive investment experience of AUD 109 million and significant items a positive AUD 7 million. I'll provide more details on the investment experience gained shortly. Group assets under management closed the half at AUD 115 billion, up 20% on the corresponding prior period.
For the first half, AUM increased by 4.5%, driven by life sales and funds management net flows. Now looking at the group results in more detail. Challenger's total income increased by 19%, reflecting stable margins and strong asset growth. Expenses increased by 16% or by AUD 20 million, of which AUD 4 million relates to the bank. I'll take you through the expenses shortly. Group EBIT increased 21%, resulting from strong contributions from both Life and Funds Management, with Life up 21% and Funds Management up 28%. The bank acquisition approval process took a little longer than we anticipated and it will take longer than initially expected to reach break even. Normalized NPAT was AUD 166 million and increased by 21%.
Pre-tax return on equity of 12.1%, which was up 60 basis points from last year, is in line with our ROE targets. Investment experience after tax was a positive AUD 109 million, reflecting strong credit performance and property revaluation gains. Significant items were a gain of a positive AUD 7 million, with a AUD 9 million gain achieved following the sale of Accurium, partially offset by bank integration costs. There is very strong momentum in both Life and Funds Management. We remain confident in our ability to scale the bank, which will enhance our overall financial performance. Looking at income and expenses. Income was AUD 387 million, an increase by 19%, driven entirely by the increase in AUM, with stable margins in both Life and Funds Management.
Life income or normalized cash operating earnings increased by 18%, 1% higher than the average increase in AUM. In Funds Management, the net income increase was slightly less than the increase in average FUM, with the net income margin one basis point lower due to a reduction in performance fees. Expenses were AUD 147 million for the half, which reflected costs associated with the recently acquired bank and personnel costs due to higher FTE and lower levels of annual leave taken throughout the pandemic. Other expenses related to growth opportunities, including the development of the new market-linked annuity product and the establishment of the Funds Management Singapore office. Expenses this half were up AUD 1 million against the second half of 2021 when excluding the one-off software impairment charge of AUD 9 million last period.
The group cost to income ratio was 38.1%. 38.1% and decreased by 90 basis points on last year. Looking to the Life business performance in more detail. As Nick mentioned, the continued success of our sales diversification strategy resulted in half year Life sales of AUD 4.9 billion, including annuity sales of AUD 2.5 billion. Both were half yearly records. Total Life sales increased by an impressive 44%, driving strong growth in both policy liabilities and investment assets. Average investment assets increased by 17% on prior period and with a normalized cash operating earnings margin that was 1 basis point higher than last year. Cash operating earnings growth was 18%. Expenses increased by AUD 3 million or 6% and Life EBIT was AUD 233 million, 21% above last year.
Life's PCA ratio was 1.69 times, up 6 points for the half and at the top end of our 1.3-1.7 times range. The Life company continues to remain very strongly capitalized. Life had exceptional sales outcome. It saw book growth of 8.4% for the half. Annuity book growth was also strong for the period. In retail, annuity sales were AUD 1.1 billion and were up slightly on the prior period. This is particularly pleasing given the disruption as a result of COVID-19 related lockdowns. We have seen significant growth in the institutional channel. This includes new institutional clients and existing clients topping up their investments, particularly in the profit to member superannuation sector. 79% of Index Plus maturities were reinvested, demonstrating the value institutional clients see in the Index Plus product offering.
In institutional term annuities, a relatively new focus area for us with sales of AUD 1 billion, which more than doubled that of the first half of FY 2021. Index Plus sales for AUD 2.4 billion for the half, almost doubling the first half of last year and represents both reinvestment of maturities and new client sales. In the second half of 2022, there will be a small Index Plus mandate that we will not actively seek to retain. This reflects our disciplined approach to pricing. Our Japan annuity sales were JPY 423 million, representing approximately 70% of the full year minimum of the sales volume. We have significant sales momentum that puts us in a good position for the full year. Now looking at the liability and asset portfolio.
Liabilities increased by 17% compared to the prior corresponding half and finished the period at AUD 18.5 billion, with both categories increasing. With the exceptional growth in our institutional franchise, Index Plus liabilities increased by 45% and now represent 23% of total liabilities. Term annuity liabilities benefited from our successful diversification strategy, with AUD 1 billion of institutional term annuity sales driving a 19% increase. Record sales drove strong books and asset growth. We continue to maintain a high quality investment portfolio to allow us to meet our liability obligations. For the half, there was a 2% increase in the allocation to equities and infrastructure and a corresponding decrease in fixed income.
There has been no significant change within the fixed income portfolio in the half, with investment grade continuing to represent 79% of the fixed income portfolio, which is above our target to hold at least 75% investment grade. Investment experience before tax was a positive AUD 156 million, driven mainly by fixed income and property revaluations. Credit performance remained resilient, with only 2 basis points of credit defaults for the half, which was well below the 35 basis points per annum we forecast. With relatively stable credit spreads, this delivered AUD 23 million positive fixed income investment experience. For property, there were upward revaluations across all key categories and we do not expect any significant change to asset allocation in the second half. Now turning to life's margin trends.
We operate a spread-based model with the cost of funds or our annuity pricing adjusted for changes in investment yields in order to generate a net spread. You can see from the chart on the left side that the product spread has remained broadly stable. You may recall from the full year results, we were expecting a cash operating earnings margin of around 2.5%. This is equivalent to the margin generated in the second half of last year after adjusting for the 12 basis points one-off asset-backed security fee. We have provided a detailed analysis today to show the key margin movements. Lower asset returns of 14 basis points were more than offset by a 19 basis points reduction in interest expenses. Distribution expenses were 3 basis points higher following our decision to prepay future trail commissions to our customers.
Normalized capital growth was 2 basis points higher as a result of an increased allocation to equities and the return on shareholder capital was down 3 basis points, reflecting lower returns. We are running a little ahead of our 2.5% expectation, with the first half benefiting by an additional AUD 7 million or 6 basis points of absolute return fund distributions, which we do not expect to see in the second half. We remain confident of achieving a COE margin of 2.5% for FY 2022. Now turning to Funds Management. Funds Management EBIT was AUD 45 million for the half, an increase of 28%. Funds Management has produced impressive results building on the strong foundations established over many years. FUM growth was exceptional, with average FUM up by 26% to AUD 108 billion.
Higher average FUM drove a 21% increase in net income, slightly less than that in average FUM due to a reduction in Fidante Partners performance fees and CIP Asset Management transaction fees. Funds Management expenses increased by AUD 7 million or 15% as we invested in our people and added capability to support our growth ambitions. Pleasingly, investment performance has remained strong. Looking more closely at net flows and Fidante Partners' investment performance. Funds Management net flows for the half were AUD 900 million and almost exclusively driven by Fidante Partners. Retail flows continued to be very strong and were AUD 2.6 billion for the half. The strength in our retail flows is providing the opportunity to remix funds to optimize our margins.
Fidante Partners institutional business recorded an outflow of AUD 1.5 billion impacted by the termination of a AUD 4.2 billion fixed income mandate. Excluding this lower margin mandate, institutional flows were positive AUD 2.7 billion across a range of our managers. Underpinning our net flows is a continuation of Fidante Partners and CIP Asset Management's superior investment performance. Over 3 years, 97% of funds has outperformed the benchmark and 83% of funds have achieved first or second quartile performance since inception. Now looking at funds management margins and fund growth. The total net income margin was 18 basis points, down 1 basis point. The lower net income margin is entirely attributed to lower performance and transaction fees, which were AUD 2 million lower than last year.
Reflecting this, the fund base margin was stable at 16.7 basis points, benefiting from our multi-year focus on retail. Growth in funds for the half was 3%, with very strong growth in equities offset by lower fixed income, reflecting the benefit of our diversified platform. Now let's turn to our new bank. We completed the acquisition of MyLife MyFinance in late July and the results for the bank include its performance over the five-month period. The bank is a key component of our growth strategy and integration is well progressed. Our key priority has been to ensure the foundations are strong as we prepare to scale and grow the business. We are investing, including adding a treasury function and enhancing its risk and credit capability.
We are taking a very disciplined approach to deposit and asset growth until our lending program is established. As a result, approximately 60% of assets are currently held in cash and cash equivalents, with the remaining 40% of assets in residential lending. The bank maintains a high-quality residential lending book with an average LVR of 51% and 86% of our customers are owner-occupiers. Over time, we expect cash to be redeployed into higher returning investments as we expand into SME, corporate and commercial real estate lending. Taking this approach will impact the timing of when we reach our breakeven point, which now is unlikely to be in this financial year. The timing will be dependent on how quickly we enhance our lending activities to improve investment returns and scale business through deposit growth.
N oted a level 3 equivalent capital position for the entire business, which includes our two regulated APRA entities, the life company and the bank. Our group minimum regulatory requirement ratio closed the half at 1.75 times, which means Challenger is holding 75% more regulatory capital than minimum requirements. Our financial strength was noted by S&P Global Ratings, who recently reconfirmed Challenger Life A rating with a stable outlook. We are strongly capitalized and maintain significant financial flexibility across the group. Now for dividends. We have declared an interim dividend of AUD 0.115 per share for the half, which is up 21%, reflecting the increase in normalized net profit after tax. More recently, investors have been focused on the impact of rising inflation and interest rates.
I'd like to give you an update on how these factors impact our business and I'm pleased to report we are very well positioned. Across our policyholder funds, we are fully hedged for inflation and the impact of changes in interest rates. On our shareholder funds, we do not hedge the profit and loss for movements in interest rates. Reflecting this, we have an ROE target that is tied to the RBA cash rates. I'm also pleased to report our capital position has remained very strong and remains broadly unchanged at the end of January despite the market volatility. Our half year results show strength and momentum, with both life and funds management businesses maintaining their market-leading positions, driving significant growth.
With our disciplined approach to annuity pricing, we are maintaining stable margins and converting AUM growth to earnings growth, helping to improve our shareholder returns. I'll now hand back to Nick and I look forward to rejoining you for Q&A.
Thank you, Rachel. I will probably embarrass Rachel now in acknowledging her recognition in the Australia Day Honours. Rachel received the Member of the Order of Australia for her contribution to accountancy and financial services. Very big congratulations to you, Rachel. Driven by our purpose to provide customers with financial security for better retirement, we have an exciting opportunity to meet the needs of more Australians as they save for and enter retirement. I believe we are best placed to achieve this by leveraging the capabilities of our broad business. Australia's leading retirement income business. Our market-leading active manager platform and Australia's largest fixed income manager. Our digital bank, providing a platform to develop Australia's leading retirement bank. We are focused on driving long-term sustainable growth, delivering great outcomes for our customers.
Achieving all of this requires an experienced and highly capable team. I believe we have the right team in place to deliver on the strategy now and into the future. As CEO, one of my first priorities was to establish a leadership structure that best supports our people and our business so we can unlock our full potential. Reflecting this, I'm delighted that Louise Roche has joined the leadership team as Chief Human Resources Officer. Michael Clarke, who has successfully led institutional and offshore distribution in Funds Management, has stepped into the role of Acting Chief Executive, Funds Management. Mark Ellis, who has extensive local and international banking experience, has joined the leadership team as Chief Executive of the Bank. The more familiar faces, who you know well, Angela, Chris and Tony, have very long Challenger tenure.
Finally, Stuart Kingham. Known to many of you, joins the leadership team in a new position, Chief Commercial Officer. This role will bring together the best of our business to help drive innovation and deliver stronger commercial outcomes aligned with our strategy. Our leadership team has a strong mix of market-leading experience and tenure across Challenger and externally and are deeply committed to delivering for our people, our customers and shareholders. As a member of Challenger's leadership team since 2019, I've been closely involved in Challenger's growth strategy. I have a strong belief in Challenger's purpose and the opportunity to deliver better financial outcomes for retirees. We will provide a more detailed update on our strategic plans at our upcoming investor day in early May. Today, however, I would like to share my priorities for the second half.
We will work as one team to bring the best of Challenger to more retirees than we do today, leveraging the combined and complementary capabilities of Life, Funds Management and the bank. This also means focusing on our people, supporting a culture of openness and inquiry and ensuring that our high-performing team are clear and motivated on their role in delivering our priorities. Building on the strong performance in the first half, we will maintain momentum across our business, progressing our diversification strategy to drive growth. In Life, that includes expanding and strengthening relationships with institutional clients. In Funds Management, we'll continue to broaden our distribution capabilities, including realizing the benefits of our offshore expansion. In the bank, establishing relationships with a wider range of customers will be a priority as we build momentum in our lending program.
Our new market-linked annuity highlights our readiness to develop products that meet the needs of a wider range of retirees. This is the first cab off the rank this calendar year and we'll continue to evolve our product offering. In the second half, we'll transition the bank to the Challenger brand, leveraging the group's strong reputation and market position to drive growth. Excitingly, we'll be Australia's first retirement bank with products specifically designed to meet the needs of retirees. Finally, we'll pursue strategic opportunities with Apollo Asset Management, including a joint venture. Challenger and Apollo share a number of similarities, including our common purpose. Over the last few months, we've held strategic discussions to explore further opportunities to work together.
Today, I'm pleased to share that we've entered into a non-binding MoU with the intention of establishing a joint venture to build a non-bank lending business. This initiative would further diversify our business and provide important origination capability to support the growth of our life and bank businesses. The proposed joint venture would also leverage the capabilities of both Challenger and Apollo, who will bring together Challenger's operating platform and relationships across the country's lending markets. With Apollo's extensive global credit investing capabilities and range of retirement products, we believe this JV would provide significant opportunity and value for both parties. This is an important step in developing our relationship with Apollo and I look forward to sharing more detail in due course. Turning to the outlook.
Challenger is on track to meet our full-year guidance, with normalized net profit before tax expected to be within our range of between AUD 430 million and AUD 480 million. Achieving the midpoint of this range would deliver 15% earnings growth and also achieve our group ROE target of RBA cash rate plus 12%. The group remains strongly capitalized with AUD 2 billion of excess regulatory capital. Reflecting the board's confidence in the business, we will continue to target a dividend payout ratio of between 45% and 50%. The business is in great shape. Our diversification strategy is delivering impressive results and there's significant momentum across the group. This has translated into strong profit growth in the half and we're on track to achieve full-year guidance and targets.
Looking ahead, I am energized by the opportunity we have to deliver for our customers, our shareholders and our people. We have the right team and the right purpose, with clear and immediate priorities that will drive growth over the remainder of the year. For our customers, we have a unique opportunity to meet more of their needs. For our shareholders, we're focused on improving returns. I'd like to finish by thanking our people for their energy and dedication, as well as their openness to sharing ideas on how we can continue to grow and deliver for our customers. I am delighted to have shared this first result and what a great platform and result to build from.
Rachel and I will now take your questions and we'll also be joined by Chris, our Deputy CEO and lead on Apollo discussions. Thank you.
Ladies and gentlemen, if you'd like to ask a question.
As a matter of process, we'll take questions from the phone first. I remind you can ask a question via the webcast. We've received a few but we'll do the phone first. Thank you, operator.
Thank you, speaker. Ladies and gentlemen, if you'd like to ask a question via the web interface, simply type your question in the ask a question box and click send. If you'd like to ask a question via the audio portion, please signal by pressing star one on your telephone keypad. We'll take our first question of the day. Please go ahead. Your line is open.
Oh, hi. It's Nigel Pittaway here. I think that's me that got the first question. Is that?
Yes, Nigel.
Thanks for taking my question. Firstly, just a question on the sort of COE margin. I mean, you've called out obviously the lower yield on alternatives in the second half relative to first half, so you're not gonna get that six basis points of distribution. But are there any other headwinds that you see for the COE margin in the second half?
Nigel, I might start off and then I'll pass to Rachel and Chris to make some additional comments. You know, we set out at the beginning of this financial year to target a 2.5% and we're very pleased to be able to deliver in this half. We have said that we've probably pulled forward from the second half, as you note, the absolute return funds. You know, the COE margin will be dependent on a number of things, including our asset allocation of the balance sheet and the composition of future sales mix and level of interest rates. You know, the approach we're taking is to remain very disciplined on our pricing and I hope you saw that today in the result.
The other thing that Rachel noted is that in the second half, we won't renew an Index Plus mandate, which is circa AUD 500 million, due to the lower returns on that business. [audio distortion]. We think we've pulled some of it forward from the second half, sorry and so remaining, you know, we're committed to that 2.5%. Rachel, would you like to add any additional comments?
The only thing, Nick, I'd add is we don't see any change to our asset allocation, Nigel. We will still hold firm on the 2.5%.
If you do look at the second half, is there any sort of positive or negative delta from property rentals? Or is that all sort of pretty much stable now in terms of those sort of, you know, concessions you were giving as a result of COVID?
Do you wanna take that?
Yeah, I'm happy to take that. No, we don't see any major headwinds in relation to rental relief at this point in time. We were very pleased where we landed for this half and comfortable in terms of where we are positioned at the moment with our portfolio being so heavily weighted to government tenancies.
I mean, just stating the obvious, I mean, you've done AUD 256 the first half on your calc, so you can calc it another way and get AUD 258. It sounds like, if anything, there's more tailwinds than headwinds in second half. You know, to get around AUD 250, you obviously have to go lower than AUD 250 in the second half. It just sounds quite conservative. Are we missing anything there?
No. We're only looking at the half year, so, you know, that upside, you've got to split over the whole year. That'd be one component that I'd say. If we did have any tailwinds from an increase in the cash rate. In relation to our shareholder funds, it does take a while for that to season through our portfolio and as yet, those rates haven't moved. You know, you're right but as Nick said, there's so many variables in this number. At this point in time, around that 2.5% is where we're focused.
Okay, maybe moving on then. Thank you for that. There was quite a pick-up in retail fixed term sales in the December quarter, at least a reasonable pick up. Do you view that as sort of an improvement in the trend there or are there some one-offs in that, meaning that, you know, the outlook might not be any better than it was at the end of the September quarter?
Nigel, I'll start on that. We did have a pick-up in the second half. It is hard to. There is in the term sales a larger piece of business there. You know, I think as we look forward, there's a couple of things that will happen on the retail side. You know, one is activity from our sales teams. We'll pick up in market. I think we feel confident about the pipeline there. There is seasonality, as you know, in how, you know, the term sales come through.
Okay, maybe just finally, I mean, obviously the lifetime sales are still sort of a little bit sort of sluggish. You know, do you see any prospect that they might pick up now moving forward? Or, you know, is it still a sluggish outlook for lifetime sales?
Nigel, I'll make comment. I think what we're pleasingly seeing is stabilization in the lifetime sales of both the Liquid Lifetime and the CarePlus. We've called out the product development around the market-linked annuity, which sits inside the PDS for the Liquid Lifetime product, that is going through the pre-marketing stage, getting approvals, going on to APLs. We feel good about that. You know, as we look forward, there'll be more in-market activity by our sales teams, with travel, our market-linked annuity product coming through this half.
Okay. Thank you very much.
We'll take our next question from Siddharth Parameswaran of JP Morgan.
Thanks very much. A couple of questions, if I can. Just firstly, just on the agreement with Athene and the relationship that you're setting up with Athene and Apollo, I was hoping you could just comment on a couple of things. Firstly, what do they actually bring to the table in terms of you setting up a non-bank lending business in Australia and how that business fits alongside your bank? If I could just ask that question. The second one on Athene, just around whether they're seeking a board seat or not.
Thank you, Sid, for the question. I'll pick that one apart. It's not sitting in the bank, just as one comment. This will be a non-bank lending asset origination platform. I'll make a couple comments and I'll let Chris also add to that. We've had a very fruitful set of conversations with Apollo over this last period. They are clearly a market leader in international markets around non-bank lending. They have very significant balance sheet. Challenger itself within the Australian market has been active through our life company and through our CIP Asset Management business in non-bank lending. It's an extension for us and it is a way for the two businesses. I think one plus one here is more than two. We're very excited about it.
We think the opportunity in the Australian market for non-bank lending to grow is there. As well for us, it's core to asset origination to support our ambitions for the life company and for the bank for growth. I might, Chris, have I missed anything? Would you like to add anything to those comments?
Yeah. Thanks, Nick. Look, I think you captured it really well but it's still worth repeating. You know, we think this is a really exciting opportunities in that it really does speak to both the strategic objectives of both companies and also, you know, our competitive advantages. Nick talked about this but Challenger, we see bringing our, you know, leading operating platform and also that deep knowledge and experience in Australian credit markets. Obviously, Apollo brings, you know, amazing global expertise and scale. Together, you know, we think there's a real opportunity there. As Nick said, this is gonna be another way that we can generate assets in a reliable way. [audio distortion].
The conversations with Apollo are focused around the MOU and the JV. Ultimately, it's not for us as executives to answer, you know, the question with regards to a board seat. That's a board decision.
Okay. Just one last question on Athene and Apollo. I mean, you talk about other opportunities you're investigating. I was just wondering, does that include perhaps seeking new investment assets for yourselves using their reach? Is that what you're hinting at? That the life company may have access to different yield or different assets that you otherwise couldn't get?
Sid, I think what we've been pretty clear about today is the focus for us with Apollo is around the MOU to move towards a joint venture. That for us is the focus. They are a world-leading originator of assets. They've got a purpose and a business model that's not, you know, wholly dissimilar as you would, I'm sure, know to Challenger. I think that would be where I'd leave the comment at this stage. Actually, final thing is, as soon as we've got more to add around the formation of the JV, we will be very excited to bring it back to market.
Okay.
Yeah, Nick, I'll just maybe just add a couple of things to that. To say, I mean, as Nick said, you know, there's a lot of parallels in our two businesses. There's a number of conversations going on. You know, they're still a bit too formative to be able to talk to you about. You know, if you think about what we do in our market and what they do in their markets, you can see that there's plenty of ways to work together, you know, in both directions.
Yeah. Okay. Thanks. Okay. Just a question, maybe for Rachel, just around the capital charges. Obviously, there's quite a sharp drop in your asset charge and you do explain that that's because of, I think, just a lower asset charge on equities. Should we expect a similar benefit going forward? I mean, I understand that the charges are based on trailing dividends and if dividends are maintained in the market at current levels, should we expect as you go forward that just the rolling twelve months should basically help you out again? Should that capital ratio improve again going forward?
Thank you for the question. Look, we believe that they will be relatively stable. We anticipate that in relation to equities. Our capital is quite high because we've had the benefit of property sales. We see that those that will be redeployed in the future. You know, again, lots of moving parts to our capital number but I think your assumption there is correct.
During the half, maybe just worth adding, there was a sale of a property asset which has reduced the capital intensity as well, as Rachel mentioned, with the rising dividend yield, the increase in the equity allocation has come without there being an increase in the capital requirement. Chris, as Chair of the Investment Committee, might like to add a comment to that as well.
Yeah, look, we're getting a bit into the weeds here but I'll just make one quick observation, which is to say that, you know, there was a specific kind of one-off benefit in that, you know, out of the pandemic, obviously, there was a really big widespread reduction in dividends being paid and so that had a kind of quite material impact on the overall market dividend yield. That was what we saw being unwound. In that respect, that's kind of a one-off. As the guys said, you know, we're in a really strong capital position at this point.
Okay. Just related to the equities, the increase in equities exposure, should we expect a benefit to the margin going forward or has that actually flowed through? I think most of that was back-ended, wasn't it? There should be a benefit to your COE margin going forward. Is that right? Could you comment how much that would likely be?
Chris, do you want to pick that one up?
Okay. I think we've Nick's given overall guidance and that's only one part of it. There's a whole bunch of factors that go into that and that's reflected in the outlook. That movement occurred in the first quarter of this half and you know that showed up in some numbers. It's just one factor.
Okay. No worries. Thanks.
We'll pick our next question from Matt Dunger of Bank of America.
Thank you very much. Thank you very much for taking my questions. Just wondering if I could ask firstly on the institutional sales, if you could talk to what's driving them and the outlook. And if you can talk to the new clients and clarify you know whether those institutional sales are yet to benefit from the Retirement Income Covenant or are you talking to future upside here, Nick?
Thank you, Matt, for the question. It was, you know, as we've called out, a very, very strong period for institutional sales across both annuity and the Index Plus. We've had strong retention of clients, so rolling over of pre-existing clients plus new clients. To put that in context, you know, this has been a journey for us at Challenger over the last, say, three-four years, to build out across the Challenger business the opportunity within the institutional marketplace. You know, this, if on the fund management side, you know, 90%+ of institutions are clients, what we're doing on the Challenger side, on the life side, is building out a really attractive looking footprint. You know, what is attractive about the product?
It's a guaranteed product that gives them a market-leading yield. That from a fund executive perspective is very attractive. We've been really clear that the institutional business that we've been writing on the annuity side and enhanced Index Plus side is at economics similar to the retail side of it. I'll leave that as a comment on the first part. On Retirement Income Covenant, I think my comments today, let's put that into macro context. Australia's built up a world-class accumulation system and it's growing extraordinarily quickly. The demographics of Australia are moving towards retirement. Retirement has a number of parts which are just genuinely unique to accumulation and longevity and mortality is key to that.
We see the opportunity from this, the demographic trends and from an institutional perspective as they start to deliver and develop products for their members, solutions for their members will play out over the coming years. The other Retirement Income Covenant is a great step. It recognizes the criticality of ensuring, you know, certain unique aspects of retirement are dealt with by the institution. Building the institutional relationships as we have done over this last number of years and familiarization with the annuity product and the Index Plus product, we see as being very supportive going forward.
Great. Thank you very much. If I could just ask a follow-up question on the asset allocation. I note, you know, you noted there's gonna be no imminent changes to that asset allocation but just given the change in lower capital intensity on equities you noted, also around the absolute return funds, do you intend to review the normalized COE margin there that there's no distribution from those funds? I'm wondering if you could comment.
I think, Matt, it comes a bit back to how Chris and I characterized before. You know, we've set ourselves 2.5% COE margin for the year. We've pulled forward a little bit from the second half. There's a whole lot of pieces that go into, you know, the formulation of that. You know, we're committed to that. We've also made clear that we see no change in asset allocation as we go through the second half of the financial year. You know, clearly any changes around this would be communicated to the market, you know, down the track.
Thank you very much.
We'll take our next question from Anthony Hoo.
Morning, guys. Thanks a lot. Just a couple of questions. Firstly, just maybe following up on Matt's question around institutional sales. They represent almost 70% of total sales now. You know, that's a lot higher than even two or three years ago. Institutions, from that on, your experience in the life business.
Anthony, thanks for the question. Probably the first thing, we don't give sales guidance. We might make some comments. You know, clearly we're being successful in this period around not only winning clients initially but then seeing that money roll over. You know, the effective maturity of those clients is longer than the initial term. You know, we've also been very disciplined around the pricing to ensure that we're meeting our ROE target. This is shorter dated business and that you know comes with different asset allocation, clearly. We've been very disciplined around where we write in the business. You can see that through the product yield as part of the COE. It's in the product yield but, you know, that's remained stable through this piece.
In terms of the second part, which I think Anthony was in relation back to Retirement Income Covenant, it's early days. The super funds have had a range of things that they've been working on which, you know, probably reasonably well known, of which development of retirement products is but one of them. We've been engaged in really substantive conversations over a long time now, around the differences of retirement to accumulation. You know, the way that we think about the opportunity for Challenger and I'll bring it back out of the life company for a second, is the delivery of retirement products will be secured and not guaranteed, non-guaranteed. The acquisition of the bank is a great opportunity for us down the track. The life company continues and you can see that in institutional sales.
On the funds side, you know, our strong position in non-guaranteed fixed income provides us a great platform, you know, to meet the income needs and the longevity requirements into retirement. Rachel's made mention of the very strong capital position that we have and you know that gives us confidence that we can continue to support growth. As we look forward, you know, we feel good about the pipeline ahead.
Okay. Thanks for that. Can I also ask another question just in the bank? You've said that you're waiting for approvals to expand your lending activities there. Can you elaborate on that? What are you planning to do on asset side?
Sure, Anthony. Yeah, the acquisition of the bank was somewhat delayed. Also, the integration came up through the fourth quarter of last calendar year and through the holiday season. One of the things that we've been really committed to through this transition period of the bank into Challenger is building really strong foundations around the business. Rachel spoke today about the uplift in headcount and that is across treasury, credit, risk and compliance and that's a substantial step up in capability. The MyLife MyFinance business had a residential mortgage focused lending program. Challenger is obviously highly regarded for its non-resi lending in commercial credit, et cetera. We're broadening the bank's permissions to match more where our, you know, some of our core DNA, our core skill set is. That is a process that we're going through.
You know, we will be very disciplined until the approvals come through around our TD rates so that we don't build up liabilities there. You can see that if you go on the comparative sites today. That's where we're at. That's why Rachel's also noted for the second half, you know, we're not expecting breakeven in the second half. It'll be later than that.
Okay, thanks. Do you have an updated target for breakeven?
The moving parts to go into breakeven from the asset origination, finding the lending, the distribution program. There's a number of moving parts, so we're not providing any guidance. It isn't a material part of Group. And our, you know, our focus today is this is part of the long-term strategy. We've gotta get it right. It's a very clean balance sheet. We're gonna put the resourcing in place in the business. And as the approvals and resourcing comes up, then we will start to grow the liability book. You know, we'll provide more updates down the track.
Okay, thanks a lot.
We'll take our next question from James Cordukes of Credit Suisse. Please go ahead.
Thanks, guys. Just to follow up on the MoU, maybe on from Sid's question. I mean, when I look at Apollo, I mean and that agreement potential, you know, you're already a leading non-bank originator. You've got great relationships with super funds and advisors. You can already manufacture your own products. So if the only thing they're bringing is balance sheet and, you know, origination capability, do you view their role as more being a partner who you can just syndicate the assets out to? Or, you know, is it that the demand expectations for annuities and term deposits is so great, you couldn't possibly have foreseen yourself being able to write enough assets? In which case you probably don't need the balance sheet as much. Just trying to understand a bit more around those two points.
It's a great question, James. It is about market dynamics within that space. Chris has been working closely on it for many years in this space. I might let Chris provide a bit more color on the opportunity in non-bank lending in Australia.
Thanks, Nick. Look, I think as well, it's important to say that, you know, what we've done right now is we've signed this MOU. There's a lot of work to be done and we'll be keeping you guys updated as that sort of progresses. I think if you sort of take it right up to a sort of macro level, you know and you look at the Australian lending markets and you compare that internationally, you know, the banks continue to not dominate. We think that there are a lot of opportunities to, you know, respond to that and that there are some really underserved areas. That we think combining the two groups' capabilities and knowledge and expertise puts us in a great position to respond to that.
I think it's a lot more than just leveraging our existing capabilities. We think we can use those to go into new areas as well.
All right. I mean, is that more of a strategic view of like following in the markets like, you know, for example, the U.K., where you've seen a lot of business origination shift to off-bank balance sheets to the non-bank lenders and this is the way to, I guess, see that trend continue in Australia or start in Australia?
To some extent. You know, I think as we've said before, you know, we see opportunities to create real platforms so that, you know, there's real recurring assets. Because importantly, what this comes back to for us is creating high quality assets for our growing balance sheets. That will be an important sort of objective for the JV as we build out the strategy.
Thank you. Look, just on the Retirement Income Covenant, I'd be interested in feedback from the discussions with super funds and advisors and how that's changed over the last six months in the explanatory materials of the legislation. You know, how's, you know, are clients aware of that and has that changed their appetite?
Thank you, James, for that question on Retirement Income Covenant. I think you've got to see this in the bigger picture to see the opportunity in many ways. The Retirement Income Covenant catalyzes and recognizes the uniqueness of the risks in retirement. Being a covenant, it then becomes a duty of the trustees to ensure that members' interests are then looked after through retirement. You know, that's something super funds have been incredibly good at through the accumulation phase. The move is on to work out how we create in Australia the best accumulation system in the world. It's not one nor the other in many ways. This is a multi-year demographic trend that is occurring.
I come back to the opportunity for us as a business from the ability to do, to write guaranteed incomes and longevity through both the life company and guaranteed incomes through the bank. Then within the funds business, our capacity to provide alternate credit or income product where we're a leader in fixed income and credit today. So, you know, I see it being multifaceted as an opportunity for us. And you know, our expertise is highly regarded in the market. You know, Challenger is uniquely positioned as the retirement income leader with its very long history of longevity and this protection of longevity in the market. So, you know, we're very pleased with the level of engagement that we've got with the superannuation funds.
All right. Thank you.
We'll take our next question from Kieren Chidgey of Jarden. Please go ahead.
Morning, guys.
Morning, Kieren.
Morning, guys. Just a couple of questions. Maybe starting on group costs. 16% cost growth this half on pcp and I know sort of the bank coming in obviously contributed to that but I think you said ex that it was 13%, which just sounded a little bit high given headcount didn't seem up that materially on an average basis relative to last year. I think it was up only 2% on our calculations. Just wondering if you can unpack that a little bit more and then sort of give us a feel for how you're thinking on a go-forward basis relative to the AUD 147 base this half. What sort of wage inflation you're seeing moving through the organization and how much additional headcount around, you know, factors like the bank need to come in the second half.
Thanks, Kieren, for the question. I'll just make a few comments and Rachel can pick up on the details. You're right about the numbers. There is an element of that which is both the bank plus also recruiting in additional roles to support the bank, as well as, you know, general people related uplift in the business. We've also invested into some areas for growth. We've called out the Singapore office as well and there are expenses again that relate to that as well. That's probably as a summary but I'll let Rachel, if there's some more detail you wanted to provide.
Thanks, Kieren. Look, I'd like to say Challenger really takes a disciplined approach to expenses. If you look at the first half for 2021, it was unusually low. In fact, it was lower than the four preceding halves and that's largely because of the COVID lockdown. While the incremental looks extreme, it's actually pretty much in line when you take out the bank costs of those other previous halves in terms of just, you know, distribution, travel, all those different components. I do think it is a good call-out. In relation to going forward, we do expect a slight uptick on our costs from the AUD 147 base, largely because of the travel and our market-linked annuity products. It's growth pieces of travel associated with distribution costs and our market-linked annuity launch.
As I said, we take a disciplined approach and we're definitely focused on expenses as a whole.
Okay. Thank you. Maybe just rolling that discussion into sort of a broader question around the guidance. You know, I understand you've raised a few times more divisional levels but you know, the midpoint of your range for this year would require your second half to be 8% below first half. You know, which across each of the divisions, I'm just struggling to understand, given sort of you know, wider credit spreads in life and higher risk-free rates coming through, pretty strong annuity book at the end of the period. You know and funds management seems to have pretty good traction as well. Why that would be the case that we'd get profits going backwards in the second half of the year?
It doesn't sound like your flagging costs will be, you know, a particularly large step up across the group in second half.
Thanks. Thanks, Kieren. I'll make a few comments and again, Rachel will wanna add to it. You know, across the business, I think we've spoken quite a lot about the COE margin. To the point around interest rates, obviously, you know, we hedge the policy holders and any credit spread widening will season in over an extended period. It would need base rates to go up to impact, you know, the shareholder fund returns. We've talked about future sales mix. On the FM side, you know, we're broadly tracking in line, you know, with our assumptions. We're pleased with how that business is tracking. You know, there's clearly some variability that you'll see in the funds business around the final result, whether it be performance fees, transaction fees, or markets.
On the bank side, we've just spoken about, you know, that, you know, taking longer and the expenses there that we are incurring as we move towards, you know, ramping the lending program and the deposit program. It is a mix of those three things. That's why we've, you know, we've landed on the 455 as where we want to maintain, you know, our target.
Thanks, Nick. The only other things I'd add, again, that absolute return fund distribution, AUD 7 million higher in our first half and we just don't anticipate receiving that level of distributions in the second half. The asset allocations will remain the same for the second half and not all our assets have guaranteed returns. We have done well in the first half, so we're still comfortable with that, as Nick said, the 455 guidance at this point, Kieren.
Rachel, just on the AUD 7 million contribution from alternatives, which you spoke about bringing forward some of the margin from second half. You seem to be calling out AUD 5 million of higher one-off distribution costs, which largely offset that. I mean, that doesn't really seem to be a net drag into second half. Should we be viewing that net contribution across both those items?
In relation to the distribution fees, we did bring that forward as part of our simplification approach. Those trial commissions will be returned to the customers. That was over a five-year period, so it's very negligible on each half, even though we have brought that whole piece forward. It's just a small contribution for the second half for our margin but not a material one.
All right. Maybe just a final question for Nick around sort of the broader life business. You know, taking over as CEO, we're seeing some of your predecessors use that as an opportunity to reconsider the normalized earnings framework and some of the assumptions underpinning that around the life division. Just wondering if you could offer your thoughts on that and sort of, you know, particularly in light of the fact over sort of the last 10 or so years it's underperformed those assumptions.
Kieren, thanks for the question. I'll make a few general comments, then we'll come back to the normalized one in a second. Stepping into this role, I'm incredibly excited about the opportunity that the business presents from our capacity to do more for customers and to grow our business using both the life, the funds and the bank platform. You know, my priority is growth through the development of new solutions and new products. I called out that Challenger as one. That's a, it's something we're talking a lot about inside the business. I feel very excited about the position that Challenger finds itself in. The strategy that you know, i t's probably worth saying, I joined the business in 2016 came onto the leadership team in 2019.
I've been in and around the life company my entire time here. We're not a giant business and I've been part of the strategy development and formulation for Challenger. I feel very confident in the business that we have today and the opportunities I look ahead. We're not intending. We're not making any noises in relation to the normalized framework. I think we've provided in the pack a slide that sort of shows the trend of that relative to stat. I understand your comment but it is coming back through time. You know, for a business of ours, it's an appropriate framework, given the asset volatility that sits behind the balance sheet. You know, we're committed to that, Kieren.
Great. Thanks, Nick.
We'll take our last question in line from Andrew Buncombe of Macquarie. Please go ahead. Your line is open.
Hi, everyone. Thanks for taking my questions. I just had one main one, please. You've tweaked your maturity expectations for FY 2022. How should we be thinking about those for FY 2023? The reason I ask the question is that previously we've been told that those maturity numbers would edge towards 10% over time. As that maturity and duration starts to shift, I'm just thinking maybe it doesn't come down as quickly. Any thoughts on that would be great. Thank you.
Sure, Andrew. I will start and Rachel will have some comments, I'm sure, to add to it. We've clearly called out a stellar sales result here, big institutional numbers. The term of this business is shorter tenor. The effective term is longer because we are seeing, you know, reinvestments. You are seeing that the maturity rate almost matching, not almost but less 1.4 the growth in annuity and GUR sales. The way that and so actually, I mean, the other comment and actually I might forget the number here but, you know, if you look at all the business that we've written, the effective maturity is about 5.1 years is the right number. That's looking at 20%, so trending back down from where we are today. Rachel, do you wanna make sure I've got that correct?
No, you've got that 100% correct. The only thing I would add, you know, the higher insto sales, our duration is shorter but our retention rates are stronger. If we look at, we split it out, our retail maturity rates are more in the order of around 20%. You have to look at the book as a total for that number. You know, if we split it out a little bit, I think, you know, the numbers don't tell the true story if we just look at that in one hit because of those strong retention rates we've experienced right across our book.
Excellent. Thank you.
We have a range of questions coming in online, so thank you for sending those through. The first one comes from Lafitani at MST. Thanks, Laf, for your question. It's in relation to the cost to income ratio at 38%. Laf's question is, a criticism of Challenger over the years has been the inability to get scale benefits from the healthy growth that it's seen. Should we expect improved operating leverage over the medium term?
Laf, thank you for the question. One of the things we called out today is that we've seen our earnings growth in line with our firm growth, that we've, you know, we've been writing our business in a disciplined way and that we've had, you know, stable margins on the life side and the fund side. We've also spoken about the bank and the opportunity and scale potential for there. I understand your question. Rachel's spoken about expenses. We're very focused on running the business effectively, efficiently but also mindful that we're investing for growth as well. Unless, Rachel, you wanna add any other comments to that?
No, that's all.
No. Okay.
Thanks. Thanks, Laf. The next question comes from Andrei Stadnik at Morgan Stanley. There are three parts to Andrei's question, so we might do them one at a time. The first is in relation to the strategy to, of the bank, which seems subscale for now. Does the bank need to be integrated with the new non-bank JV? And how do you ensure the non-bank and the bank lending activities will not overlap?
Thanks. Let's take that one first. The what we've spoken about today in the formation of the JV but also in Challenger's broader credit capabilities, is the importance of origination to support the balance sheet growth over time. You know, our focus around whether it be the JV or how we scale the bank is the quality of the lending program. It is a small acquisition but it's a very clean business. It's got new technology that had been integrated and sourced through it, which is pleasing. That in itself was a significant investment made into the purchase. Our focus is on, for the second half, rebranding the bank, working through the lending program and then starting to grow our deposit and term deposit book.
Thank you, Andrei. Andrei's second question is in relation to interest rates. The three-year and five-year swap rates are starting to rise. Does this make you more confident about your full year outlook? How much uplift at earnings can interest rate rises deliver?
Thanks. Thank you for that. Just to, as a reminder, you know, the statutory funds, the policyholder funds are fully hedged for interest rates. The shareholders' funds aren't but it needs the base rate to go up, not the swap curve. Where it starts to play through from a swap curve perspective is the pricing that we put into the market around our annuities. Indeed, this last three, four days, we've increased the three-year term annuity rate, my apologies, up to 2.8% from 2.55. You know, we have seen the steepening of the curve and we're passing that through. That's, you know, it sort of shouldn't necessarily matter because we price over a swap but optically from a customer's perspective, that higher rate has the potential as we look forward to be more appealing.
We are passing the rate through to our customers. We're keeping the spread though between that 90-100 points over swap.
Andrei's final question is in relation to the capital intensity in January 2022. How big has the asset allocation change been and how big of a headwind will that be to normalized profit?
I think to make sure I understand the question, what we've said is that there's no, I mean, Rachel made clear from an asset allocation perspective, there's no change. Where we have provided some detail in the fixed income book, we have increased the quality of that book, from triple B, some out of triple B up to double A, triple A ABS. So that's coming through. But we've said, you know, we're not looking to change the asset allocation of the book. We've been maintaining our guidance that for the COE of 2.5%.
I'll just add to that, Andrei, the detail for you. The capital intensity reduction we've referred to, that's largely a function of the equity market falling. You know, as Nick mentioned earlier, the capital requirement for equities is a dividend shock, a shock to the yield of the ASX 200. Equity markets fall, the capital intensity of equities also correspondingly falls. The next question comes from Bell Potter, from Marcus Barnard. It's in relation to the life risk business, the U.K. life risk business. In 2021, you increased your PV from changes in mortality rates. Does this cover the period to end of 2021? And what is the opportunity for mortality improvements to come through in future years?
Thanks for that question. That's a very technical one, so what I might do is just, Chris, if you wanted to add any color, if you had any thoughts on that or we take it away.
No, look, I think and Rachel may be able to add to it but I'll just really briefly say that those are very long-term assumptions. You know, they tend to move slowly. There was that adjustment in a previous year and I don't know if there's been any material. Rachel?
No, there have been no material movements in relation to the mortality rates. COVID has not worked its way through on this. It's one that we continue to watch but there's been no change at this point in time. Thank you for the question.
Great. Thank you, everybody. That concludes the question and answer session for today. I'm available today for questions and Mark is obviously available ongoing. Please feel free to get in touch if we can assist you with any further questions. Thank you.