Can't agree with you there, I value IVC with very low risk adjustment due to the nature of death & its irrelevance of market conditions. CGFs business is retirement income, a thing easily obtained in many many places - albeit nothing quite like an annuity.
That last bit of your sentence is the essence of the investment case for CGF.
Annuities currently make up a very small part of the trillions of dollars of retirement funding assets held by Australians who, historically, have had their retirement assets heavily skewed towards listed equities.
So, all that Challenger has to do is to keep participating in the existing trend to re-balance that skew and, simply by the laws of small numbers, the company has a natural structural tailwind which will drive earnings higher in the decade to come [*].
What happens to equity markets in the interim is irrelevant to that structural organic earnings growth tailwind.
[*] For a clear articulation of this dynamic, refer to Challenger's FY2017 full-year result presentation, pages 37-42 (and especially page 39 and page 41) which illustrate how the overall pie is growing (i.e., superannuation balances), but also how Challenger's share of that growing pie is also growing.
On the issue of barriers to entry, you seem to be sending a bit of a mixed message, in your last post, to wit:
"I too wonder, but I will resign my judgement for the day my future kids close out my will. My best guess is the COE margin we run is too low to incentivise a competitor to make the effort...but that ROE is gold.
There are massive barriers to entry but equally so is the market opportunity, there are many organisations with the capital, regulatory & investment knowledge who could compete. I don't believe the annuity specific actuarial IP is anything the 4 big banks, any large international bank, AMP.. etc couldn't develop if they don't already have it. It only takes one to challenge."
The days of the cheap money has been sloshing around the globe over the past 7 or 8 years are now over, with monetary conditions now clearly tightening. And the regulatory capital requirements for this kind of business is significant which suggests to me that if ever there was going to be a serious competitor for Challenger put up the capital to set up shop in Australia, if it didn't happen over the past 7 years, then the chances of it happening now are slim.
I suspect that if any company with a big enough balance sheet wanted to get into the annuities gig in Australia the best way to do so would be to buy out the industry's leading incumbent.
As for the Big 4 banks having a go at annuities, you'll notice the Big 4 banks are undergoing regulatory tightening of their capital bases and, as it is, they are selling out of their wealth management businesses (ANZ selling their wealth management business to IOOF and NAB's MLC said to be up for sale and CBA reported to be considering an IPO of Colonial Fist State).
The major banks have had decades to get into the annuities business, and under market conditions far more benign than the banks are facing today; if they haven't done so by now suggests to me that they are unlikely to do so soon.
In summary, I think the reason why there have not been any major competitors for Challenger in the Australian market is because, simply, doing what Challenger does is not easy. Not easy at all.
You need to be across a lot of different issues, all of them mission-critical:
- Investment Track Record
- Industry Credibility
- Asset Consultant Endorsement
- Distribution Capability
- Brand Recognition
- Proven Risk Management Processes
- Regulatory Understanding and Adherence
- Capital Adequacy
- Comprehensive Reporting Framework
Those sorts of things take many years, decades even, to put into place.
Why, it took Challenger from 1987 to 2001 to get to the point where it started to gain market credibility and to start making any half-decent (tens of millions of dollars, as opposed to just a few million dollars) profits.
It's not just a case of hanging out a shingle in front of a rented office, and then putting out a series of adverts saying, "Looking for annuities? Call ACME Annuities on 1800....etc. "
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