CHALLENGER LIMITED — Annual Report 2009

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Challenger Financial Services Group Annual Report 2009

Directory

Principal registered office in Australia

Level 15 255 Pitt Street Sydney NSW 2000 Telephone: 02 9994 7000 Facsimile: 02 9994 7777

Directors

Peter Polson (Chairman) Dominic Stevens (Chief Executive Officer) Graham Cubbin Thomas Barrack Jr. Russell Hooper Tetsuya Wada Leon Zwier

Secretaries

Christopher Robson

Suzanne Koeppenkastrop

Share register

Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney NSW 2000

Telephone: 02 8234 5000

Facsimile: 02 8234 5050

Website: www.computershare.com.au

Auditor

Ernst & Young 680 George Street Sydney NSW 2000

Internet address

www.challenger.com.au

Challenger today

Challenger Financial Services Group is an ASX-listed investment management fi rm established in 1985. We are the foremost issuer of annuities in Australia and a leading provider of listed and unlisted investment products and services. In the 2009 fi nancial year, we were also the largest non-bank participant in Australia’s residential mortgage industry.

Life

Challenger is the leading provider of annuities in Australia with a market share of 42%. Annuities issued by our ‘A’ rated, APRAregulated Life company offer attractive, guaranteed returns with low fees, making them well-suited for retirement income planning. Annuity premia, shareholder and other capital are invested in a diversifi ed portfolio of investment assets, delivering predictable longterm cash fl ows to meet annuitant obligations while providing attractive returns to shareholders.

Funds Management

As one of Australia’s largest fund managers, Challenger offers a wide range of investment choices across a variety of asset classes and investment styles and operates both unlisted funds and listed infrastructure and property funds. The fi rm is a quality investment manager in its own right, has acquired equity interests in a number of leading boutiques and also acts as a gateway to other expert investment managers.

Mortgage Management

In the 2009 fi nancial year, Challenger’s Mortgage Management division was also one of Australia’s largest nonbank residential lenders, offering a wide range of products through a national network of separatelybranded lenders and owning three of the largest mortgage broker aggregation businesses in the country. Its divestment was announced in August 2009, subject to the approval of the regulators, APRA and the ACCC.

1

Results at a glance

This year, cash fl ow growth and stringent cost control led to higher normalised earnings and profi ts and a stronger balance sheet. Moreover, it negated the need to raise capital from external sources, preserving our earnings and dividend per share.

• Underlying cash fl ows increased 33%

• to $287 million

• Underlying expenses decreased 12%, excluding one-off restructuring and PLAN acquisition costs

• Normalised net profi t after tax increased 1% to $219 million

• Capital surplus to regulatory minimum increased to $530 million

• Normalised earnings per share increased 6% to 39.2 cents

• Final dividend of 7.5 cps maintained, unfranked

Financial performance	2009	2008
Net Income	$579m	$567m
Expenses	$259m	$256m
Normalised EBIT1	$320m	$311m
Normalised NPAT1	$219m	$218m
Statutory NPAT	$(91m)	$(44m)
EPS (Normalised Basic) – cps	39.2	37.1
EPS (Statutory Basic) – cps	(16.2)	(7.5)

1 Excluding investment experience and significant items.

The ‘mark to market’ accounting rule for Life companies resulted in Challenger recording an unrealised, statutory net loss of $90.7 million for the full year. However, the second half of 2009 saw normalised cash operating earnings exceed our negative investment experience and we recorded an unrealised, statutory net profi t after tax of $17.2 million for the half.

Normalised profi t explained

As is the case with banks, life insurers and many other fi nancial services fi rms, Challenger’s fi nancial assets are traded in markets that have experienced substantial volatility during the fi nancial crisis. Unlike banks, our Life company is required to mark them at their then-market value rather than their historic cost. In order to distinguish our underlying cash earnings from the effect of this ‘mark-to-market’ accounting rule, we supplement our statutory profi t reporting with ‘normalised’ profi t reporting, which removes the volatility of our assets’ market value and focuses on the income they produce. This is the income that funds our operations and is distributed to shareholders in the form of cash dividends.

2

Despite two years of testing market and economic conditions, our track record in growing normalised earnings was maintained in 2009. While divisional contributions vary over time, our total Group normalised earnings have increased at a compound rate of 27% p.a. since 2005.

Normalised EBIT grew

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While income and normalised NPAT have grown over the last three years, we’ve simultaneously managed to reduce our operational cost base. After deducting one-off and restructuring costs, our underlying cost to income ratio has decreased from 49% in 2007 to 41% in 2009.

Normalised costs fell

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Sources of income

Life derives income by achieving a higher rate of return from its diversifi ed portfolio of investments than the guaranteed fi xed rates it has agreed to pay to annuity policy holders. Total income is a product of the size of the portfolio multiplied by the spread income received from those invested assets. Over the last two years, asset yields have been high, while the portfolio has grown.

Funds Management is a fi duciary manager of thirdparty capital, so its income is calculated as a margin or percentage of total funds under management (FUM). Additional income is earned from certain

assets in the form of base management, performance and transaction fees. This year, while margins have been retained, net income has been reduced because FUM has fallen.

Mortgage Management manages, administers or services a large number of residential and commercial mortgages from which it earns a fee or derives margin income. Total income is a product of the book size and the fees and margins. This year, it has risen through margin accretion and acquisitions, although mortgage volumes were down.

3

Chairman’s report

‘Throughout tough times, Challenger has adapted, evolved, and positioned itself for success in a changed fi nancial services landscape’

In a year when governments around the world needed to bail out their banking systems, few people would have expected a diversifi ed Australian fi nancial services fi rm to grow cash profi ts while organically regenerating capital.

Starting the year well-capitalised following an earlier equity raising meant Challenger avoided the fate of the many listed companies forced to return to the market for expensive equity. Ongoing capital discipline and strong operational cash fl ows ensured that, rather than issue capital during market lows, Challenger was able to invest in its own equity, keeping earnings per share intact while signalling Board and management’s confi dence in the company’s prospects.

Full year result to 30 June 2009

This year, Challenger recorded a rise in normalised net profi t after tax to $219 million from an underlying cash fl ow of $287 million.

Continued investment market volatility resulted in a statutory NPAT of $(91) million, highlighting the different treatment accorded to life companies which invest in similar assets to banks, yet must hold them at current market rather than historical cost.

Recovering credit markets helped drive a reversal of investment experience for the second half of fi scal 2009, which bodes well for a narrowing of the gap between statutory and normalised profi ts in 2010.

More notably, even after absorbing substantial markto-market adjustments from ongoing credit and equity market dislocation, Challenger has come through the worst of the fi nancial crisis with a $530 million surplus to its regulatory capital minimum.

The Company’s strong cash fl ows and capital strength have translated directly to shareholder benefi t, with our normalised total shareholder return and earnings per share growth positioning us competitively within our peer group.

Dividend

With a fi nal dividend of 7.5c declared by the Board, we have provided shareholders with annual income of 12.5c per share for the third consecutive year and will maintain our dividend payout ratio of approximately 30% into next year.

Board changes

During the year, Mr Tetsuya Wada of The Bank of Tokyo-Mitsubishi UFJ, Limited (BTMU) replaced Mr Tatsuo Tanaka, also of BTMU. In September 2009, following the share sales by Consolidated Press Holdings Limited and the Mitsubishi UFJ Financial Group, Mr James Packer, Mr Ashok Jacob and Mr Tetsuya Wada all resigned from the Challenger Board, leaving us with six directors, the majority of whom are independent.

4

Peter Polson Chairman

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Management team

Much credit for this year’s result should go to the senior management team that was put in place in 2003. Their considerable risk and capital management experience has been extensively called upon this year and their track record in the acquisition and integration of new businesses will help secure our growth for the future.

Outlook

As we begin to emerge from the economic and market crisis, new opportunities will emerge in the changed fi nancial services landscape. With strong cash and capital balances and undrawn credit facilities, Challenger is well positioned to embrace and benefi t from this change.

Sale of Mortgage Management

Over the last six years we have built a residential lending business of high strategic value. Throughout the course of 2009, with securitisation markets effectively closed to normal issuance, we received expressions of interest from several parties regarding acquiring or joint venturing with Mortgage Management.

These offers were considered as part of our regular strategic review process, and after a competitive tendering process, the decision was made in August to sell the origination and distribution business to the National Australia Bank for $385 million.

Challenger has retained the commercial lending business and the residual income from the $11 billion term-funded mortgage back-book, which was transferred to the Life company and will continue to generate secure, high quality cash fl ows that are well-matched to our annuitant liabilities.

5

CEO’s report

‘Our focus on producing cash fl ow to regenerate capital has delivered an enviable fi nancial position at a time of opportunity. The way ahead for Challenger is now clear’

While 2009 was the most diffi cult year on record for the fi nancial services industry, Challenger’s continued focus on capital and risk management and the high cash fl ow nature of our business made us more resilient than many of our local and global peers in the lending, insurance and funds management industries. Earnings and net profi t rose slightly on a normalised basis, and with our cash generation more than doubling over the last two years, Challenger ended 2009 with enough cash and capital to grow our investment management platform through both acquisitive and organic means.

Business performance

While total assets under administration (AUA) grew substantially due to the acquisition of the remaining 85% of mortgage aggregator PLAN Australia, it was not unexpected that total assets under management (AUM) fell during the year, primarily due to the impact of falling markets on our Funds Management division in the fi rst three quarters.

Normalised NPAT of $219 million surpassed last year’s result by 1%, while normalised EBIT gained 3% to $320 million, with a lower contribution from Funds Management offset by growth of 23% and 36% in Life and Mortgage Management, respectively.

After excluding one-off restructuring costs and those relating to the acquisition of the remaining 85% of mortgage aggregator PLAN Australia, we’ve reduced our underlying Group cost to income ratio to a fi veyear low of 41%, yet our businesses remain scalable with good operating leverage to improving markets.

Operational and fi nancial highlights

• Group normalised EBIT continued to grow despite a second year of market dislocation, refl ecting a compound annual earnings growth rate of 27% since 2005.

• Operating cash fl ow reached $287 million, an increase of 33% over last year.

• Capital reserves in excess of our regulatory minimum grew to $530 million, with regeneration organically achieved.

• Shareholders have received consistent income throughout the fi nancial crisis, with total dividends of 12.5c payable for the full year.

• The transfer and reinvestment of AXA’s $1.3 billion annuity portfolio added 17,000 new clients and led to increased guidance for Life earnings at the half year.

• Investments in absolute return fund Wavestone and fi xed income specialist Ardea have diversifi ed and developed our boutique platform in Funds Management.

6

Dominic Stevens

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New management structure

In November 2008, we revised Challenger’s organisational structure to create complete transparency around our APRA-regulated Life company and consolidate our Funds Management operations under one profi t centre. In response to the needs of the business in the second year of market uncertainty we also created a combined Group Chief Financial Offi cer/Group Chief Operating Offi cer role and made a number of other senior appointments.

Capital management

At 30 June 2009, Challenger’s Life company had capital surplus to regulatory requirements of $530 million and held approximately $900 million in cash and cash equivalents. Capital reserves returned to pre-crisis levels, without the need for external recapitalisation and after accounting for substantial mark-to-market adjustments to our balance sheet. We are aiming to complete the purchase of 10% of our issued capital in 2010, following 2009’s buyback of 31 million shares.

for the future. Once completed, the transaction will have a positive fi nancial impact on the Group, resulting in zero net debt and a surplus of cash.

Strategy

Challenger now has the resources to develop its investment management platform at an opportune time in the markets. As will be discussed in the following pages, the Life and Funds Management divisions are prepared and capitalised for organic growth.

Growth through acquisition is also a distinct possibility for 2010. As our fi rm’s acquisition track record has shown, highly attractive cost synergies can be derived from discrete funds management purchases, while closed annuity books acquired at near book value offer compelling platforms for generating spread income.

We have much to look forward to in the year ahead.

Mortgage Management

On both a personal and business level, the Mortgage Management team has made a signifi cant contribution to Challenger over the last six years. On behalf of the company I would like to express my gratitude to Drew Hall and his entire team, and wish them every success

7

Life

Richard Howes Chief Executive Life

Our APRA-regulated Life business is the largest provider of retail annuities in Australia, with approximately $4.5 billion in policy liabilities to 60,000 annuitants backed by $5.8 billion in assets under management (AUM).

In December 2008, Standard & Poor’s (S&P) reconfi rmed its ‘A’ credit rating.

The 2009 fi nancial year saw AUM rise 7% as a result of the transfer of AXA’s $1.3 billion annuity book in November 2008 and organic annuity and fi xed-rate allocated pension and personal super sales of $514 million. Net income for the year was $251 million, and with expenses kept fl at, normalised earnings before interest and tax (EBIT) rose 23% to $228 million.

As previously noted in the Chairman’s report, markto-market accounting rules require the recording of assets at market value rather than historic cost. With falling property and infrastructure asset values globally and widening fi xed income credit spreads, this resulted in an unrealised, negative investment experience of $310 million for the year.

Post-balance date and following the sale of Challenger’s mortgage origination and distribution business to the National Australia Bank, Life purchased from the Group the future income derived from $11 billion of term-funded residential mortgages previously held within Mortgage Management. This fi nancial asset is cash-fl ow rich and well-matched to the outfl ows payable to our annuity policy holders.

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Life also received from the Group a $200 million cash injection to provide for future growth and provide capital against the new asset.

With equity markets continuing their downward trend in the fi rst three quarters of 2009, the virtues of annuities have become more apparent to fi nancial advisers and their retiree clients, and are being vigorously promoted with renewed sales and marketing efforts.

In addition to normal organic sales, we have in place three prospective workstreams with the potential to deliver accelerated growth to the business.

In February 2009, we recommended to the Government’s review of Australia’s future tax system (the ‘Henry Review’) that retirees be required to allocate 30% of their assets to lifetime annuities in order to better manage their market and longevity risk.

In the third quarter, we initiated discussions with several leading platform (wrap) providers, with a view to establishing a unitised annuity investment option for

More recently, following the full consolidation and reinvestment of the AXA book, we continue to evaluate both the domestic and offshore acquisition landscape.

With June annuities sales initiating what we hope is a longer-term upward trend, 2010 is set to be a positive year for the Life business, particularly if income growth continues to be supported by elevated risk premia.

8

Funds Management

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Rob Woods and Rob Adams Joint Chief Executives

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The second year of the fi nancial crisis saw lower fi nancial asset valuations and the fl ight to cash and fi xed income persist.

Challenger’s total funds under management (FUM) declined to $16.0 billion, while net income was $114 million and EBIT $18 million. This performance, while disappointing, was broadly representative of the general trend continuing to impact the industry.

Despite a diffi cult year, Challenger has an established franchise and remains committed to investment management due to the ongoing attraction of a resilient Australian economy fuelling governmentmandated growth in investment fl ows.

Fortunately, the last few months of the year saw equity markets rise consistently from their lows of 9 March, drawing side-lined superannuation cash back into the market and leading to FUM growth for the last quarter across both our in-house and boutique products.

In terms of scaling the business to match the reduction in FUM, integrating the operations of our unlisted and listed funds helped shrink our cost base by 19%, giving us good operating leverage to a sustained market recovery.

Although our listed specialised funds continued to trade at signifi cant discounts to their net asset values (NAV), the underlying assets are largely performing as expected, with Challenger Infrastructure Fund (CIF) and Challenger Diversifi ed Property Group (CDI) both exceeding their benchmarks and generating performance fees for the Group.

Although the last 12 months saw the Australian REIT sector substantially recapitalise at often heavy discounts to net asset values, CDI’s conservative portfolio of high quality assets and pro-active approach to capital management negated the need to take this step when the market was at its lowest, while the underlying value of CIF’s assets was again confi rmed by the sale in December of one third of its investment in UK utility Southern Water at NAV, or what was then a substantial premium to its unit price.

With the Group well-capitalised and narrowing its focus to investment management, we will devote the next year to achieving consistent investment performance, developing further income-oriented products and strengthening our distribution relationships.

While product performance varied across asset classes and product categories, approximately 75% of our funds outperformed their 12-month benchmarks. Meanwhile, our boutique fund platform was further diversifi ed by investments in absolute return fund Wavestone and the commencement of fi xed income specialist Ardea, and we are seeing encouraging fl ow trends for all six of our partnerships.

9

Mortgage Management

Drew Hall

Chief Executive Mortgage Management

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Although the environment remained diffi cult for non-bank lenders due to highly restricted term credit availability, this year saw Mortgage Management achieve a further increase in earnings as we benefi ted from the integration and consolidation of our mortgage aggregator platforms and industry-wide increases in loan margins.

The acquisition of the remaining 85% of PLAN Australia in September 2008 delivered a large increase in mortgages under administration to $75.3 billion, while restricted access to term funding markets led total mortgages under management 18% lower to $17.9 billion.

As expected, a contracting mortgage portfolio from the lending business was more than offset by the consolidation of PLAN, full-year ownership of Choice and increased margins as the industry repriced loans. Net income rose 27% to $209 million, while earnings before interest and tax grew 36% to $136 million. PLAN Australia’s acquisition and consolidation increased total costs by 12%, but other expenses for the year remained fl at.

In August 2009 the Group announced the sale of our origination and distribution business to National Australia Bank (NAB) for $385 million, a move which I believe is a very positive one for our staff, customers, mortgage managers and brokers.

While our existing warehouse capacity and the Australian Offi ce of Financial Management’s purchase program permitted origination to continue at reduced levels, Challenger management was regularly reviewing the feasibility of alternatives to reinvigorate the business while waiting for securitisation markets to normalise. With approaches to buy the business also being made by third parties, the value to certain strategic buyers of our mortgage managers and 5,700 broker network became more apparent throughout the course of the year. So too did the viability of transferring the complete residential lending business to new ownership, such that its independence and culture would be maintained.

With NAB undertaking to operate a renamed Challenger Mortgage Management as a stand-alone entity, bound by information barriers and assured of its continued autonomy, an arrangement was struck to transfer ownership on 31 October 2009, subject to the necessary regulatory approvals.

The outcome is a benefi cial one for all concerned. Challenger will receive capital to fund more immediate growth opportunities in Life and Funds Management, NAB will bolster its presence in the growing broker distribution channel, and our customers and 380 employees have a solid foundation for future growth.

10

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Paul Rogan

Executive General Manager Capital Risk and Strategy

During the fi rst half of this fi nancial year, the Capital Risk and Strategy team has been active across the Group, with a focus on protecting our capital base while seeking opportunities to add value for shareholders via the share buyback. With global credit markets constrained and uncertain economic outlooks, we continued to diligently monitor and carefully manage our market risk exposures.

The second half of the year was notable for our engagement with parties interested in gaining economic exposure to Mortgage Management’s strategic position in residential lending, culminating in the announcement of its sale to NAB, subject to regulatory approval. This will result in the repayment of all Group recourse debt and a signifi cant positive cash position.

Jennifer Wheatley

Executive General Manager

Human Resources

With parts of the business changing scale to meet the more diffi cult operating environment, it’s important that we retain our comparative advantage and remain well-equipped to act decisively and collaboratively on opportunities that will emerge over the next year.

To this end, we have strengthened the principles used to assess performance at Challenger in the new

‘Your Performance’ framework, and have further refi ned our remuneration policies and employee programs to ensure they support our key objectives of recognising special effort while rewarding business outcomes.

Into next year, we expect to bolster our leadership capability by launching a program in association with the Australian Graduate School of Management and will be refreshing our corporate citizenship activities with a new non-profi t alliance.

Brian Benari

Group Chief Financial Offi cer Group Chief Operating Offi cer

The creation this year of a combined Group Chief Financial Offi cer/Group Chief Operating Offi cer role has enabled the extraction of greater cost effi ciencies across the Business Services function. As with all such responses to a changing external environment, it’s imperative that we retain suffi cient scalability and fl exibility for when normal markets and growth patterns return.

We’ve been especially pleased to have achieved this whilst undertaking major projects such as, consolidating our Funds Management and Life Operations, rationalising technology platforms and realigning our technology group to enhance delivery to our businesses.

After two years focused on expense reduction, we expect to move next year to a more neutral position as our businesses grow the value of their assets under management.

11

12

Directors’ report

The Directors of Challenger Financial Services Group Limited (‘the Company’) submit their report together with the fi nancial report of the Company and its controlled entities (‘the Group’), for the year ended 30 June 2009.

1. Directors

The names and details of the Company’s Directors holding offi ce during the fi nancial year and until the date of this report are as listed below. Directors were in offi ce for this entire period unless otherwise stated.

Peter L Polson

Independent Chairman

Experience/qualifi cations

Mr Polson holds a Bachelor of Commerce degree from the Witwatersrand University in South Africa and a Master of Business Leadership from the University of South Africa, and has completed the Harvard Management Development program.

Mr Polson retired from the Commonwealth Bank in October 2002, where he held the position of Group Executive, Investment and Insurance Services. Mr Polson joined the Colonial group in 1994 prior to its acquisition by the Commonwealth Bank. Previously, Mr Polson was Managing Director of National Mutual Funds Management (International) Limited. Mr Polson was a director of the previously listed company Australian Leisure and Hospitality Group Limited. Mr Polson has been a Director of the Company since 6 November 2003.

Special responsibilities

Mr Polson is Chairman of the Remuneration Committee, Chairman of the Nomination Committee and a member of the Group Audit and Compliance Committee.

Directorships of other listed companies

Mr Polson is Chairman of AWB Limited (appointed as a director on 31 March 2003).

Dominic J Stevens

Chief Executive Offi cer and Managing Director

Appointed 1 September 2008.

Experience/qualifi cations

Prior to accepting the role of Chief Executive Offi cer in September 2008, Dominic Stevens was Deputy Managing Director of Challenger.

Mr Stevens joined Challenger in September 2003, from which time he primarily held responsibility for overseeing Challenger’s capital, risk management and strategy group.

Prior to joining Challenger, Mr Stevens led the foundation, and was the Senior Managing Director of Zurich Capital Markets in the Asian region. Zurich Capital Markets Asia specialised in the areas of structured fi nance, derivative solutions and provision of risk management products to investors in alternative assets.

From 1987 to 1999, Mr Stevens held a number of senior roles at Bankers Trust. Mr Stevens was a Partner of Bankers Trust Company, where he headed the Bankers Trust commodity businesses globally (ex energy). In addition Mr Stevens was responsible for the derivatives risk management business at Bankers Trust Australia.

Mr Stevens was awarded a Bachelor of Commerce (Hons) Finance in 1986 from the University of New South Wales, Sydney, Australia.

Directorships of other listed companies

Mr Stevens was a director of Homeloans Limited from 3 May 2007 until 28 October 2008.

13

Directors’ report

Thomas Barrack Jr.

Non-Executive Director Independent

Experience/qualifi cations

Mr Barrack received a Juris Doctor in Law from the University of San Diego and also holds a Bachelor of Arts degree from the University of Southern California.

Mr Barrack is the Founder, Chairman and Chief Executive Offi cer of Colony Capital, LLC and Colony Advisors, LLC. Prior to forming Colony, Mr Barrack was a principal with the Robert M. Bass Group, Inc. Mr Barrack also served in the Reagan Administration as Deputy Under Secretary of the Department of the Interior. Previously, Mr Barrack was a Senior Vice President at EF Hutton in New York City and President of Oxford Development Ventures, Inc. Mr Barrack was appointed as a Director on 22 November 2007.

Special responsibilities

Mr Barrack is a member of the Nomination Committee.

Graham A Cubbin

Non-Executive Director Independent

Experience/qualifi cations

Mr Cubbin holds a Bachelor of Economics (Hons) from Monash University and is a Fellow of the Australian Institute of Company Directors.

Mr Cubbin was a Senior Executive with Consolidated Press Holdings Limited (CPH) from 1990 until September 2005, including Chief Financial Offi cer for 13 years. Prior to joining CPH, Mr Cubbin held senior fi nance positions with a number of major companies including Capita Financial Group and Ford Motor Company. Mr Cubbin has been a Director of the Company since 6 January 2004.

Special responsibilities

Mr Cubbin is a member of the Group Audit and Compliance Committee and the Nomination Committee.

Directorships of other listed companies

Mr Cubbin is a non-executive director of STW Communications Limited (appointed 20 May 2008) and a non-executive director of Bell Financial Group Limited (appointed 12 September 2007).

Russell R Hooper

Non-Executive Director Independent

Experience/qualifi cations

Mr Hooper is a Fellow of the Australian Institute of Company Directors, a Fellow of the Australian Society of Practising Accountants, a Fellow of the Financial Services Institute of Australasia and has completed the Advanced Management Program, Harvard Business School.

He has experience at chief executive level in life insurance, wealth management and listed investment trusts. Mr Hooper has been a Director of the Company since 6 November 2003.

Special responsibilities

Mr Hooper is the Chair of the Group Audit and Compliance Committee, and a member of the Remuneration Committee and the Nomination Committee.

Directorships of other listed companies

Mr Hooper is a director of Century Australia Investments Limited (appointed 12 September 2006).

14

Ashok P Jacob

Non-Executive Director

Experience/qualifi cations

Mr Jacob is Chief Executive Offi cer of Consolidated Press Holdings Limited (CPH). Prior to joining CPH in 1998, Mr Jacob was the Managing Director of the investment arm of the Pratt group of companies. Mr Jacob has been a Director of the Company since 6 November 2003.

Mr Jacob holds a Master of Business Administration from the Wharton School and a Bachelor of Science from the University of Pennsylvania.

Special responsibilities

Mr Jacob is a member of the Nomination Committee.

Directorships of other listed companies

Mr Jacob is a director of Consolidated Media Holdings Limited (appointed 9 November 1998), Crown Limited (appointed 6 July 2007) and Ellerston Capital Limited (appointed 6 August 2004).

James D Packer

Non-Executive Director

Experience

Mr Packer is Executive Chairman of Consolidated Press Holdings Limited. Mr Packer has been a Director of the Company since 6 November 2003.

Special responsibilities

Mr Packer is a member of the Remuneration Committee and the Nomination Committee.

Directorships of other listed companies

Mr Packer is Executive Chairman of Crown Limited (appointed 6 July 2007) and Executive Deputy Chairman of Consolidated Media Holdings Limited (appointed 28 April 1992). Mr Packer is also the Chairman of SEEK Limited (appointed 31 October 2003).

Mr Packer is also a director Ellerston Capital Limited (appointed 6 August 2004). Mr Packer was a director of Qantas Airways Limited from 1 March 2004 until 31 August 2007 and of the Sunland Group Limited from 20 July 2006 to 13 August 2009.

Tetsuya Wada

Non-Executive Director

Mr Wada was appointed to offi ce on 21 May 2009.

Experience/qualifi cations

Mr Wada is Managing Executive Offi cer, Chief Executive Offi cer for Asia and Oceania of the Bank of Tokyo-Mitsubishi UFJ, Limited (BTMU), the largest commercial bank in Japan and a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc. (MUFG). Prior to this, Mr Wada held senior executive positions in BTMU and MUFG. Those positions include Managing Director, Chief Executive Offi cer for the retail business of BTMU and Managing Executive Offi cer, Chief Executive Offi cer for the retail business of MUFG.

Mr Wada holds an Master of Business Administration from Ann Arbor, University of Michigan and a Bachelor of Law from Kyoto University.

Special responsibilities

Mr Wada is a member of the Nomination Committee.

Leon Zwier

Non-Executive Director Independent

Experience/qualifi cations

Mr Zwier is a partner in the law fi rm Arnold Bloch Leibler. Mr Zwier holds a Bachelor of Law from the University of Melbourne. Mr Zwier is a member of the External Advisory Committee of the Department of Business Law and Taxation (Monash University) and is an Honorary Fellow of the same department. Mr Zwier has been a Director of the Company since 15 September 2006.

Special responsibilities

Mr Zwier is a member of the Nomination Committee.

15

Directors’ report

Michael Tilley

Mr Tilley retired from offi ce on 31 August 2008.

Experience/qualifi cations

Mr Tilley holds a Post Graduate Diploma in Business Administration from the Swinburne University in Victoria, Australia.

Mr Tilley was previously Vice-Chairman, Investment Banking Group, JP Morgan, a position he resigned from upon his appointment as Chief Executive Offi cer (CEO) of the Company in June 2004. Until 31 March 2003, Mr Tilley was a director of Incitec Limited.

Prior to this, up until February 2002, Mr Tilley was employed with investment bank Merrill Lynch, where he held the positions of Executive Chairman, Merrill Lynch (Australasia), Head of Mergers and Acquisitions in the Asia Pacifi c region, and was a member of the Merrill Lynch Asia Executive Committee. Prior to joining Merrill Lynch in 1997, Mr Tilley was principal and a Managing Partner of Centaurus Corporate Finance Pty Limited and before that a partner at Deloitte Touche Tohmatsu. Mr Tilley is a past member of the Australian Takeovers Panel. Mr Tilley was a Director of the company from 6 November 2003.

Directorships of other listed companies

Mr Tilley is a director of Orica Limited (appointed 10 November 2003).

Tatsuo Tanaka

Non-Executive Director

Mr Tanaka resigned from offi ce on 21 May 2009.

Experience/qualifi cations

Mr Tanaka holds a Bachelor of Arts in Law from Keio University, Japan.

Mr Tanaka is Deputy President and Chief Executive of the Global Business Unit for The Bank of Tokyo-Mitsubishi UFJ, Limited (BTMU), where he has held this position since June 2008. Prior to this, Mr Tanaka held senior executive positions in BTMU. Mr Tanaka was appointed as a Director of the Company on 22 November 2007.

Special responsibilities

Mr Tanaka was a member of the Nomination Committee.

2. Company Secretary

Christopher Robson was appointed to the position of Company Secretary in March 2005. Mr Robson is also the Group General Counsel. He has been qualifi ed as a solicitor for over 20 years, with 16 years experience in the fi nancial services industry.

Suzanne Koeppenkastrop was appointed to the position of Company Secretary in October 2006. Ms Koeppenkastrop is a qualifi ed solicitor and head of the company secretariat team at Challenger. She has over 15 years experience in legal and company secretarial roles in the fi nancial services industry.

3. Company information

The Company was incorporated in Victoria on 6 November 2003 and its shares were admitted to the offi cial list for quotation on the Australian Securities Exchange on 23 December 2003. The registered offi ce of the Company is Level 15, 255 Pitt Street, Sydney NSW 2000.

4. Principal activities

The principal activities of the Group during the year were the provision of fi nancial services.

The Group’s principal activities during the reporting period have remained unchanged; however, as a result of an organisational restructure, the principal activities undertaken by the divisional units have changed. These changes are summarised below.

Revised organisational structure

In November 2008, the Group revised its organisational structure in preparation for the next stage of strategic development. The key changes resulted in:

• the specialised funds component of the Asset Management division merging with the broader Funds Management division, consolidating the Group’s funds management activities; and

• the Australian Prudential Regulation Authority (APRA) regulated Life Company component of the Asset Management division forming its own dedicated division referred to as Life.

As a result of these changes, the Asset Management division ceased to exist.

16

At balance date, the following restructured divisional units were responsible for delivering the Group’s principal activities:

Life

Manages a portfolio of assets delivering long-term guaranteed income streams to annuitants and predictable over-the-cycle returns to shareholders.

Mortgage Management

White label funding provider delivering competitive lending products to branded distributors and distribution through ownership of broker aggregation platforms.

Funds Management

Manufactures and distributes quality investment products for both institutional and retail clients.

The principal activity of the Company is to act as a holding company for the Challenger Financial Services Group.

There have been no other signifi cant changes in the nature of these activities during the year.

5. Operating and fi nancial review

Challenger introduced an enhanced format for reporting its statutory earnings referred to as Normalised Cash Operating Earnings (COE), which is management’s view of the underlying performance of Challenger Life Company Limited (CLC) and of the Group.

COE reports the underlying cash spread earned; that is, the cash yield on investment assets over the costs of funding on the investment assets within CLC, together with the normalised or expected growth in the capital value of those investment assets.

In any given reporting period, the actual investment gains (both realised and unrealised revaluation movements) will vary to the normalised gains. The resulting investment experience net of the expected normalised gains is reported separately, in the COE format below.

As shown in the analysis provided below, the Group reported a normalised profi t after tax result for the year of $218.9 million, up 0.5% ($1.0 million) on the prior year. This result was supported by growth in normalised Earnings Before Interest and Tax (EBIT) of 3.0%. Interest and borrowing costs were $36.9 million (down 10.7%) due to a combination of lower average cost of debt and lower debt levels.

debt and lower debt levels.
Group f nancial summary	2009	2008	Change
Management analysis	$M	$M	%
Income1
Normalised cash operating earnings	250.8	207.9	20.6
Net fee income	318.8	348.1	(8.4)
Other income	9.2	10.7	(14.0)
Net income	578.8	566.7	2.1
Expenses1
Total operatingexpenses	(259.0)	(256.2)	1.1
Normalised EBIT	319.8	310.5	3.0
Interest and borrowing costs	(36.9)	(41.3)	(10.7)
Discontinued operations	–	10.1	(100.0)
Normalised prof t before tax	282.9	279.3	1.3
Tax	(64.0)	(61.4)	4.1
Normalisedprof t after tax	218.9	217.9	0.5
Investment experience after tax	(309.6)	(192.3)	(61.1)
Signif cant items after tax	–	(69.8)	(100.0)
Statutory (loss)/prof t after tax	(90.7)	(44.2)	(105.2)
Normalised EBIT represented by:
Life	227.5	184.8	23.1
Mortgage Management	136.1	100.1	36.0
Funds Management	18.0	68.4	(73.7)
Corporate	(61.8)	(42.9)	44.1
Normalised EBIT	319.8	310.4	3.0

1 ‘Net income’ and ‘Total operating expenses’ differs from ‘Revenue’ and ‘Expense’ as disclosed in the fi nancial report, as certain direct costs including commissions and management fees are netted off against gross revenues in deriving ‘Net income’ above. These direct costs are classifi ed as ‘Expenses’ in the fi nancial report. In addition, the Mortgage Management Special Purpose Vehicle revenues, expenses and fi nance costs disclosed in the fi nancial report are netted off in ‘Net income’ above. These classifi cations have been made in the Directors’ Report disclosure, as it is considered that this presentation more closely refl ects the key value drivers and core operations of the Challenger Group.

17

Directors’ report

The major drivers of the changes in normalised profi t after tax were improvements in the cash spread earnings generated by the Life division as a result of the addition of the AXA portfolio in November 2008 (which drove the uplift in normalised cash operating earnings).

Higher profi ts were seen from Mortgage Management following the addition of Plan Group Holdings (PLAN) during the current period.

Funds Management’s earnings declined for the period as a result of lower fees resulting from lower assets under management.

Corporate expenses increased during the year mainly as a result of non-recurring restructure expenses.

After allowing for the investment experience losses of $309.6 million after tax (2008: $192.3 million) arising from the extreme volatility in global debt and equity markets during the period, the Group’s statutory loss after tax for the year ended 30 June 2009 was $90.7 million (2008: loss after tax of $44.2 million).

As shown in the table below on a normalised basis, basic earnings per share (eps) increased 5.7% to 39.2 cents and diluted eps increased 8.5% to 38.4 cents compared to 2008. Both basic and diluted eps were impacted by the on-market share buy-back undertaken during the year.

undertaken during the year.
	2009	2008
Earnings per share	cents	cents
Basic – normalised	39.2	37.1
Diluted – normalised	38.4	35.4
Basic – statutory	(16.2)	(7.5)
Diluted – statutory	(15.9)	(8.1)

Key events during the year:

In July 2008, the Company announced an on-market share buy-back of up to 10% of the Group’s issued share capital. As at 30 June 2009, 4.9% of the Group’s issued share capital had been purchased, and the Company continues to evaluate opportunities to purchase shares based on market conditions alongside other alternative investment opportunities.

On 25 August 2008, the Group announced that Mr Tilley, the Chief Executive Offi cer and Managing Director, would step down effective 31 August. Mr Tilley has been succeeded by Mr Stevens. Mr Stevens was previously the Deputy Managing Director and has been a key member of the Challenger leadership team over the past fi ve years.

On 30 September 2008, the Group announced that it had acquired the remaining 85% of PLAN (15% was acquired in December 2005), the largest Australasian mortgage aggregator with mortgages under administration of $42 billion as at 31 August 2008. This acquisition confi rmed the continuation of the Group’s strategy in this area.

On 25 November 2008, Challenger Life Company Limited (CLC), formerly Challenger Life No.2 Ltd, received federal court approval for the transfer of the $1.29 billion AXA annuity portfolio. The transfer of this annuity portfolio has contributed to Challenger’s annuity book increasing to $4.6 billion at 30 June 2009, reaffi rming the Group’s leadership position in this sector.

CLC acquired further units in the Challenger Diversifi ed Property Group (CDI) listed fund during the period and it was determined that the Group had achieved control over CDI, resulting in the consolidation of CDI into the Group at 31 December 2008.

The Funds Management division continued its expansion into the boutique area and signed up two new boutique fund managers: Wavestone Capital Pty Limited, an established Australian Equities absolute return manager, and Ardea Investment Management Pty Limited, a new fi xed income manager.

6. Likely developments and expected results

Further information about likely developments in the operations of the Group and the expected results of those operations in future fi nancial years have not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group.

Other than as disclosed in Note 11 of this Directors’ report, as at the date of this report no other matter or circumstance has arisen that has affected or may signifi cantly affect:

• the Group’s operations in future fi nancial years; or

• the results of those operations in future fi nancial years; or

• the Group’s state of affairs in future fi nancial years.

18

7. Signifi cant changes in the state of affairs

There were no signifi cant changes to the state of affairs of the Group during the year ended 30 June 2009, other than as outlined in Note 4 above.

8. Environmental regulation and performance

The Group acts as a trustee or responsible entity for a number of trusts, which own assets both in Australia and overseas. These assets are subject to environmental regulations under both Commonwealth and State legislation. The Directors are satisfi ed that adequate systems are in place for the management of its environmental responsibilities and compliance with various legislative, regulatory and licence requirements. Further, the Directors are not aware of any breaches of these requirements and to the best of their knowledge all activities have been undertaken in compliance with environmental requirements.

9. Dividends

On 21 August 2009, the Directors of the Company declared a fi nal dividend on ordinary shares in respect of the year ended 30 June 2009. The amount of the fi nal dividend is $44.7 million, which represents a dividend of 7.5 cents per share (2008: 7.5 cents per share) from current year profi ts and will be unfranked (2008: 60% franked).

The dividend has not been provided for in the 30 June 2009 fi nancial statements. The fi nal dividend is payable on 16 October 2009.

On 13 February 2009, the Directors of the Company declared an interim dividend on ordinary shares. The amount of the dividend was $29.6 million which represented an unfranked dividend of 5.0 cents per share. This dividend was paid on 17 April 2009.

On 22 August 2008, the Directors of the Company declared a fi nal dividend on ordinary shares in respect of the year ended 30 June 2008. The amount of the dividend was $47.4 million, which represented a fully franked dividend of 7.5 cents per share. This dividend was paid on 17 October 2008.

In accordance with its Constitution, and where permitted under relevant legislation or regulation, the Company indemnifi es the Directors and offi cers against all liabilities to another person that may arise from their position as Directors or offi cers of the Company and its subsidiaries, except where the liability arises out of conduct involving lack of good faith, wilful misconduct, gross negligence, reckless misbehaviour or fraud.

In accordance with the provisions of the Corporations Act 2001, the Company has insured the Directors and offi cers against liabilities incurred in their role as Directors and offi cers of the Company and its subsidiaries. The terms of the insurance policy, including the premium, are subject to confi dentiality clauses and the Company is prohibited from disclosing the nature of the liabilities covered and the premium. The Company has not given or agreed to give any indemnity to an auditor of the Group and has not paid any premium for insurance against that auditor’s liabilities for legal costs.

11. Signifi cant events after the balance date

The Group announced the sale of its Mortgage Management division on 18 August 2009 to National Australia Bank Limited (NAB). Under the terms of the sale, NAB will acquire the Mortgage Distribution and Multi Brand Lending businesses, along with approximately $4 billion of residential mortgages held in warehouses for a consideration of $385 million. The transaction is subject to regulatory approvals and is not expected to close before 31 October 2009.

The sale to NAB includes the mortgage aggregation businesses of Plan, Fast and Choice, the multi branded mortgage origination business, approximately $4 billion of residential mortgages held in warehouses and the Group’s 41% stake in the listed mortgage origination company, Homeloans Limited (subject to Homeloans Limited shareholder approval).

The entitlement to the residual income units (RIUs) of the remaining residential mortgage loan special purpose vehicles (SPVs) not sold to NAB (backed by approximately $11 billion of mortgages) was transferred from the Mortgage Management division to Challenger Life Company Limited (CLC) within the Life division on 1 August 2009. The transfer was completed on arm’s length, commercial terms for $575 million. The consideration paid refl ects a value excluding any obligation for future trail commissions and amortisation of prior year acquisition costs pertaining to the loan portfolio. Although no change to the net asset position of the Group has arisen, the transfer was cash settled and so has increased the Group’s fi nancial fl exibility since balance date.

The proceeds from the sale of the Mortgage Management division and from the cash settlement of the RIUs transferred to CLC will be used to retire the Group’s major debt facilities/borrowings consisting of the Medium Term Note, Corporate Net Interest Margin Bond and Corporate bank facility as outlined in Note 19 to the fi nancial statements.

19

Directors’ report

The Group’s controlled entity, Challenger Diversifi ed Property Group (CDI), announced a $130 million capital raising on 6 August 2009 with a 4 for 7 pro-rata entitlement offer to eligible unitholders of CDI. As a major shareholder, CLC has subscribed for its entitlement under the offer and the Group has also agreed to sub-underwrite the offer. The Group owned approximately 44.3% of the CDI units on issue prior to the offer being announced.

Following these transactions, Challenger will be focusing purely on the signifi cant opportunities that exist within the investment management activities of its Life and Funds Management businesses.

Other than the matters reported above, no other matter or circumstance has arisen since 30 June 2009 that has signifi cantly affected, or may signifi cantly affect:

(a) the Group’s operations in future fi nancial years; or

• (b) the results of those operations in future fi nancial years; or

• (c) the Group’s state of affairs in future fi nancial years.

12. Remuneration report

This remuneration report describes the Director and executive remuneration arrangements of the Company and the Group as required by the Corporations Act 2001 and its Regulations. For the purposes of this report, Key Management Personnel (Directors and key executives) of the Group are defi ned as the fi ve highest remunerated executives in the parent and the Group who have authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any Director (whether executive or otherwise) of the parent company.

This remuneration report also includes a substantial body of information in addition to these statutory requirements which the Board believes will assist stakeholders in better understanding the Company’s remuneration arrangements and in particular how individual reward outcomes are linked to the delivery of sustainable shareholder wealth creation.

The sections of the report are:

Section 1:

The Company’s executive remuneration policy and framework and specifi c arrangements applicable to the key executives of the Group. The Company’s fi nancial performance is incorporated to provide context to the remuneration approach.

Section 2:

Key executives’ contractual arrangements and remuneration disclosure tables, including information on actual cash and shortterm incentives, as well as long-term incentives vested throughout the period.

Section 3:

Non-Executive Directors’ remuneration.

This report has been prepared and audited in accordance with the requirements under Section 300A of the Corporations Act 2001.

Signifi cant items of note

CEO and key executives

On 1 September 2008, Dominic Stevens (formerly Deputy Managing Director) was appointed CEO. Following his appointment, Mr Stevens consolidated his management team to ensure that the most suitable key executives were in roles to drive the business forward. Full details of these roles and remuneration details can be found in Section 2 of this remuneration report.

No salary package increases for key executives

In view of the severe economic downturn and its impact on current and near-term fi nancial performance, the Company has taken steps to restrain expenses. Consistent with this action, no salary package increases for the CEO and key executives will be paid arising from the September 2009 remuneration review.

No cash bonuses for key executives in 2009

No cash bonuses will be paid to key executives in respect of the 2009 year. Despite the strong normalised performance produced by the Company, in recognition of adverse market conditions and to align key executives with shareholders, bonuses earned in respect of 2009 will be fully deferred into performance rights that will only vest after the satisfaction of future employment conditions. Shareholder alignment is achieved as the value of the deferred performance rights have exposure to the future Challenger share price.

20

Capped performance rights

To supplement the long-term incentive component of key executives’ remuneration, in December 2008 Challenger issued capped performance rights to a select number of executives. In line with emerging regulatory guidelines, this new grant was introduced as a means of moderating executive risk-taking associated with incentive reward programs.

Board changes

On 21 May 2009 Mr Tatsuo Tanaka resigned from the Challenger Board. Mr Tanaka was replaced by Mr Tetsuya Wada.

Non-Executive Director fee pool

No increase to the Non-Executive Director fee pool will be sought for 2009. Full details of the remuneration arrangements paid to the Non-Executive Directors are in Section 3.

1. Executive remuneration

The CEO and key executives whose remuneration is detailed in this report are:

		Date role
Name	Current role	change effective	Former role
Dominic Stevens	CEO and Managing Director	1 September 2008	Deputy Managing Director
Rob Adams	Joint Chief Executive, Funds Management	11 November 2008	Chief Executive,
			Funds Management
Brian Benari	Group Chief Financial Off cer/	11 November 2008	Chief Executive,
	Chief Operating Off cer		Mortgage Management
Drew Hall	Chief Executive, Mortgage Management	11 November 2008	Chief Financial Off cer,
			Mortgage Management
Richard Howes	Chief Executive, Life	11 November 2008	Principal Executive Off cer,
			Challenger Life Company
Paul Rogan	Executive General Manager,	11 November 2008	Group Chief Financial Off cer
	Capital Risk and Strategy
Robert Woods	Joint Chief Executive, Funds Management	11 November 2008	Chief Executive,
			Asset Management

With the exception of Mr Hall, who became a key executive when he became Chief Executive, Mortgage Management, all other individuals have been key executives from the beginning of the reporting period.

Remuneration policy

Our remuneration policy for executives aims to deliver superior levels of performance. We aim to retain those key executives critical to the delivery of sustainable growth in our results and align their remuneration with shareholder value delivered. To allow appropriate consideration of the fi nancial markets in which we operate, it is also critical that we have reasonable remuneration policy fl exibility. This means that in years such as the one just past, the Board is able to determine executive reward, balancing the view of the markets in which we operate with the prospective value of the individual.

The Board takes its responsibility around remuneration policy seriously and has engaged PricewaterhouseCoopers on specifi c remuneration projects throughout fi scal year 2009. We have also recently engaged Guerdon Associates to review our current remuneration structure and to advise on the development of policies and practices that encourages appropriate risk management, support the business strategy and respond to the regulatory and governance initiatives emerging from global remuneration reform.

Our ongoing policy will be to:

• attract and retain suitably qualifi ed individuals to our executive roles, sourced either internally or externally;

• align executive remuneration outcomes with the Company’s capacity to pay and the returns delivered to shareholders;

• differentiate remuneration on the basis of performance (considering both short-term and long-term business/fi nancial outcomes in line with Challenger’s principles);

• ensure that there is an equitable distribution of the reward between investors who risk capital and executives who put capital to work;

• ensure that our remuneration structures are commensurate with those of competitors and suffi ciently fl exible to maintain parity in a constantly changing environment; and

• provide all employees with the opportunity to acquire shares to support Challenger’s ‘commercial ownership’ principle.

21

Directors’ report

Relationship of incentives to the Group’s fi nancial performance

Normalised profi t is our key measure of performance because it removes the volatility of investment market movements. Additionally, normalised results more accurately refl ect the underlying performance and cash generation within Challenger.

In assessing the Company’s capacity to pay and the establishment of a short-term incentive pool, the Board references underlying fi nancial measures such as normalised net profi t after tax (NPAT) and return on net assets (RONA) in deriving the overall pool. However, the Board also considers it relevant to take into consideration statutory NPAT along with related market conditions in effect throughout the year. Refer to the table and graph below for a summary of the growth trend in normalised and statutory NPAT.

and statutory NPAT.
	30 June	30 June	30 June	30 June	30 June
	2005	2006	2007	2008	2009
Normalised net prof t after tax ($m)1,2	85.0	117.5	182.0	217.9	218.9
Normalised basic earnings per share (cents)1,2	15.9	20.0	33.0	37.1	39.2
Statutory net prof t/(loss) after tax ($m)	119.6	134.3	255.0	(44.2)	(90.7)
Closing share price ($)	3.12	3.16	5.83	1.89	2.24
Dividends per share (cents)	5.0	7.5	12.5	12.5	12.5
3-year TSR (%)	n/a	18	141	(38)	(39)

1 Normalised net profi t is defi ned in Note 5 of the Directors’ Report.

2 Normalised numbers for 2005 and 2006 are on a historic cost basis.

In making long-term incentive grants, the Board aims to incorporate performance measures which are within the control of executives, but which are also suffi ciently challenging to ensure alignment with the generation of shareholder value. Measures used over time have included relative and absolute total shareholder return (TSR), earnings per share (EPS) and normalised net profi t after tax.

Growing normalised NPAT

==> picture [393 x 219] intentionally omitted <==

----- Start of picture text -----

150 25
20
100
15
10
50
5
0 0
1H05 2H05 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09
–5
–50
–10
–15
–100
Normalised NPAT (LHS) –20
Statutory NPAT (LHS)
Normalised EPS (RHS)
–150 –25
$m cps
----- End of picture text -----

Note: 1H05–2H06 normalised NPAT and EPS – historic cost basis.

22

Remuneration framework

The remuneration framework underpinning our remuneration policy has three major components:

• (1) Salary package, comprising fi xed cash salary and compulsory superannuation;

• (2) Short-term incentives which are delivered via the Employee Incentive Plan (EIP), incorporating a deferral component that provides for a portion of the reward to be delivered in the form of performance rights that vest over a further period (typically over two years), subject to continued employment; and

• (3) Long-term Incentives (LTIs) utilising the Challenger Performance Plan (CPP) that provides for the award of either options or performance rights.

Salary package

Salary packages are reviewed annually, although not necessarily increased each year. Salary package is determined by the scope of the executive’s role, their level of knowledge, skills and experience, having regard to performance and market benchmarking against a peer group of companies comprising banking and fi nancial services companies. The company aims to position the salary package around the median of the external market for comparable roles.

Executives have the opportunity to salary sacrifi ce amounts from their salary package towards the cost of certain benefi ts inclusive of any associated fringe benefi ts tax.

At the time of the CEO appointment in September 2008 and then as a part of the management team consolidation in late 2008, salary packages of all key executives were reviewed and amended to refl ect market relevant levels having regard to role responsibilities.

Short-term incentives

The EIP pool comprises:

• cash payments: Payments are made to reward employees and executives who have made a signifi cant contribution over the course of the year;

• performance rights: Compulsory deferral into performance rights (granted under the Challenger Performance Plan) in order to support retention and ensure alignment with shareholders. Refer to the long-term incentives section for further details on performance rights; and

• Challenger shares: Challenger offers $1,000 of tax exempt shares to employees with two years of service as at 1 July each year. Whilst remaining employed with Challenger, employees must hold these shares for a minimum of three years, therefore ensuring that all employees in Challenger have the opportunity to acquire Challenger shares.

• (i) Eligibility

• All executives, full-time and permanent part-time employees who commenced employment prior to 1 April in the fi nancial year are eligible to participate in the EIP. The eligibility criteria ensure we capture all employees who are in a position to make a contribution to the performance of the Company.

Challenger has a robust performance management system, and in line with the performance focus of the plan, employees who do not attain a minimum rating are not eligible for a bonus.

Consistent with good governance requirements, no Board members (apart from the CEO) are eligible to receive an EIP bonus. An EIP bonus is provided entirely at the discretion of the Board and may be subject to amendment or withdrawal in respect of any future fi nancial year. Participation is not a contractual right.

(ii) Pool calculation

• The Board calculates the EIP pool for the Company based on total profi tability of the Group (normalised NPAT and RONA) considering factors such as:

• overall Company performance relative to peers (including fi nancial and strategic non-fi nancial measures);

• quality of fi nancial results as shown by composition and consistency and future growth implications;

• organisational capacity to pay; and

• the impact of external factors beyond management control.

(iii) Performance measure

Individual allocations from the EIP pool are determined by reference to an individual’s contribution and achievement against objectives, as well as their behaviours in line with the Challenger principles as assessed in the Company’s annual Performance Review.

Challenger’s principles are creative customer solutions, compliance, working together, integrity, and commercial ownership.

23

Directors’ report

(iv) Market comparison

EIP awards are discretionary and are made having regard to Company performance and business line performance, as well as individuals’ performances as measured and refl ected in outcomes and behaviours. In addition, market data of relevant competitor organisations are sought so as to ensure that total remuneration and the mix of component parts is appropriate. The Company aims to position total cash (salary package plus EIP) at the median of the market for individuals who meet their annual objectives through to the upper quartile for those that signifi cantly exceed their objectives.

(v) Performance period and compulsory deferral

The performance period is one year and is aligned to the fi nancial year of the Company. However, as part of the reward strategy introduced in 2007, 50% of EIP amounts greater than $100,000 are compulsorily deferred into performance rights, with the balance in cash. For 2008 and 2009 EIP amounts, the deferral period was up to two years. Deferring EIP awards over this period provides a link between the short and long-term incentives.

(vi) Calibration

The Company undertakes a formal ranking process as part of its performance management cycle to ensure that those who have outperformed against their agreed objectives are recognised with the appropriate performance rating and subsequently rewarded through their EIP award.

(vii) Payment

EIP payments and notifi cations are generally made in September of each year. Payments are forfeited if an employee ceases employment or provides notice of termination on or before the date of payment.

No cash bonuses will be paid to key executives in September 2009. In recognition of adverse market conditions and to further strengthen alignment of executives with shareholders, any EIP payments awarded for 2009 will be 100% deferred into performance rights. The number of performance rights is determined by dividing the compulsorily deferred EIP amount by the allocation price. The allocation price is the volume weighted average price (VWAP) of Challenger shares on the Australian Securities Exchange over the fi ve days up to and including the date they were offered.

Long-term incentives

The LTI awards are typically delivered in the form of options with performance rights utilised for the deferral of short-term bonuses and other retention arrangements. Key features of the CPP are outlined in the table below.

	Options Performance rights
Instrument	Options over shares with the exercise price set at the prevailing market price of shares at the time of the grant. Performance rights, providing fully paid shares after the satisfaction of an employment vesting condition (and in the case of capped performance rights, a share price performance condition).
	The two-tiered approach provides optimal f exibility and allows the selection of the equity based reward instrument suited to the particular needs of the circumstances and the individual.
Eligibility	Options are granted to executives whose responsibilities provide them with the opportunity to signif cantly inf uence long-term shareholder value. Performance rights may be used as retention awards for employees who are in positions that are ‘business critical’, those who have unique specialised skills that are diff cult to source in the market, or to consistently high performing employees. They may also be used as a negotiated ‘sign-on’ for new employees to replace equity forfeited with their former employers.
Performance hurdle	Options have either an EPS, TSR or normalised NPAT performance hurdle. The Board considers the appropriateness of the performance hurdle at each issuance (with a view to ongoing consistency but also market conditions and relevance of the measure at the time). The use of options that vest subject to achieving a performance hurdle directly aligns the interests of key executives with those of shareholders. The CPP provides the Board with f exibility around the form of the performance hurdle it attaches to particular grants of options to ensure that there is appropriate alignment between shareholders and executives in the Board’s assessment at the time of grant. Only an employment based hurdle applies, given their intended purpose of: (1) retention; (2) sign-on in limited circumstances and sustained performance over time, which should be ref ected in share price movement.

24

	Options Performance rights
Performance period	The CPP provides the Board with f exibility when determining the vesting period to ensure that the timeframe is appropriate in the context of: (1) the performance hurdle that also attaches to the award; (2) the strategic activities/direction of the organisation; and (3) the markets in which we operate. With options, the performance period is typically over three years. Performance rights issued as retention grants vary in vesting periods.
Vesting	Options must generally be exercised within 90 days of vesting. Performance rights are converted to ordinary shares upon vesting and may remain in the CPP until the 10th anniversary of the date of grant (may be subject to change once government legislation is f nalised) or until an earlier request for release of the shares or the employee’s separation from employment.
Forfeiture/ lapse	Options will lapse where a participant ceases employment before the options vest due to resignation or dismissal, unless the Board determines otherwise. Options (whether vested or unvested) will lapse where an executive acts fraudulently or dishonestly or where a participant is in material breach of their obligations under the CPP or to the Company, unless the Board determines otherwise. If a participant’s role becomes redundant, Board discretion will apply. Options lapse immediately at the end of the vesting period if the performance hurdle has not been achieved. Generally, performance rights will lapse where a participant ceases employment before the vesting date due to resignation or dismissal, unless the Board determines otherwise. Performance rights (whether vested or unvested) will lapse where a participant acts fraudulently or dishonestly or where a participant is in material breach of their obligations under the CPP or to the Company, unless the Board determines otherwise. If a participant’s role becomes redundant, Board discretion will apply.
	These redundancy practices are consistent with accepted market standards, the performance basis of the CPP, and the need for fair and reasonable treatment of CPP participants who do not remain in employment for the duration of the performance period through circumstances beyond their control.
Acquisition of shares	The LTI scheme is administered by the CPP Trust. The Trust may buy shares on market to meet obligations arising from the vesting of options or performance rights under the CPP.
Change in control provisions	In the event of a change in control, the Board has sole and absolute discretion to determine the manner in which options and performance rights will be dealt with consistent with common market practice and governance expectations. Flexibility and discretion are necessary to deal with varied circumstances.
Hedging	The current Challenger policy prohibits any staff member from trading in derivatives in respect of unvested Challenger shares. This ensures that the value of unvested securities cannot be protected and that the delivery of reward from incentives remains linked to performance.
Margin loans	Challenger prohibits margin lending over Challenger shares. The use of margin loans by executives and Directors to acquire Challenger shares places them in a position of potential vulnerability to margin calls that can present risks of insider trading and perceptions of Company instability.

New LTI initiative during the 2009 year: capped performance rights

In December 2008 Challenger issued capped performance rights to a select number of executives.

This scheme was introduced as a retention mechanism, with a cap put into place to moderate the risk-taking behaviour that might otherwise be encouraged by incentive plans that offer ‘all or nothing’ outcomes. This is refl ective of the approaches advocated within emerging governance and regulatory initiatives. In addition, the design of the scheme minimised dilution of shareholders by not having unlimited upside for participants.

25

Directors’ report

The capped performance rights vest subject to the achievement of certain service and performance conditions. The conditions are employment with Challenger at the time of vesting and a share price performance condition.

If the fi ve-day VWAP of Challenger at the testing date of 15 September 2010 is less than $1.50, there is no benefi t to the employees. If the fi ve-day VWAP is $3.50 or greater, the employee receives 100% of the benefi t. There is a pro-rata award of the benefi t between $1.50 and $3.50. The benefi t is a dollar amount called maximum value. The share price performance condition is used to determine the percentage of the maximum value employees will receive. The employees ultimately receive shares in Challenger to the value of the percentage of maximum value achieved.

For example, assume that an executive was awarded a maximum value of $100,000 worth of capped performance rights on 22 December 2008. If the fi ve-day VWAP of Challenger shares up to and including 15 September 2010 was equal to $3.50 and the executive was employed with Challenger on this date, they would be allocated their maximum value of $100,000 worth of Challenger shares, this being 28,571 Challenger shares ($100,000 divided by $3.50).

Other incentive arrangements

Deferred Loan Plan

A small number of executives had outstanding future commitments under the Long-term Incentive Plan (LTIP) at the time it was suspended in December 2006 (refer to ‘Former Plans’ below).

To replace those commitments, an arrangement was entered into with a third party investment bank to provide the individuals with a loan over a similar number of Challenger shares as their prior LTIP commitment. This arrangement is known as the Deferred Loan Plan.

Challenger is responsible for meeting the interest payable on the loan over its term, net of any dividends paid on the shares. Shares vest progressively over four years, commencing at the end of year two, subject to continued employment with Challenger. Shares are forfeited and the arrangement unwound in the event that the employment condition is not satisfi ed. In certain special circumstances (such as death, total and permanent disablement and redundancy), individuals may be entitled to retain their unvested shares if they fully discharge the outstanding loan amount.

The loans are limited in their recourse to Challenger, and the Challenger Performance Plan Trust has the option of taking ownership of the shares and using them to satisfy other share awards in the event of forfeiture by the executive.

Other short-term employee benefi ts: third party loan facilities

Challenger has agreed to pay interest on loans taken out by certain key executives to acquire Challenger shares on market. The loans are fully secured against the underlying shares and are not margin loans. Challenger has no exposure in relation to the loan principal advanced to the key executives by the third party. In the Board’s view, this arrangement, when considered with the key executive’s other LTI arrangements, provides signifi cant alignment with shareholders’ interests.

Former plans

(a) Long-term Incentive Plan

With the introduction of the new reward strategy in 2007, the former Long-term Incentive Plan (LTIP) was suspended in December 2006.

The LTIP was a share scheme provided by way of a limited recourse loan with shares vesting and being released over a 5 year period, subject to the achievement of a 15% compound total shareholder return (TSR) performance hurdle. Participants paid an amount of interest on their loan equal to any dividends payable on their LTIP shares.

The performance hurdle on unvested components of awards is retested after each year from the date of grant. The Plan allows for retesting because the impacts of long-term decision making may not be refl ected within the prior period and relative performance in the subsequent years would need to be signifi cant to make up for any underperformance over the prior test periods.

Except as modifi ed by the Board in its discretion, shares that remain unvested as at the sixth anniversary of the date of grant lapse and will either be sold by the Custodian to reduce any outstanding loan, bought back under the LTIP or cancelled, subject to compliance with the law. The LTIP was approved by shareholders at the Annual General Meeting on 22 December 2003 and a more detailed description can be found in the 2006 and 2007 Annual Reports.

(b) Cash LTIP

Prior to corporatisation, certain employees were entitled to incentive payments under a cash based shadow scheme whereby they receive cash payments capped between 3 cents and 13 cents per (pre consolidation) share granted.

The vesting schedule mirrors that of the LTIP, with unpaid entitlements forfeited upon resignation.

26

Changes to the LTIP and Cash LTIP

As disclosed in last year’s annual report, following substantial decline in the Challenger share price in the quarter following November 2007, which in the Board’s view was not a refl ection of the underlying performance of the Group, on 3 April 2008

The extension was for key continuing employees with reference dates of 10 April 2003 (and hence a fi nal test date of 10 April 2008). In July 2008, this was extended to two other groups of key continuing employees, who were on a short time lag to the original group, with reference dates of 1 August 2003 (with a fi nal test date of 1 August 2008) and 1 December 2003 (with a fi nal test date of 1 December 2008).

The one-off extension for all of these related groups was to 30 November 2009.

This extended test date only applies to the fi nal tranche (5.72 million shares) of the awards, as previous tranches had vested. The cost of this extension was 32 cents per share for the August 2008 group and 6 cents per share for the December 2008 group. The total cost of $1.5 million is being expensed over the revised time to maturity. At the time of the fi nal change on 1 December 2008, the Challenger share price was $1.30.

The original performance conditions remain in place and therefore a substantial recovery in Challenger’s share price before 30 November 2009 will be required for the performance condition to be satisfi ed and the fi nal tranches to vest. Challenger will not be extending the vesting period of any other LTIP awards.

The Board believes that the exceptional conditions infl uencing the Challenger share price warranted the above change. These elements of remuneration will be fi nalised by 30 November 2009, being the fi nal performance test date.

2. Key executives

CEO remuneration

The Remuneration Committee is responsible for reviewing the remuneration of the CEO, which must be approved by the full Board.

Under the terms of his appointment as CEO, Mr Stevens is entitled to:

• a salary package (base salary and superannuation) of $1,000,000 per annum; and

• an annual short-term incentive subject to achieving qualitative and quantitative hurdles set by the Board.

At the Annual General Meeting held on 20 November 2008, shareholders approved an award of options to Mr Stevens under the Challenger Performance Plan. Mr Stevens was awarded 5,500,000 options with an exercise price of $2.36.

If Challenger terminates Mr Stevens’ Service Agreement (other than for cause), Mr Stevens will be entitled to a payment of $1,500,000 (Termination Payment). The Termination Payment is in addition to accrued statutory entitlements.

If Mr Stevens’ employment is terminated for cause, all unvested performance rights and all unvested options will lapse at the termination date.

If his employment terminates for any other reason (including resignation with Board approval):

• unvested performance rights will vest in full at the termination date (Accelerated Vesting Entitlement); and

• unvested options will continue to be held by Mr Stevens in accordance with, and subject to, the terms relating to the original issue (Retained Option Arrangement).

Mr Stevens may terminate his Service Agreement by giving 26 weeks notice, in which event he will receive accrued statutory and contractual entitlements, but he will not be entitled to any Termination Payment (unless Challenger makes a payment in lieu of notice).

Mr Stevens will not be entitled to any short-term incentive payment in these circumstances (unless his resignation is with Board approval).

Key executives (excluding CEO)

The notice period by the Company and the key executive is 26 weeks (unless terminated for cause).

Upon termination, if the key executive is considered a good leaver (for example, because of cessation of employment due to redundancy), the key executive will be entitled to:

• retain vested LTIP from awards made to them other than as initial participants;

• a pro rata short-term incentive payment; and

• any deferred short-term incentive amounts (subject to Board discretion).

Board discretion will also apply in relation to awards under the CPP.

27

Directors’ report

Remuneration of the CEO and other key executives for the years ended 30 June 2009 and 30 June 2008 The following table (Table 1A) provides a breakdown of the CEO and other key executives’ remuneration. The Board is aware that these disclosures are quite complex, particularly in terms of the accounting requirements of LTI schemes. We have therefore provided an additional table (Table 1B) which depicts:

• salary packages received during the year to 30 June;

• other cash received during the year; and

• net value of share based payments vested during the period (including LTIP and performance rights).

Table 1A: Statutory reporting table: Remuneration of the CEO and other key executives for the years ended 30 June 2009 and 30 June 2008.

				Post	Other
		Short-term		employment	long-term	Termination
Executive	Year	benef ts		benef ts	benef ts	payment	Subtotal
				Super-
		Salary1	STI2	annuation
		$	$	$	$	$	$
Dominic Stevens	2009	919,588	–	13,745	–	–	933,333
	2008	586,871	1,000,000	13,129	–	–	1,600,000
Rob Adams	2009	636,255	–	13,745	–	–	650,000
	2008	586,871	300,000	13,129	–	–	900,000
Brian Benari	2009	636,255	–	13,745	–	–	650,000
	2008	586,871	1,000,000	13,129	–	–	1,600,000
Richard Howes	2009	552,922	–	13,745	–	–	566,667
	2008	386,871	525,000	13,129	–	–	925,000
Paul Rogan	2009	636,255	–	13,745	–	–	650,000
	2008	586,871	400,000	13,129	–	–	1,000,000
Robert Woods	2009	636,255	–	13,745	–	–	650,000
	2008	586,871	525,000	13,129	–	–	1,125,000
Drew Hall3	2009	371,149	–	8,018	–	–	379,167
Mike Tilley4	2009	247,912	–	2,291	–	1,750,000	2,000,203
	2008	1,486,871	2,000,000	13,129	250,000	–	3,750,000

• 1 Salary increases as a result of promotion, increased responsibility.

2 No STI in the form of cash has been awarded to the CEO and key executives for 2009.

• 3 Mr Hall became a key executive on 11 November 2008, when he became Chief Executive, Mortgage Management. Disclosures are therefore from that date. Prior to that date he was the Chief Financial Offi cer for Mortgage Management.

4 Mr Tilley ceased to be Group CEO on 31 August 2008. Remuneration disclosed is for the period from 1 July 2008 to that date.

28

Executive	Year	Share based payments	Share based payments	Share based payments		Total
		Equity	Equity	Cash	Other7
		settled	settled	settled
		shares	options	shares
		and units5	and rights5	and units6	$	$
Dominic Stevens	2009	499,209	2,027,704	(330,000)	848,102	3,978,348
	2008	191,118	943,562	165,000	625,000	3,524,680
Rob Adams	2009	327,731	673,717	(650,000)	–	1,001,448
	2008	180,132	384,215	325,000	–	1,789,347
Brian Benari	2009	138,664	2,012,254	(650,000)	848,102	2,999,020
	2008	157,475	868,009	–	625,000	3,250,484
Richard Howes	2009	270,603	1,796,362	(120,000)	848,102	3,361,734
	2008	204,402	1,094,660	60,000	625,000	2,909,062
Paul Rogan8	2009	1,219,916	771,905	–	324,741	2,966,562
	2008	1,062,001	276,845	–	308,747	2,647,593
Robert Woods	2009	120,872	1,863,458	–	848,102	3,482,432
	2008	181,170	1,189,096	–	625,000	3,120,266
Drew Hall	2009	15,153	329,387	–	–	723,707
Mike Tilley9	2009	74,133	(1,121,380)	–	387,366	1,340,322
	2008	567,078	1,979,778	–	1,811,936	8,108,792

5 The value of the equity settled shares and units and equity settled options and rights is calculated on the basis outlined in Note 1 (xxix) and refl ects the fair value of the benefi t derived at the date at which they were granted. The fair value is determined using an option pricing model. As the majority of Challenger’s equity settled share-based payment rewards are subject to share price based performance hurdles (eg TSR of Challenger), no adjustment to the fair value after grant date is allowed to be made under the Accounting Standards for the likelihood of the market performance conditions not being met. Therefore, the value of the reward included in the table may not necessarily have been vested to the key executives during the year.

6 Performance hurdles for the cash settled shares and rights are not expected to be achieved and therefore the shares and units are not expected to vest. The related expense previously recognised for these grants has been reversed in the current fi nancial year.

7 Relates to the interest amounts accrued in the year on the loan taken out by individuals to acquire Challenger shares.

8 For Mr Rogan, the Other amount relates to the interest amounts accrued in relation to his participation in the Deferred Loan Plan.

9 Mr Tilley’s share based payments represent a reversal of the accruals for his options that were forfeited upon termination.

29

Directors’ report

Table 1B: Remuneration of the CEO and other key executives for the years ended 30 June 2009 and 30 June 2008 – cash accounting basis.

					Post				Share	Total
			Short-term		employment			Total	based	compen-
Executive	Year		benef ts		benef ts			Cash1	payments	sation3
									Realised
				Cash		Other			or
				settled		long-			instrinsic
				shares	Super-	term	Termination		value at
		Salary	STI	and units	annuation	benef ts	payment		30 June2
		$	$	$	$	$	$	$	$	$
Dominic	2009	919,588	–	–	13,745	–	–	933,333	185,147	1,118,481
Stevens	2008	586,871	1,000,000	165,000	13,129	–	–	1,765,000	–	1,765,000
Rob	2009	636,255	–	–	13,745	–	–	650,000	67,081	717,081
Adams	2008	586,871	300,000	325,000	13,129	–	–	1,225,000	924,000	2,149,000
Brian	2009	636,255	–	–	13,745	–	–	650,000	163,679	813,676
Benari	2008	586,871	1,000,000	–	13,129	–	–	1,600,000	–	1,600,000
Richard	2009	552,922	–	–	13,745	–	–	566,667	228,079	794,745
Howes	2008	386,871	525,000	60,000	13,129	–	–	985,000	600,000	1,585,000
Paul	2009	636,255	–	–	13,745	–	–	650,000	75,132	725,132
Rogan	2008	586,871	400,000	–	13,129	–	–	1,000,000	–	1,000,000
Robert	2009	636,255	–	–	13,745	–	–	650,000	254,912	904,912
Woods	2008	586,871	525,000	–	13,129	–	–	1,125,000	–	1,125,000
Drew	2009	371,149	–	–	8,018	–	–	379,167	13,415	392,582
Hall4
Mike	2009	247,912	–	–	2,291	–	1,750,000	2,000,203	201,246	2,201,449
Tilley5	2008	1,486,871	2,000,000	–	13,129	250,000	–	3,750,000	–	3,750,000

1 Refers to actual cash and superannuation received by a key executive in a fi nancial year.

2 Represents the net value of share based payments vested during the period (including LTIP and performance rights). The value is either the realised proceeds net of the exercise price, or if not sold during the period, the 30 June value net of the exercise price. If net value is negative, nil is disclosed.

3 Total compensation includes equity that was vested but not necessarily exercised by an executive.

4 Mr Hall became a key executive on 11 November 2008, when he became Chief Executive, Mortgage Management. Disclosures are therefore from that date. Prior to that date, he was the Chief Financial Offi cer for Mortgage Management.

5 Mr Tilley ceased to be Group CEO on 31 August 2008. Remuneration disclosed is for the period from 1 July 2008 to that date.

Terms and conditions of equity allocations for the year ended 30 June 2009

Challenger granted a mix of performance rights and options to key executives during 2009. The mix of performance rights and options ensures that key executives make sound decisions, driving shareholder value and Company performance. As options have an in-built share price hurdle, they are designed to motivate sustainable share price growth. Whilst performance rights don’t have a performance hurdle, participants realise the same growth as shareholders, therefore sustainability of share price growth remains a key driver.

Terms and conditions of performance rights

Performance rights have employment based vesting only. There is no other performance condition, because grants of performance rights have been either for compulsory deferred EIP awards, representing reward for past performance and/or as a retention mechanism. The alignment of employer and shareholder/company interests is strong, however, as the future sustainable growth of Challenger’s share price remains relevant, given that participants realise the actual share price at the time of vesting, not the price at grant.

30

The following tables detail performance rights awards made under the Challenger Performance Plan (CPP). (i) Performance rights granted for the year ended 30 June 2009:

					Vesting		Vesting
				15	Sep 2009	15	Sep 2010
	Compulsory		CPP		Fair		Fair
	deferral from	Allocation	rights		value		value
	2008 EIP	price	granted Grant		at grant		at grant
Executive	$	$	Number date	Number	$	Number	$
D Stevens	1,600,000	2.819	567,555 15 Sep 2008	283,778	2.52	283,777	2.39
R Adams	300,000	2.819	106,416 15 Sep 2008	53,208	2.52	53,208	2.39
B Benari	1,600,000	2.819	567,555 15 Sep 2008	283,778	2.52	283,777	2.39
D Hall	200,000	2.819	70,944 15 Sep 2008	35,472	2.52	35,472	2.39
R Howes	875,000	2.819	310,382 15 Sep 2008	155,191	2.52	155,191	2.39
P Rogan	600,000	2.819	212,832 15 Sep 2008	106,416	2.52	106,416	2.39
R Woods	875,000	2.819	310,382 15 Sep 2008	155,191	2.52	155,191	2.39

(ii) Capped performance rights granted during the 2009 fi nancial year:

				Vesting
				15 Sep 2010
	CPP maximum	Allocation		Fair value
	rights granted	price	Grant	at grant
Executive	Number	$	date	$
R Adams	285,714	1.50–3.50	22 Dec 2008	0.532
B Benari	571,428	1.50–3.50	22 Dec 2008	0.532
D Hall	285,714	1.50–3.50	22 Dec 2008	0.532
R Howes	571,428	1.50–3.50	22 Dec 2008	0.532
P Rogan	285,714	1.50–3.50	22 Dec 2008	0.532
R Woods	571,428	1.50–3.50	22 Dec 2008	0.532

These capped rights were issued on the 22 December 2008. The rights vest subject to the achievement of certain performance conditions. The performance conditions are employment with Challenger at the time of vesting and a share price performance condition as outlined on page 26.

Terms and conditions of option grants

The following tables detail share option offers and grants made during the 2009 fi nancial year to key executives.

Options granted during 2009 to the Group CEO

Executive	CPP
	options		Exercise	Fair value	Aggregate
	granted	Grant	price	at grant	value
	Number	date	$	$	$	Vesting period
D Stevens	5,500,000	1 Dec 2008	2.36	0.235–0.270	1,292,500	24 Aug 2011–29 Feb 2012

Challenger granted options to the CEO as approved at the Annual General Meeting of 20 November 2008. The options vest subject to the achievement of certain performance conditions.

31

Directors’ report

The performance conditions are:

• compound EPS growth of 10% or more annually over the period from 1 July 2008 to 30 June 2011; or

• if compound annual TSR growth is greater than 15%, 100% of the options will vest. If compound TSR growth is less than 10% per annum, no options will vest. There is pro-rata vesting between the two TSR hurdle rates. The initial performance period for the TSR measure is 25 August 2008 to 24 August 2011. The share price used to calculate TSR is the 30-day volume weighted average price.

Any options that have not vested as at 24 August 2011 will vest if, at any time up to and including 29 February 2012, Challenger achieves the TSR growth or EPS growth that would have enabled them to vest as at 25 August 2011.

Options granted during 2009 to key executives

Executive			Vesting	Vesting	Vesting	Vesting	Vesting	Vesting
			22 Dec	2009	22 Dec 2010		22 Dec	2011
	CPP								Aggregate
	options	Exercise	Fair value			Fair value		Fair value	fair
	granted1	price		at grant		at grant		at grant	value
	Number	$	Number	$1	Number	$	Number	$	$
R Adams	600,000	1.34	200,000	0.482	200,000	0.520	200,000	0.497	299,800
B Benari	1,500,000	1.34	500,000	0.482	500,000	0.520	500,000	0.497	749,500
D Hall	600,000	1.34	200,000	0.482	200,000	0.520	200,000	0.497	299,800
R Howes	1,500,000	1.34	500,000	0.482	500,000	0.520	500,000	0.497	749,500
P Rogan	600,000	1.34	200,000	0.482	200,000	0.520	200,000	0.497	299,800
R Woods	1,500,000	1.34	500,000	0.482	500,000	0.520	500,000	0.497	749,500

• 1 Fair value and aggregate are shown as the higher EPS fair value for this table (see Note 31 to the fi nancial statements for detail).

The performance conditions are:

• compound EPS growth of 10% or more annually over the period from 1 July 2008 to 30 June 2011; or

• if compound annual TSR growth is greater than 15%, 100% of the options will vest. If compound TSR growth is less than 10% per annum, no options will vest. There is pro-rata vesting between the two TSR hurdle rates. The initial performance period for the TSR measure is 16 December 2008 to 15 December 2011. The share price used to calculate TSR is the fi ve-day volume weighted average price.

The Company’s auditor, Ernst & Young, will independently test whether the performance conditions attaching to each tranche

Given the ongoing dislocation of global fi nancial and equity markets, the Board was of the view that performance measures needed to be within the control of executives, but suffi ciently challenging to be responsibly balanced against the expectations of shareholders. This alignment is considered to have been achieved through the use of the internal compound EPS growth hurdle and the compound annual TSR growth requirement, together with an option exercise price set at a premium to the share price at the time of offer.

No options issued under the CPP were exercised or lapsed in the year ended 30 June 2009. Under the terms of the Plan, options were forfeited when employees left the Company.

No amounts were paid by the participants upon the grant of options.

For full details of all new issues from the Challenger Performance Plan during the period, see Note 31 of the fi nancial statements, ‘Employee Entitlements’.

32

Remuneration components as a % of total remuneration

					LTI
Executive	Year	Fixed	STI	Options		Other	Total
Dominic Stevens	2009	23%	21%	17%		38%	100%
	2008	17%	46%	7%		30%	100%
Rob Adams	2009	65%	0%	30%		5%	100%
	2008	34%	17%	7%		43%	100%
Brian Benari	2009	22%	28%	21%		29%	100%
	2008	18%	50%	7%		24%	100%
Drew Hall1	2009	52%	0%	26%		22%	100%
	2008	n/a	n/a	n/a		n/a	n/a
Richard Howes	2009	17%	25%	18%		40%	100%
	2008	14%	40%	8%		38%	100%
Paul Rogan	2009	22%	11%	7%		60%	100%
	2008	23%	27%	–%		51%	100%
Robert Woods	2009	19%	24%	18%		39%	100%
	2008	19%	37%	8%		36%	100%
Mike Tilley	2009	19%	159%	(95)%		17%	100%
	2008	18%	47%	16%		19%	100%

1 Mr Hall became a key executive on 11 November 2008, when he became Chief Executive Mortgage Management. Relevant disclosures are therefore for 2009 only.

Maximum value* of remuneration that vests in future years

Maximum value* of remuneration	that vests in future years
		2010	2011	2012
Executive		$	$	$
D Stevens	Cash	–	–	–
	Other1	2,738,103	1,034,309	80,258
R Adams	Cash	–	–	–
	Other1	722,624	232,114	26,030
B Benari	Cash	–	–	–
	Other1	2,675,818	759,989	50,917
D Hall	Cash	–	–	–
	Other1	478,468	250,305	50,403
R Howes	Cash	–	–	–
	Other1	2,497,405	742,517	50,917
P Rogan	Cash	–	–	–
	Other1	1,721,151	892,602	176,740
R Woods	Cash	–	–	–
	Other1	2,440,183	722,659	50,917

• The minimum value of remuneration that vests in future years for all disclosed executives is $0.

1 Other includes all accounting costs of equity that may vest in future years.

The maximum value of remuneration that may vest in future years comprises the accounting value of unvested equity grants under the EIP and the CPP/LTIP, assuming 100% vesting.

33

Directors’ report

3. Non-Executive Directors’ remuneration

The Non-Executive Directors holding offi ce in the year ended 30 June 2009 were:

Peter L Polson (Chairman) Thomas Barrack Jr. Graham A Cubbin Russell R Hooper Ashok P Jacob James D Packer Tatsuo Tanaka (Resigned 21 May 2009) Tetsuya Wada (Appointed 21 May 2009)

Leon Zwier

Policy

The remuneration policy for Non-Executive Directors aims to ensure that the Company can attract and retain suitably skilled and experienced people to serve on the Board and to reward them appropriately for their time and expertise. The Board’s focus is on strategic direction and the delivery of sustained long-term corporate performance.

Fee pool

Non-Executive Director fees are determined within an aggregate fee pool limit which is required to be approved by shareholders.

The current fee pool limit of $2,000,000 was approved by shareholders in 2007. No increase to the Non-Executive Director fee pool will be sought for 2010.

Fee framework

The Board periodically reviews the fee framework. The most recent review was conducted in April 2007. Under the current fee framework, the Non-Executive Directors receive a base fee for main Board duties and additional fees for membership or chairmanship of Board Committees other than the Nomination Committee. The Chairman also receives an additional fee for chairing the main Board. The fees detailed in the table over page also cover service provided on subsidiary Company boards.

Superannuation

The Non-Executive Directors receive superannuation contributions in accordance with Superannuation Guarantee legislation.

Equity participation

The Non-Executive Directors do not receive shares, options or share rights as part of their remuneration and do not participate in any equity based incentive plans.

The following table details the current base fee policy levels:

Board/Committee	Role	Annual fee
Board1	Chairman1,2	$180,000
	Member	$120,000
Group Audit and Compliance	Chairman2	$15,000
	Member	$20,000
Remuneration	Chairman2	$10,000
	Member	$15,000

1 Board fees include Nomination Committee fees.

2 Chairman fees are in addition to member fees.

34

Details of Non-Executive Director remuneration for 2009

Details of the nature and amount of each element of the emoluments of each Non-Executive Director of the Company and of the Group for the year ended 30 June 2009 are set out in the table below:

		Short-term
		salary benef ts	Post employment	Total
	Year	Director Fees	Superannuation
		$	$	$
P Polson	2009	311,255	13,745	325,000
	2008	311,871	13,129	325,000
T Barrack Jr.1	2009	–	–	–
	2008	–	–	–
G Cubbin	2009	155,000	–	155,000
	2008	165,000	–	165,000
R Hooper2	2009	219,996	–	219,996
	2008	344,050	–	344,050
A Jacob3	2009	–	–	–
	2008	–	–	–
J Packer3	2009	–	–	–
	2008	–	–	–
T Tanaka4	2009	110,000	–	110,000
	2008	73,200	–	73,200
T Wada4	2009	10,000	–	10,000
	2008	–	–	–
L Zwier5	2009	120,000	–	120,000
	2008	120,000	–	120,000

1 Acts as a director in discharging his duties as an executive of Colony Capital, LLC and consequently does not take fees for his services.

2 Includes Challenger Listed Investments Limited (CLIL) fees (2009: $29,996, 2008: $112,185 plus $20,955 for CLIL Due Diligence committee).

3 Acts as a director in connection with discharging his duties as an executive of Consolidated Press Holdings (CPH) and consequently does not take fees for his services.

4 Mr Wada replaced Mr Tanaka on 21 May 2009 and the annual fee was allocated accordingly.

5 In the 2008 AnnualReport this amount was erroneously shown as $130,000. The 2008 comparative has been restated accordingly.

13. Rounding

The amounts contained in the annual fi nancial report have been rounded off to the nearest $100,000 under the option available to the Company under Australian Securities and Investments Commission (ASIC) Class Order 98/0100. The Company is an entity to which the class order applies.

35

Directors’ report

14. Auditor’s independence and non-audit services

The Directors received the following declaration from the auditor of Challenger Financial Services Group Limited.

Ernst & Young Centre 680 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 www.ey.com/au

Auditor’s Independence Declaration to the Directors of Challenger Financial Services Group Limited

In relation to our audit of the fi nancial report of Challenger Financial Services Group Limited for the fi nancial year ended 30 June 2009, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

==> picture [112 x 39] intentionally omitted <==

Ernst & Young

==> picture [144 x 35] intentionally omitted <==

S J Ferguson Partner 21 August 2009

Liability limited by a scheme approved under Professional Standards Legislation

Non-audit services

The following non-audit services were provided by the entity’s auditor, Ernst & Young. The Directors are satisfi ed that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised.

Ernst & Young received or is due to receive the following amounts for the provision of non-audit services:

	$’000s
Tax compliance services	236
Due diligence services	34
Other assurance services	504

See Note 33 to the fi nancial statements for details.

Signed in accordance with a resolution of the Directors of Challenger.

==> picture [137 x 38] intentionally omitted <==

G A Cubbin Director Sydney 21 August 2009

==> picture [97 x 51] intentionally omitted <==

D J Stevens Director Sydney 21 August 2009

36

Corporate governance statement

The Company’s approach to corporate governance

The Board and management of Challenger Financial Services Group Limited (‘the Company’) recognise their duties and obligations to stakeholders to implement and maintain a robust system of corporate governance. The Company believes that the adoption of good corporate governance adds real value to stakeholders and enhances investor confi dence.

The Board determines the most appropriate corporate governance arrangements for the Challenger Group, taking into consideration Australian and international standards and the prudential requirements of regulators such as APRA and ASIC. This statement refl ects the Company’s corporate governance system as at the date of signing this report.

This statement reports against the Australian Securities Exchange (ASX) Corporate Governance Council’s ‘Corporate Governance Principles and Recommendations’ released in August 2007.

As required by the ASX Listing Rules, this statement sets out the extent to which Challenger has followed the Principles or, where appropriate, indicates a departure from them with an explanation.

This report applies to the Company and its subsidiaries; however, some subsidiaries have adopted their own policies and procedures to deal with specifi c issues relevant to their business, for instance Australian Financial Services Licence compliance. Where such policies and procedures have been adopted, they have been developed in line with the standards referred to throughout this report.

Principle 1 – Lay solid foundations for management and oversight

The role of the Board and delegations

The Board is accountable to shareholders for the activities and performance of the Company by overseeing the development of sustainable shareholder value within an appropriate framework of risk and regard for all stakeholder interests.

The Board has identifi ed the key functions which it has reserved for itself. These duties are outlined below and set out in the Board Charter, a copy of which is available on the Company’s website.

• establishment, promotion and maintenance of the strategic direction of the Company;

• approval of business plans, budgets and fi nancial policies;

• consideration of management recommendations on strategic business matters;

• establishment, promotion and maintenance of proper processes and controls to maintain the integrity of accounting and fi nancial records and reporting;

• fairly and responsibly rewarding executives, having regard to the interests of shareholders, the performance of executives, market conditions and the Company’s performance;

• adoption and oversight of implementation of appropriate corporate governance practices;

• oversight of the establishment, promotion and maintenance of effective risk management policies and processes;

• determination and adoption of the Company’s dividend policy;

• review of the Board’s composition and performance;

• appointment, duration, evaluation and remuneration of the Chief Executive Offi cer (CEO) and approval of the appointment of the Chief Financial Offi cer (CFO), the General Counsel and the Company Secretary; and

• determination of the extent of the CEO’s delegated authority.

The Board has established Committees to assist it in carrying out its responsibilities and to consider certain issues and functions in detail. The Board Committees are discussed in Principle 2 below.

Non-Executive Directors are issued with formal letters of appointment governing their roles and responsibilities. The responsibilities of the Chairman and the Directors are also set out in the Board Charter.

Management responsibility

The Board has delegated to the CEO the authority and powers necessary to implement the strategies approved by the Board and to manage the business affairs of the Company within the policies and specifi c delegation limits specifi ed by the Board from time to time. The CEO may further delegate within those specifi c policies and delegation limits, but remains accountable for all authority delegated to management.

37

Corporate governance statement

Executive performance assessment

The performance of senior executives is reviewed at least annually against appropriately agreed and documented performance objectives and measures, consistent with the performance management framework that applies to all Challenger employees. All employees at Challenger are also assessed against the Challenger Principles (refer to Principle 3 below).

The Remuneration Committee is responsible for reviewing the performance of the Group CEO at least annually, including setting the Group CEO goals for the coming year and reviewing progress in achieving those goals and making recommendations to the Board. The Group CEO is responsible for setting performance objectives and reviewing the performance of his direct reports.

Performance evaluations for the Group CEO and senior executives have taken place in respect of the 2009 reporting period in accordance with the above process.

Principle 2 – Structure the Board to add value

Membership of the Board

The Board comprises Directors who possess an appropriate range of skills, experience and expertise to:

• have a proper understanding of, and competence to deal with, the current and emerging issues of the business;

• exercise independent judgement;

• encourage enhanced performance of the Company; and

• effectively review and challenge the performance of management.

The Company’s constitution provides for a minimum of three Directors and a maximum of 12 Directors. The table below summarises the current composition of the Board. Background details of each Director are set out in the Directors’ report.

Name	Position	Independent	First appointed
Peter Polson	Chairman	Yes	2003
Dominic Stevens	Executive Director	No	2008
Thomas Barrack Jr	Non-Executive Director	Yes	2007
Graham Cubbin	Non-Executive Director	Yes	2004
Russell Hooper	Non-Executive Director	Yes	2003
Ashok Jacob	Non-Executive Director	No	2003
James Packer	Non-Executive Director	No	2003
Tetsuya Wada	Non-Executive Director	No	2009
Leon Zwier	Non-Executive Director	Yes	2006

The Chairman is selected by Non-Executive Directors of the Board. The roles of Chairman and CEO are not exercised by the same person.

Nominations and appointment of new Directors

Recommendations for nominations of new Directors are made by the Nomination Committee and considered by the Board as whole. If a new Director is appointed during the year, that person will stand for election by shareholders at the next Annual General Meeting. Shareholders are provided with appropriate information to judge the adequacy of candidates. All new Directors are provided with an appropriate induction into Challenger’s business. A copy of the Nominations Committee Charter can be found on the Company’s website at www.challenger.com.au.

Retirement and re-election of Directors

The Company’s constitution requires that, excluding the CEO, one third of the remaining Directors must retire each year. In addition, any Director who is appointed during the year must retire at the next Annual General Meeting.

Mr Wada was appointed to the Board on 21 May 2009, and accordingly will retire and submit himself for re-election at the 2009 Annual General Meeting.

Succession planning

In conjunction with the Nomination Committee, the Board considers the succession of its members, the CEO, the CFO and the Chief Executives of each of the business divisions, as required.

38

Review of Board performance

The Board Charter sets out the requirement for a formal review of the Board’s performance at least every two years. A review of the Board’s performance was conducted in May 2009.

The review of the Board’s performance is conducted by the Chairman with all Board members. The review involves consideration of the effectiveness of the Board and its committees, having regard to the knowledge, skills and experience of the Directors. The review involves considering the weighting of attributes, culture and capabilities of the Board.

Director independence

The Board has adopted an Independence Policy that states that an independent Director should be independent of management and free from any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the independent exercise of their judgement.

The Board regularly considers and assesses the independence of each Director in light of the interests and information which Directors disclose. In accordance with the Corporations Act, Directors are required to advise the Company of any material personal interests they have in a matter.

In assessing independence, the Board will have regard to whether the Director has any of the following relationships with Challenger or any Challenger Group company:

1. is a substantial shareholder (as defi ned by section 9 of the Corporations Act) of Challenger, or is a Director or offi cer of, or otherwise associated directly with, a substantial shareholder of Challenger;

2. is employed, or has previously been employed in an executive capacity by Challenger or another Group company, and there has not been a period of at least three years between ceasing such employment and serving on the Board;

3. has within the last three years been a principal of a material professional adviser or a material consultant to Challenger or another Group company, or an employee materially associated with the service provided;

4. is a material supplier or customer of Challenger or another Group company, or an offi cer of or otherwise associated directly or indirectly with a material supplier or customer; and

5. has a material contractual relationship with Challenger or another Group company other than as a Director.

The Board will state its reasons if it considers a Director to be independent notwithstanding the existence of a relationship of the kind referred to in paragraphs 1 to 5 above.

From the commencement of the year the Board has had a majority of non-independent Directors. The Board has since evaluated the independence status of each of the Directors. In making that evaluation, the Board determined that Mr Cubbin is an independent Director.

In evaluating Mr Cubbin’s independence, the Board took into consideration (i) that a period of over three years had passed since Mr Cubbin was a senior executive with Consolidated Press Holdings (CPH); and (ii) that Mr Cubbin had not held executive offi ce with CPH since September 2005; and (iii) Mr Cubbin’s role as a director of Teys Bros. (Holdings) Pty Limited, his post retirement benefi ts and his personal circumstances.

The Board considers that Mr Cubbin has no continuing association with CPH that would interfere with his independent exercise of free judgement.

Determination of materiality in assessing independence

The materiality of a relationship is assessed on a case-by-case basis after having regard to each Director’s individual circumstances. In line with the Company’s Independence Policy, Messrs Jacob, Packer and Wada are not considered independent due to their association with a substantial shareholder.

In accordance with the Board Charter and the Corporations Act 2001 (Cth), any Director with a material personal interest in a matter being considered by the Board must declare such an interest and may only be present when the matter is being considered at the Board’s discretion. Directors with a material interest may not vote on any matter in which they have declared a personal interest.

39

Corporate governance statement

Meetings of the Board

During the year, the Board generally meets formally approximately every six weeks. In addition, the Board may meet whenever necessary to deal with specifi c matters needing attention between scheduled meetings.

The CEO, in consultation with the Chairman, establishes the meeting agendas to ensure adequate coverage of strategic, fi nancial and material risk areas throughout the year. Senior executives are invited to attend Board meetings and are available for contact by Non-Executive Directors between meetings. The Non-Executive Directors often hold a private session without any executive involvement as part of Board meetings.

Board access to information and advice

All Directors have unrestricted access to the Company records and information. The Company Secretary provides Directors with guidance on corporate governance issues and developments and on all other matters reasonably requested by the Directors and monitors compliance with the Board Charter.

The Board or each individual Director has the right to seek independent professional advice at the Company’s expense to assist them in discharging their duties. Whilst the Chairman’s prior approval is required, it may not be unreasonably withheld or delayed.

Board committees

To assist it in undertaking its duties, the Board has established the following Committees:

• the Audit and Compliance Committee;

• the Nomination Committee; and

• the Remuneration Committee.

Each Committee has its own Charter, copies of which are available on the Company’s website.

The Charters specify the composition, responsibilities, duties, reporting obligations, meeting arrangements, authority and resources available to the Committees and the provisions for review of the Charter. Details of Directors’ membership of each Committee and their attendance at meetings throughout the period are set out below.

Directors’ meetings

			Group	Group
			Audit	and
			Compliance		Remuneration		Nomination
Director	Board		Committee		Committee		Committee**
	Eligible		Eligible		Eligible		Eligible
	to attend	Attended	to attend	Attended	to attend	Attended	to attend	Attended
P Polson	8	8	6	5	3	3	–	–
M Tilley	2	2	–	–	–	–	–	–
D Stevens	6	6	–	–	–	–	–	–
T Barrack Jr.*	8	4	–	–	–	–	–	–
G Cubbin	8	8	6	6	–	–	–	–
R Hooper	8	8	6	6	3	3	–	–
A Jacob*	8	8	–	–	–	–	–	–
J Packer*	8	8	–	–	3	2	–	–
T Tanaka*	7	7	–	–	–	–	–	–
T Wada*	1	1	–	–	–	–	–	–
L Zwier	8	7	–	–	–	–	–	–

• Directors attended by personal attendance and through the attendance of their appointed alternate Directors.

• ** The Nomination Committee did not meet in the period. The appointment of the new Director was considered by the Board in connection with the strategic alliance with The Bank of Tokyo-Mitsubishi UFJ, Limited.

40

Principle 3 – Promote ethical and responsible decision making

The Board and the Company’s commitment to ethical and responsible decision making is refl ected in the internal policies and procedures, underpinned by the Challenger Principles of:

• commercial ownership;

• compliance;

• creative customer solutions;

• working together; and

• integrity.

Code of Conduct

The Board has adopted a Code of Conduct which applies to all Directors, executives, management and employees of the Company and its subsidiaries. The Code articulates the standards of honest, ethical and law-abiding behaviour expected by the Company. Employees are actively encouraged to bring any problems to the attention of management or the Board, including activities or behaviour which may not comply with the Code of Conduct, other policies and procedures in place, or other regulatory requirements or laws. A copy of the Code can be found on the Company’s website.

Political donations policy

The Board has adopted a policy of not making political donations in any country or jurisdiction in which it operates. Representatives of the Company may on occasion attend political functions. This attendance is strictly for commercial reasons and is predicated on the price charged not being in excess of commercial value (in terms of access) of the function.

Directors’ and staff trading policy

Directors and staff are subject to restrictions under the law relating to dealing in securities, including the securities issued by the Company, if they are in possession of insider information. The Board has approved the Group’s Staff Trading Policy which prescribes the manner in which staff can trade in the Company’s shares. A summary of the policy is available on the Company’s website.

The policy applies to all Directors and staff and places restrictions and reporting requirements on staff, including the imposition of blackout periods for trading in the securities of the Company (or other listed entities within the Group) and requiring pretrade approval.

Challenger prohibits any Director or staff member from trading in derivatives in respect of remuneration related unvested Challenger shares or options. Challenger prohibits Directors and staff members from margin lending over Challenger shares.

Those staff designated as potentially having access to insider information are required to seek prior approval to trade in other securities. The policy applies to listed funds offered by Challenger Group companies.

Principle 4 – Safeguard integrity in fi nancial reporting

Integrity of Challenger fi nancial reporting

The Board has the responsibility to ensure truthful and factual presentation of the Company’s fi nancial position. The Board has established an Audit and Compliance Committee to assist the Board to focus on issues relevant to the integrity of the Group’s fi nancial reporting. In accordance with its Charter, the Audit and Compliance Committee must have at least three members and is comprised of all Non-Executive Directors and a majority of independent members. The Committee is chaired by an independent Director, who is not Chair of the Board.

The background details of the Audit and Compliance Committee members are set out in the Directors’ report. The Committee typically meets four times a year and additional meetings are scheduled as required. The members’ names and attendance at meetings are set out on page 40 of this report.

The Committee makes recommendations to the Board in relation to the appointment, review and removal of an external auditor, the assessment of the external auditor’s independence and the appropriateness of non-audit services that the external auditor may provide. A copy of the Audit and Compliance Committee Charter is available on the Company’s website.

41

Corporate governance statement

Declaration by the Chief Executive Offi cer and the Chief Financial Offi cer

The CEO and the CFO periodically provide formal assurance statements to the Board that:

• the Company’s fi nancial statements present a true and fair view of the Company’s fi nancial condition and operational results; and

• the risk management and internal compliance and control systems are sound, appropriate and operating effi ciently and effectively.

Independent external audit

The Company requires its independent external auditor to:

• provide stakeholders with assurance over the true and fair view of the fi nancial reports; and

• ensure that accounting practices comply with applicable accounting rules and policies.

The Company’s independent external auditor is Ernst & Young (E&Y). E&Y was appointed upon constitution of the Company in November 2003, and this appointment was ratifi ed by members at the Annual General Meeting held in November 2004.

External auditors are required to rotate the engagement partner assigned to the Company on a fi ve-year basis. Under this policy, the lead audit engagement partner assigned to the Company rotated at the conclusion of the 2007 fi nancial reporting period.

The Board has requested that E&Y attend the Company’s Annual General Meeting, and that E&Y be available to answer questions arising in relation to the conduct of its audit.

Principle 5 – Make timely and balanced disclosure

Continuous Disclosure Policy

The Company is committed to ensuring that all investors have equal and timely access to material information concerning the Company and that Company announcements are factual and presented in a clear and objective manner.

The Board has approved and implemented a Continuous Disclosure Policy. The policy is designed to ensure compliance with the Corporations Act and ASX Listing Rules continuous disclosure requirements. The Company has a Continuous Disclosure Committee which is responsible for:

• making decisions on what should be disclosed publicly under the Continuous Disclosure Policy;

• maintaining a watching brief on information; and

• ensuring disclosure is made in a timely and effi cient manner.

Principle 6 – Respect the rights of shareholders

The Company recognises the importance of enhancing its relationship with investors by:

• communicating effectively;

• providing ready access to clear and balanced information about the Company; and

• encouraging participation at general meetings.

As set out in principle 5, it is Company policy that material information concerning the Company will be announced to the market in a timely and objective manner. Following release to the market, the Company publishes annual and half yearly reports, announcements, media releases and other relevant information on its website at www.challenger.com.au.

Internet web-casting and teleconferencing facilities are provided for market briefi ngs to encourage participation from all stakeholders, regardless of their location. The Company also encourages greater use of electronic media by providing shareholders with greater access to the electronic receipt of reports and meeting notices.

The Company also provides a facility to ask questions about the Company and have them answered directly via electronic means.

All major and price sensitive announcements by Challenger are lodged with the ASX and made publicly available via its website before being discussed or disseminated with members of the investment community.

42

Principle 7 – Recognise and manage risk

Risk management and compliance

The management of risks is fundamental to the Company’s business and to building shareholder value. The Board recognises the broad range of risks which apply to Challenger as a participant in the fi nancial services industry, including, but not limited to, market risk, funding and liquidity risk, credit risk, investment, strategic and business risk, reputation, licence (compliance) and operational risk. The Board is responsible for determining the Group’s risk management strategy. Management is responsible for implementing the Board’s strategy and for developing policies and procedures to identify, manage and mitigate risks across the whole of the Group’s operations.

The key design component of Challenger’s approach to risk management is that the heads of the business units have accountability for the risks within their divisions with oversight, analysis, monitoring and reporting of these risks by executives who are independent of the business units and are responsible to the CEO and the Board or its Committees.

The Board has delegated certain authorities to management to manage risk. The Group Risk Management Framework is underpinned by a robust set of policies, procedures and delivery plans that are regularly reviewed.

The framework and policies are developed and approved by management, reviewed and approved by the Group Audit and Compliance Committee, and then made available to all staff of the Company and its subsidiaries. The Group’s Risk Management functions have day-to-day responsibility for monitoring the implementation of the framework and policy, with regular reporting provided to the Group Audit and Compliance Committee on the adequacy and effectiveness of management controls for material business risk.

The Committee provides reporting to the Board on compliance with the framework and policies. A summary of the Group Risk Management Framework can be found on the Company’s website.

The Board and the Group Audit and Compliance Committee review the effectiveness of the risk management and internal control system on an annual basis.

Internal audit

Internal audit services for the Challenger Group were provided by PricewaterhouseCoopers during the period.

The Group Audit and Compliance Committee has appointed KPMG to provide internal audit services to the Challenger Group effective 1 July 2009. The Group Audit and Compliance Committee oversees the scope of the internal audit and monitors the progress of the internal audit work program. The Committee receives reports from internal audit at each meeting and monitors management’s responsiveness to internal audit fi ndings and recommendations. The internal audit function is independent of the external auditor. The internal audit function reports directly to the Group Audit and Compliance Committee.

Assurance

During the period, the Board has received formal assurance from the CEO and CFO that:

• the Company’s fi nancial statements present a true and fair view of the Company’s fi nancial condition and operational results; and

• the risk management and internal compliance and control systems are sound, appropriate and operating effi ciently and effectively.

This assurance forms part of the process by which the Board determines the effectiveness of its risk management and internal control systems in relation to fi nancial reporting risks.

Principle 8 – Remunerate fairly and responsibly

The Board Remuneration Committee

The Board has established a Remuneration Committee comprised of a majority of independent Directors, having at least three members and which are chaired by an independent Director.

The background details of the Remuneration Committee members are set out in the Directors’ report. The Committee usually meets at least twice during the year, and additional meetings are scheduled as required. The members’ names and attendance at meetings are set out in Principle 2 of the corporate governance statement.

43

Corporate governance statement

The Remuneration Committee is responsible for reviewing and recommending to the Board on:

• the Company’s remuneration, recruitment, retention and termination policies and procedures for senior executives;

• senior executives’ remuneration and incentives;

• superannuation arrangements; and

• the remuneration framework for Directors.

Remuneration

The remuneration details for key executives and Non-Executive Directors are reported in the Remuneration Report. Non-Executive Directors are not entitled to participate in incentive schemes.

There are no termination payments to Non-Executive Directors on their retirement from offi ce other than payments accruing from superannuation contributions comprising part of their remuneration.

Challenger policy, contained in the staff trading policy, prohibits any executive or staff member from entering into a transaction that is designed or intended to hedge that component of their unvested remuneration which is constituted by Challenger shares or options.

It is also Company policy to prohibit margin lending over Challenger shares by Directors, senior executives and staff members.

44

	Income statements 46 Bl h 47	Statements of cash f ows 49 N h f il 0
	aance seets	otes to te nanca statements 5
	Statements of changes in equity 48	Directors’ declaration 136

Financial pages

45

Income statements

For the year ended 30 June 2009 Notes	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
Derived from operating activities Revenue 3 Expenses 4 Finance costs 5	1,973.0 2,465.0 128.6 117.1 (917.5) (847.2) (2.6) (0.1) (1,214.9) (1,682.0) – –
Share of prof ts of associates 37	(159.4) (64.2) 126.0 117.0 3.1 2.1 – –
(Loss)/prof t from continuing operations before income tax Income tax benef t/(expense) from continuing operations 6	(156.3) (62.1) 126.0 117.0 68.7 31.3 (0.5) 0.2
(Loss)/prof t from continuing operations after income tax (Loss)/prof t from discontinued operations after income tax 35	(87.6) (30.8) 125.5 117.2 – (8.4) – –
(Loss)/prof t after income tax Prof t attributable to non-controlling interests 26	(87.6) (39.2) 125.5 117.2 (3.1) (5.0) – –
(Loss)/prof t attributable to equity holders of the parent	(90.7) (44.2) 125.5 117.2
	cents cents
Earnings per share from continuing operations: Basic earnings per share 8 Diluted earnings per share 8	(16.2) (6.1) (15.9) (6.7)
Earnings per share from all operations: Basic earnings per share 8 Diluted earnings per share 8	(16.2) (7.5) (15.9) (8.1)

The income statements should be read in conjunction with the accompanying notes.

46

Balance sheets

As at 30 June 2009 Notes	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
Assets Cash and cash equivalents 9 Cash and cash equivalents – SPV1 9 Receivables 10 Receivables – SPV 10 Current tax assets Derivative assets 28 Financial assets fair valued through income statement 11 Available-for-sale assets 11 Investment property 12 Plant and equipment 13 Deferred tax assets 6 Investment in controlled entities 36 Investments in associates 37 Other assets 14 Goodwill 15 Other intangible assets 15	1,071.7 804.1 0.9 2.8 737.0 956.0 – – 582.4 381.3 735.2 526.6 15,644.1 18,760.4 – – 2.7 – 7.8 – 191.7 83.3 – – 4,009.0 4,000.2 – – 24.3 33.5 – – 2,020.5 1,239.7 – – 56.8 61.7 – – 52.2 – 124.9 70.6 – – 1,131.9 1,087.6 43.2 35.0 – – 92.4 149.2 – – 688.7 624.0 – – 21.1 28.9 – –
Total assets	25,237.8 27,157.3 2,000.7 1,687.6
Liabilities Payables 17 Current tax liabilities Derivative liabilities 28 Financial liabilities fair valued through income statement 18 Interest bearing liabilities 19 Interest bearing liabilities – SPV 19 Provisions 20 Deferred tax liabilities 6 Life contract liabilities 21	614.5 492.8 447.0 162.3 – 3.6 – – 164.5 75.7 – – – 43.6 – – 1,818.2 1,494.0 – – 16,310.2 19,523.7 – – 52.9 53.3 5.1 7.5 14.3 97.5 – – 4,573.8 3,743.1 – –
Total liabilities	23,548.4 25,527.3 452.1 169.8
Net assets	1,689.4 1,630.0 1,548.6 1,517.8
Equity Contributed equity 23 Reserves 24 Accumulated losses 25	1,401.4 1,462.4 1,445.5 1,486.9 167.9 170.2 183.0 159.3 (187.4) (19.7) (79.9) (128.4)
Total equity attributable to equity holders of the parent	1,381.9 1,612.9 1,548.6 1,517.8
Non-controlling interests 26	307.5 17.1 – –
Total equity	1,689.4 1,630.0 1,548.6 1,517.8

1 Special purpose vehicles (‘SPV’).

The balance sheets should be read in conjunction with the accompanying notes.

47

Statements of changes in equity

For the year ended 30 June 2009 Notes	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
Issued capital Opening balance at the beginning of f nancial year New shares issued Movements due to share based remuneration schemes Cost of share buy-back	1,622.1 1,427.1 1,622.1 1,427.1 – 207.5 – 207.5 (17.3) (12.5) (17.3) (12.5) (41.8) – (41.8) –
Closing balance at the end of f nancial year	1,563.0 1,622.1 1,563.0 1,622.1
Treasury shares Opening balance at the beginning of f nancial year Shares issued/purchased Shares redeemed Shares issued under share based remuneration net of shares cancelled on forfeiture in these schemes	(159.7) (167.2) (135.2) (167.2) (26.2) (25.8) – – 23.9 13.8 17.3 12.5 0.4 19.5 0.4 19.5
Closing balance at the end of f nancial year	(161.6) (159.7) (117.5) (135.2)
Total contributed equity 23	1,401.4 1,462.4 1,445.5 1,486.9
Reserves Opening balance at the beginning of f nancial year Increase in equity option premium reserve Foreign currency translation differences Changes in cash f ow hedges, net of tax Changes in available-for-sale assets, net of tax Cost of share based payments	170.2 82.9 159.3 85.3 0.1 63.4 0.1 63.4 (0.6) – – – (28.3) 15.7 – – 2.9 (2.4) – – 23.6 10.6 23.6 10.6
Closing balance at the end of f nancial year 24	167.9 170.2 183.0 159.3
Accumulated losses Opening balance at the beginning of f nancial year (Loss)/prof t for the year Equity dividends/distributions	(19.7) 102.1 (128.4) (168.0) (90.7) (44.2) 125.5 117.2 (77.0) (77.6) (77.0) (77.6)
Closing balance at the end of f nancial year 25	(187.4) (19.7) (79.9) (128.4)
Total equity attributable to equity holders	1,381.9 1,612.9 1,548.6 1,517.8
Non-controlling interests Opening balance at the beginning of f nancial year Other non-controlling interest movements/distributions Prof t for the year Consolidation of new controlled entities	17.1 3.7 – – 12.3 8.4 – – 3.1 5.0 – – 275.0 – – –
Closing balance at the end of f nancial year	307.5 17.1 – –
Total equity	1,689.4 1,630.0 1,548.6 1,517.8
Total recognised income and expense for the year Items recognised directly in equity (Loss)/prof t for the year recognised in the income statement	(26.0) 13.3 – – (87.6) (39.2) 125.5 117.2
	(113.6) (25.9) 125.5 117.2
Total income and expense for the year attributable to: Equity holders of the parent Non-controlling interests	(116.7) (30.9) 125.5 117.2 3.1 5.0 – –
	(113.6) (25.9) 125.5 117.2

The statements of changes in equity should be read in conjunction with the accompanying notes.

48

For the year ended 30 June 2009 Notes	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
Operating activities Receipts from customers1 Annuities received Annuities paid Payments to vendors and employees1 Dividends received Interest received Interest paid Income tax paid	2,054.6 2,557.7 – 0.3 514.0 768.5 – – (1,171.8) (1,005.8) – – (1,905.6) (2,456.9) – (2.2) 104.2 111.8 123.4 110.3 318.6 322.0 5.2 6.5 (126.7) (119.5) – – (6.3) (5.5) (5.2) (0.8)
Net cash (outf ow)/inf ow from operating activities 32	(219.0) 172.3 123.4 114.1
Investing activities Net (payments)/proceeds on sale/purchase of investments Proceeds on disposal of subsidiary Mortgages loans – advanced and purchased Mortgages loans – repaid and sold Net proceeds for purchase of controlled entities/signif cant transactions Payments for purchase of plant and equipment	(176.4) (1,542.8) – – – 136.9 – – (7,011.6) (10,723.7) – – 10,116.8 11,755.6 – – 610.4 898.3 – – (3.2) (14.1) – –
Net cash inf ow from investing activities	3,536.0 510.2 – –
Financing activities Proceeds from interest bearing liabilities Repayment of interest bearing liabilities Proceeds from issue of units Payments on buy-back of shares/treasury shares Dividend paid Distributions paid to non-controlling interests Advances from/(to) controlled entities	8,324.7 11,480.7 – – (11,435.9) (12,406.6) – – – 292.2 – 292.2 (67.0) (25.7) (67.0) (25.7) (76.8) (76.5) (76.8) (76.5) (13.4) (7.5) – – – – 18.5 (303.5)
Net cash outf ow from f nancing activities	(3,268.4) (743.4) (125.3) (113.5)
Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the start of year	48.6 (60.9) (1.9) 0.6 1,760.1 1,821.0 2.8 2.2
Cash and cash equivalents at the end of year 9	1,808.7 1,760.1 0.9 2.8
Cash Cash – SPV	1,071.7 804.1 0.9 2.8 737.0 956.0 – –
Cash and cash equivalents at the end of year	1,808.7 1,760.1 0.9 2.8

1 Inclusive of GST.

The statements of cash fl ows should be read in conjunction with the accompanying notes.

49

1. Summary of signifi cant accounting policies

The fi nancial report of Challenger Financial Services Group Limited (‘the Company’) for the year ended 30 June 2009 was authorised for issue in accordance with a resolution of the Directors on 21 August 2009.

The consolidated fi nancial report of the Company for the fi nancial year ended 30 June 2009 comprises the Company and its subsidiaries (together referred to as ‘the Group’) and the Group’s interest in associates.

(i) Basis of preparation

The fi nancial report is a general purpose fi nancial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. Since 1 July 2008, the Group has adopted a number of Australian Accounting Standards and Interpretations which were mandatory for accounting periods beginning on or after 1 July 2008. Adoption of AASB 3 has led to a gain being recognised on consolidation of CDI, refer Note 1(iii) and Note 34.

The fi nancial report has been prepared on a historical cost basis, except for investment properties, derivative fi nancial instruments, sub-debt, policy liabilities, available-for-sale fi nancial assets and assets supporting the life insurance business which have been measured at fair value.

The fi nancial report is in Australian dollars except where noted otherwise.

(ii) Statement of compliance

The fi nancial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS).

A summary of the signifi cant accounting policies of the Group is disclosed below.

(iii) New reporting standards issued or applied during the year

AASB 8: Operating Segments, AASB 3: Business Combinations, AASB 127: Consolidated and Separate Financial Statements and AASB 2008-3: Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 (effective from 1 July 2009). These have been early adopted for this reporting period.

Under the amended AASB 3 , if the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Transaction costs related to the acquisition are expensed. Noncontrolling interest is valued at share of net assets.

The following standards, interpretations and amendments were available for early adoption and applicable to the Group but have not been applied in these fi nancial statements:

• AASB 101: Presentation of Financial Statements and AASB 2007-08: Amendments to Australian Accounting Standards arising from AASB 101. This is applicable for annual reporting periods beginning on or after 1 January 2009. This standard requires the presentation of a statement of comprehensive income which replaces the income statement and makes changes to the statement of changes in equity. Any changes made with respect to a prior period adjustment or reclassifi cation in the fi nancial statement will require a third balance sheet as at the beginning of the comparative periods to be disclosed. The Group will need to reformat its income statement and statement of changes in equity for its 30 June 2010

• AASB 2008-5: Amendments to Australian Accounting Standards arising from the Annual Improvement Project. This is applicable for annual reporting periods beginning on or after 1 January 2009. The amendment to AASB 140: Investment Property requires development property to be managed at fair value rather than at cost. The impact on initial application of this amendment has not been assessed as relevant information cannot be reliably estimated.

• AASB 2009-2: Amendments to Australian Accounting Standards – Improving Disclosures about fFnancial Instruments. This is applicable for annual reporting periods beginning on or after 1 January 2009. The main amendment requires fair value measurements to be disclosed by the source of the inputs. This standard is disclosure only and will not have a fi nancial impact on the results of the Group.

(iv) Basis of consolidation

The consolidated fi nancial statements comprise the fi nancial statements of the Company, its subsidiaries and certain special purpose entities as at 30 June 2009.

The fi nancial statements of subsidiaries and special purpose entities are prepared for the same reporting period as the Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

All intercompany balances and transactions, including unrealised profi ts arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered.

Subsidiaries and special purpose vehicles are consolidated from the date on which control is transferred to the Company and cease to be consolidated from the date on which control is transferred out of the Company.

50

Where there is a loss of control of a subsidiary or special purpose entity, the consolidated fi nancial statements include the results for the part of the reporting year during which the Company had control.

Investments in subsidiaries are carried at their cost of acquisition in the Company’s fi nancial statements. Refer to Note 34 Signifi cant transactions and Note 35 Discontinued operations for details of acquisitions and disposals during the year ended 30 June 2009.

Non-controlling interests in the results and equity of controlled entities where the Group owns less than 100% of the issued capital are shown separately in the consolidated income statement and balance sheet.

Both the shareholders’ and policy owners’ interests in the life insurance funds of Challenger Life Company Limited are consolidated.

Where controlled entities other than Challenger Life Company Limited are consolidated, the excess of the purchase price over the fair value of net assets of controlled entities is treated as goodwill and is subject to impairment testing as described in Note 1 (xxii).

Investment in associates

The Group’s investments in associates are accounted for under the equity method of accounting in the consolidated fi nancial statements. These are entities which the Group has signifi cant infl uence but not control over the fi nancial and operating policies.

The fi nancial statements of the associates are used by the Group to apply the equity method. The reporting dates of the associates and the Group are consistent and both use consistent accounting policies. After application of the equity method, the Group determines whether it is necessary to recognise any additional impairment loss with respect to the Group’s net investment in the associates.

The investments in associates are carried in the balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the associate, less any impairment in value. The consolidated income statement refl ects the share of the results of operations of the associate. Where there has been a change recognised directly in the associate’s equity, the Group recognises its share of any changes and discloses this in the consolidated statement of changes in equity.

Securitisation vehicles

The Mortgage Management division originates and manages residential mortgage loans to securitisation vehicles (all referred to as special purpose vehicles) through its loan securitisation program. These vehicles are deemed by accounting standards to be controlled by the Group and are therefore consolidated.

Funds under management

Within the economic entity, certain controlled entities act as the single responsible entity/manager for a number of registered schemes and property syndicates. Registered schemes and property syndicates have not been consolidated in the fi nancial statements as individual entities within the economic entity do not have control of the schemes and syndicates.

The Group operates predominantly in the fi nancial services industry. As such, the assets and liabilities disclosed in the consolidated balance sheet are grouped by nature and listed in an order that refl ects their relative liquidity.

(v) Segment reporting

Operating segments are identifi ed on the basis of internal reports to senior management about component parts of the Group that are regularly reviewed by senior management in order to allocate resources to the segment and to assess its performance. Information reported to senior management for the purposes of resource allocation and assessment of performance is specifi cally focused on core products and services offered, comprising three reportable segments as disclosed in Note 2 Segment information.

(vi) Life business fi nancial reporting

The Life business includes the selling and administration of contracts through Challenger Life Company Limited (renamed during the year from Challenger Life No.2 Limited). These contracts are governed under the Life Insurance Act 1995 (Life Act). For purposes of the fi nancial statements these are classifi ed as either life insurance contracts or life investment contracts.

The Life business is conducted within separate statutory funds as required by the Life Insurance Act 1995 and are reported in aggregate in the income statement and balance sheet of the Group. The activities of the statutory funds are reported in aggregate with the shareholders’ fund in the fi nancial report of the Group.

Life investment contract liabilities

Life investment contracts are contracts regulated under the Life Act but which do not meet the defi nition of life insurance contracts under AASB 1038: Life Insurance Contracts and similar contracts issued by entities operating outside of Australia.

For fi xed income policies the liability is based on the fair value of the fi xed income payments and associated expenses, being the net present value using an appropriate discount rate curve as determined by the Appointed Actuary.

51

1. Summary of signifi cant accounting policies (continued)

(vi) Life business fi nancial reporting (continued)

Life insurance contract liabilities

The Challenger Life Company Limited (CLC) has a closed book of life insurance contract business. However, CLC has participated in the acquisition or transfer in of life insurance contract (and investment contract) liability books.

The Company has not generated any new business premium for the current and prior reporting period as disclosed in this fi nancial report.

Life insurance contracts involve the acceptance of signifi cant insurance risk. Insurance risk is defi ned as signifi cant if and only if an insured event could cause an insurer to pay signifi cant additional benefi ts in any scenario, excluding scenarios that lack commercial substance (i.e. have no discernible effect on the economics of the transaction).

The fi nancial reporting methodology used to determine the fair value of life insurance contract liabilities is referred to as Margin on Services (MoS). Under MoS, the excess of premium received over payments to customers and expenses (the margin) is recognised over the life of the contract in a manner that refl ects the pattern of risk accepted from the policyholder (the service) unless future margins are negative in which case the future losses are recognised. The movement in life insurance contract liabilities recognised in the income statement refl ects the planned release of this margin.

Life insurance contract liabilities are usually determined using a projection method, whereby estimates of policy cash fl ows (annuity payments, expenses etc) are projected into the future. The liability is calculated as the net present value of these projected cash fl ows using a risk-free discount rate curve.

(vii) Revenue recognition

Revenue is recognised and measured as the fair value of the consideration received or receivable to the extent that it is probable that economic benefi ts will fl ow to the Group and the revenue can be reliably measured. Revenues and expenses are generally recognised on an accrual basis. The following specifi c recognition criteria must be met before revenue is recognised:

• (a) Revenue from fee income is derived from the provision of investment management services to the Group’s managed investment products and fee and distribution income from managed loan securitisation trusts. Revenue is recognised when the services are deemed to have been earned using an effective interest rate method over the life of the contract.

• (b) Revenue from life contract premiums are separated into their revenue and deposit components. Insurance contract premium amounts earned by bearing insurance risks are recognised as revenue. There is no premium revenue in respect of investment contracts, amounts received are recognised as deposits and credited directly to investment contract liabilities.

• Premium revenue on insurance contracts and revenue on investment contracts is recognised in the income statement as part of the fair value movement in life contract liabilities. Fair value movements arise from changes in interest rates, infl ation rates and other valuation assumptions.

• (c) Interest income is recognised as it accrues using an effective interest rate, taking into account the effective yield of the

• (d) Dividends are recognised as income on the date the share is quoted ex-dividend. Dividends from unlisted companies are recognised when the dividend is received.

• (e) Rental revenue from investment properties is accounted for on a straight-line basis over the lease term. Contingent rental income is recognised as income in the periods which it is earned. Lease incentives granted are recognised as an integral part of the total rental income.

• (f) Operating lease rental income is earned on a straight-line basis over the life of the contract.

(viii) Recognition of mortgage business trailing revenues and receivables

On initial recognition, trailing revenues and receivables are recognised at fair value, being the expected future trailing commission receivable less an estimated cost of servicing, discounted to their present value. In addition, an associated payable and expense to the member brokers is also recognised, initially measured at the fair value being the future trailing commission payable to member brokers discounted to their present value.

Subsequent to initial recognition and measurement, both the trailing commission on the asset and commission payable are measured at amortised cost. The carrying amount of the trail commission asset and trailing commission payable are adjusted to refl ect the actual and revised cash fl ows by recalculating the carrying amount through computing the present value of estimated future cash fl ows at the original effective interest rate. The resulting adjustment is recognised as income or expense in the profi t and loss account.

52

(ix) Expense recognition

Expenses are brought to account on an accrual basis.

• (a) Expenses incurred under an investment property operating lease are recognised on a straight-line basis over the term of the lease.

• (b) Investment property expenditure, including rates, taxes, insurance and other costs associated with the upkeep of a building, are brought to account on an accrual basis. Repair costs are expensed when incurred. Other amounts that improve the condition of the investment are capitalised.

• (c) Recovery of outgoings as specifi ed in lease agreements are accrued on an estimated basis and adjusted at period end.

• (d) Claims from life contracts are separated into their expense and withdrawal components. The component that relates to the bearing of risks is treated as an expense. There is no claims expense in respect of investment contracts, amounts paid are recognised as withdrawals.

• (e) Claims expenses on insurance contracts and expenses on investment contracts are recognised in the income statement as part of the fair value movement in life contract liabilities. Fair value movements arise from changes in acquisition and maintenance expenses and related valuation assumptions.

(x) Finance costs

Finance establishment costs in respect of debt that is not fair valued are deferred and amortised over the life of the underlying facility.

Finance costs that are directly attributable to the acquisition, construction or production of qualifying property assets, which are assets that necessarily take a substantial period of time to develop for its intended use or sale, are capitalised as part of the cost of that asset. Investment income earned on the investment of specifi c borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

(xi) Foreign currency

Transactions

Transactions in foreign currencies are translated into presentation currency, Australian dollars, at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into Australian dollars at the foreign exchange rate ruling at the balance sheet date.

With the exception of foreign exchange differences relating to CDI property assets, foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the transaction. Non-monetary items measured at fair value in a foreign currency shall be translated to Australian dollars using the exchange rates ruling at the date when the fair value was determined.

Foreign controlled entities

As at the reporting date, the assets and liabilities of foreign subsidiaries, whose functional currency differs from the presentation currency, are translated into Australian dollars at the rate of exchange ruling at the balance sheet date and their income statements are translated at the weighted average exchange rate for the year.

Foreign exchange differences arising on the retranslation are taken directly to the foreign currency translation reserve in equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

(xii) Income tax

Income tax on the income statement for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.

Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for fi nancial reporting purposes.

Deferred income tax liabilities are recognised for all taxable temporary differences except:

• when the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profi t nor taxable profi t or loss in the income statement; or

• when the taxable temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

53

1. Summary of signifi cant accounting policies (continued)

(xii) Income tax (continued)

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profi t will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised, except:

• when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profi t nor taxable profi t or loss in the income statement; or

• when the deductible temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profi t will be available against which the temporary difference can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that suffi cient taxable profi t will be available to allow all or part of the deferred income tax asset to be utilised.

Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profi t will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Income taxes relating to items recognised directly in equity are recognised in equity and not in profi t or loss in the income statement.

Deferred income tax assets and liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority.

Tax consolidation

Challenger Financial Services Group Limited and its 100% owned Australian resident subsidiaries have formed a tax consolidated group with effect from 1 July 2002 and are therefore taxed as a single entity from that date. Challenger Financial Services Group Limited is the head entity of the tax consolidated group.

Tax effect accounting by members of the tax group

Members of the tax consolidated group have applied tax funding principles under which Challenger Financial Services Group Limited and each of the members of the tax consolidated group agree to pay tax equivalent payments to or from the head entity, based on the current tax liability or current tax asset of the member. Such amounts are refl ected in the amounts receivable from or payable to each member and the head entity.

The group allocation approach is applied in determining the appropriate amount of current tax liability or current tax asset to allocate to members of the tax consolidated group. Deferred taxes are allocated to members of the tax consolidated group in accordance with the principles of AASB 112 .

Income tax – Challenger Diversifi ed Property Group (CDI)

CDI was formed by stapling the units of Challenger Diversifi ed Property Trust 1 (CDPT1) and Challenger Diversifi ed Property Trust 2 (CDPT2).

Under current income tax legislation, CDPT1 will not be subject to income tax as unitholders are presently entitled to the income of CDPT1 each year. Any taxable income of CDPT1, including any taxable capital gains derived from the sale of an asset, is fully distributed to unitholders.

CDPT2 is a public trading trust under Division 6C of Part III of the 1936 Tax Act. CDPT2 owns all the shares in Challenger Diversifi ed Property Development Pty Ltd (CDPD), which carries on development and other business activities. Both CDPT2 and CDPD are subject to tax at the corporate tax rate on their taxable income.

(xiii) Cash and cash equivalents

Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignifi cant risk of changes in value.

Cash and cash equivalents are brought to account at the face value of the outstanding balance. Interest is recognised in the income statement when earned. For the purposes of the cash fl ow statement, cash and cash equivalents consist of cash and cash equivalents as defi ned above, net of outstanding bank overdrafts.

54

(xiv) Receivables

Trade and other receivables are stated at their amortised cost less impairment losses. Trade and other receivables are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated.

Bills of exchange have been purchased in the market at a discount to face value. The bills are carried at an amount representing cost and a portion of the discount recognised as income on an effective yield basis. The discount brought to account each period is accounted for as interest income.

(xv) Derivative fi nancial instruments and hedging

The Group uses derivative fi nancial instruments such as foreign currency contracts and interest rate swaps to hedge its risks associated with interest rate and foreign currency fl uctuations. The Group does not hold derivative fi nancial instruments for trading purposes. However, for derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the income statement for the year.

All derivative fi nancial instruments are stated at fair value. The fair value of forward foreign exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profi les. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments.

All derivative fi nancial instruments held within Challenger Life Company Limited are stated at fair value with any gains or losses arising from changes in fair value being taken directly to the income statement for the year.

For all entities, for the purpose of hedge accounting, hedges are classifi ed as:

• fair value hedges when they hedge the exposure to changes in the fair value of a recognised asset or liability;

• cash fl ow hedges when they hedge the exposure to variability in cash fl ows that is attributable either to a particular risk associated with a recognised asset or liability or to a forecast transaction.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objectives and strategies for undertaking the hedge. The documentation includes identifi cation of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair values or cash fl ows attributable to the hedged risk.

Such hedges are expected to be highly effective in achieving offsetting changes in fair values or cash fl ows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the fi nancial reporting periods for which they were designated.

Fair value hedges

Fair value hedges are hedges of the Group’s exposure to changes in the fair value of a recognised asset or liability or an unrecognised fi rm commitment, or an identifi ed portion of such an asset, liability or fi rm commitment that is attributable to a particular risk and could affect profi t or loss.

For fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged and the derivative is remeasured to fair value. Gains and losses from both are taken to profi t or loss in the income statement.

When an unrecognised fi rm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the fi rm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in profi t or loss in the income statement. The changes in the fair value of the hedging instrument are also recognised in profi t or loss in the income statement.

The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. Any adjustment to the carrying amount of a hedged fi nancial instrument for which the effective interest method is used is amortised to profi t or loss in the income statement. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged.

Cash fl ow hedges

Cash fl ow hedges are hedges of the Group’s exposure to variability in cash fl ows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and that could affect profi t or loss in the income statement. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in profi t or loss in the income statement.

Amounts taken to equity are transferred to the income statement when the hedged transaction affects profi t or loss, such as when hedged income or expenses are recognised or when a forecast sale or purchase occurs.

55

1. Summary of signifi cant accounting policies (continued)

(xv) Derivative fi nancial instruments and hedging (continued)

Cash fl ow hedges (continued)

When the hedged item is the cost of a non-fi nancial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-fi nancial asset or liability.

If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is taken to the income statement.

(xvi) Financial assets

The Group classifi es its fi nancial assets in the following categories: fi nancial assets at fair value through profi t or loss held for the purposes or trading or initially designated through profi t and loss, receivables or available-for-sale investments. The classifi cation depends on the defi nition and the purpose for which the investments were acquired. The classifi cation of investments is determined at initial recognition and evaluated at each reporting date.

Purchases and sales of investments are recognised on the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all fi nancial assets not carried at fair value through profi t or loss.

Investments are derecognised when the rights to receive cash fl ows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.

The fair values of investments that are actively traded in organised fi nancial markets are determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments with no active market, fair values are determined using valuation techniques. Such techniques include: using recent arm’s length market transactions; reference to the current market value of another instrument that is substantially the same; discounted cash fl ow analysis and option pricing models refi ned to refl ect the issuer’s specifi c circumstances making as much use of available and supportable market data as possible and keeping judgemental inputs to a minimum.

Financial assets at fair value through the income statement

Financial assets classifi ed in this category are assets held for the purposes of trading or designated as fair value through the income statement. Assets held for trading are classifi ed as debt or equity investments. They are carried at fair value and unrealised gains and losses are recognised through the income statement. Assets designated as fair value through the income statement are classifi ed as infrastructure investments or similar. Assets backing life insurance contracts are required to be fair valued in accordance with AASB 1038: Life Insurance Contracts .

Loans and receivables

Loans and receivables including loan notes and loans to key management personnel are non-derivative fi nancial assets with fi xed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Available-for-sale investments are those non-derivative fi nancial assets that are designated as available-for-sale or are not classifi ed as any of the two preceding categories. After initial recognition, available-for-sale investments are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in the income statement.

(xvii) Investment property

Investment properties are measured initially at cost including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met, and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair value, which refl ect market conditions at the balance sheet date. Independent valuations for all investment properties are conducted at least annually, from suitably qualifi ed valuers, and the Directors make reference to these independent valuations when determining fair value. Gains or losses arising from changes in the fair values of investment properties are included in the income statement in the period in which they arise.

Investment properties are derecognised when they have either been disposed of or when the investment property is permanently withdrawn from use and no future benefi t is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in profi t or loss in the year of retirement or disposal.

56

Where the Group has categorised property as development property it applies:

(i) Development properties

Where a property is undergoing investment development, the cost of redevelopment is added to its previously stated fair value.

The carrying amounts of development properties are reviewed to determine whether they are in excess of their recoverable amount at each reporting date. If the carrying amount of a development property exceeds its recoverable amount, the property is written down to the lower amount. Development properties are revalued to their fair value.

(ii) Development property held for resale

Development properties held as inventory are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling costs.

Cost includes cost of acquisition, development costs, holding costs and directly attributable interest on borrowed funds where the development is a qualifying asset. Capitalisation of borrowing costs ceases during extended periods in which active development is interrupted. When a development is completed and ceases to be a qualifying asset, borrowing costs and other costs are expensed as incurred.

(xviii) Plant and equipment and infrastructure fi xed assets

Plant and equipment

Items of plant and equipment are stated at cost or deemed cost less accumulated depreciation and impairment losses.

Depreciation is calculated on a straight-line basis to write off the net cost of each class of fi xed assets over its expected useful life. Estimates of remaining useful lives are made on a regular basis for all assets, with annual reassessments for major items. The expected useful life of plant and equipment is three to fi ve years.

Infrastructure fi xed assets are stated at cost and amortised on a straight-line basis over their estimated useful life of 40 years. This is done on an asset by asset basis with amortisation commencing when the Company starts receiving income from the asset.

The carrying values of plant and equipment and infrastructure fi xed assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Impairment losses are recognised in the income statement.

(xix) Lease assets

Leases are classifi ed as either operating leases or fi nance leases at the date of inception of the lease.

A distinction is made between fi nance leases which effectively transfer from the lessor to the lessee substantially all of the risks and benefi ts incident to ownership of leased assets, and operating leases under which the lessor effectively retains substantially

Finance leases are capitalised. A lease asset and liability are established at the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the interest expense.

The lease asset is amortised on a straight-line basis over the term of the lease, or where it is likely that the Group will obtain ownership of the asset, the life of the asset. Lease assets held at the reporting date are being amortised over periods ranging from three to 10 years.

Incentives received on entering into operating leases are recognised as liabilities and are amortised over the life of the lease.

Where the Group acquires, as part of a business combination, an operating lease over land, the fair value of the operating lease over land is recognised separately from goodwill. This intangible is recorded at fair value less accumulated amortisation. Amortisation is calculated using the straight-line method over the effective life of the lease being 25 years.

Other operating lease payments are charged to the income statement in the periods in which they are incurred.

Surplus lease space

The present value of future payments for surplus lease space under non-cancellable operating leases is recognised as a liability, net of sub-leasing revenue, in the period in which it is determined that the lease space will be of no future benefi t to the Group.

(xx) Deferred portfolio and origination costs

Deferred portfolio costs

Portfolio costs represent the costs associated with establishing securitised mortgage backed pools of funds which are funded via the issue of Residential Mortgage Backed Securities (RMBS) to investors. When incurred these costs are recognised as an asset and subsequently amortised over the life of the future economic benefi ts expected to be received.

57

1. Summary of signifi cant accounting policies (continued)

(xx) Deferred portfolio and origination costs (continued)

Deferred portfolio costs (continued)

The amortisation policy is to match the portfolio costs with the expected repayment profi le of each securitised pool so that the amortisation charge as a proportion of the outstanding securitisation pool is consistent over the life of the securitisation, creating an effective yield.

The amortisation rate is determined based on the forecast prepayment rate of the loans underlying the RMBS. This is calculated on a trust by trust basis, thereby matching each pool of relevant costs with the forecast prepayment rate of the ‘issue’ they relate to.

Deferred origination costs

Deferred origination costs are costs associated with origination of loans including commissions paid to mortgage originators and Lenders Mortgage Insurance (LMI) premiums. Deferred origination costs incurred are recognised as an asset and subsequently amortised over the life of the future economic benefi ts expected to be received.The amortisation policy is to match the amortisation of the origination costs with the average repayment profi le of a loan so that the amortisation charge as a proportion of the outstanding loan balance is consistent over the life of a loan, creating an effective yield.

The basis of amortisation is determined by the amortisation of the loan book or Cumulative Prepayment Rates (CPR) curve (excluding discharges). Any origination costs (remaining written down value) associated with a loan which has discharged during the period is written off immediately.

This policy ensures that total deferred origination costs are not carried at an amount above their recoverable amount.

(xxi) Goodwill and other intangible assets

Goodwill

Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquiree’s identifi able assets, liabilities and contingent liabilities.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefi t from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.

Each unit or group of units to which the goodwill is so allocated:

• represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and

• is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined in accordance with AASB 8: Segment Reporting .

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. When the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised.

When goodwill forms part of a cash-generating unit (group of cash-generating units) and an operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Impairment losses recognised for goodwill are not subsequently reversed.

Other intangible assets

Other intangible assets acquired are recorded at cost less accumulated amortisation and impairment losses. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition.

Certain internal and external software costs directly incurred in acquiring and developing certain software have been capitalised and are being amortised on a straight-line basis over their useful life, usually for a period of fi ve years. Useful lives are examined on an annual basis and where applicable, adjustments are made on a prospective basis. Costs incurred on software maintenance are expensed as incurred.

(xxii) Impairment of assets

At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. If any such indication exists, the Group makes a formal estimation of the asset’s recoverable amount.

58

An asset’s recoverable amount is the greater of the fair value less costs to sell and its value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash fl ows that are largely independent of those from other assets or groups of assets. In such cases, the asset is tested for impairment as part of the cash-generating unit to which it belongs. In assessing value in use, the estimated future cash fl ows are discounted to their present value using a pre tax discount rate that refl ects current market assessments of time value of money and the risks specifi c to the asset.

When the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset or cash-generating unit is considered impaired and is written down to its recoverable amount.

Impairment losses are recognised in the income statement, unless an asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through the income statement.

Impairment losses recognised in respect of cash-generating units are allocated fi rst to reduce the carrying amount of any goodwill allocated to cash-generating units, then to reduce the carrying amount of the other assets in the unit on a pro rata basis.

An assessment is also made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A reversal of the impairment loss may only increase the asset’s value up to its carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement unless the asset is carried at revalued amount, in which case it is treated as a revaluation increase.

For equity instruments classifi ed as available for sale, impairment losses recognised in the income statement shall not be reversed through the income statement until the asset is disposed.

(xxiii) Payables

These amounts represent unsecured liabilities for goods and services provided to the Group prior to the end of the fi nancial year and short-term fi nancing of deferred origination costs by managed warehouse trusts. Payables are stated at amortised costs.

(xxiv) Interest bearing liabilities

All loans and borrowings, with the exception of those held in the life company, are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.

Interest bearing liabilities in the life company are carried at fair value and unrealised gains and losses are recognised through the income statement.

Fees paid on the establishment of loan facilities that are yield related are included as part of the carrying amount of the loans and borrowings. Interest bearing liabilities in the life company are considered at fair value.

(xxv) Employee benefi ts

Defi ned contribution superannuation funds

Obligations for contributions to defi ned contribution superannuation funds are recognised as an expense in the income statement as incurred.

Wages, salaries, annual leave and non-monetary benefi ts

Liabilities for wages and salaries, including non-monetary benefi ts and annual leave expected to be settled within 12 months of the reporting date are recognised in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable.

Long service leave

A liability for long service leave is recognised as the present value of estimated future cash outfl ows to be made in respect of services provided by employees up to the reporting date. The estimated future cash outfl ows are discounted using bond yields from Australian Commonwealth government bonds which have durations to match, as closely as possible, the estimated future

Factors which affect the estimated future cash outfl ows such as expected future salary increases, experience of employee departures and period of service, are included in the measurement.

59

1. Summary of signifi cant accounting policies (continued)

(xxvi) Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outfl ow of resources embodying economic benefi ts will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for.

When the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset only when the reimbursement is virtually certain.

The expense relating to any provision is presented in the income statement net of any reimbursement.

Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that refl ects the time value of money and the risks specifi c to the liability. The increase in the provision resulting from the passage of time is recognised in fi nance costs.

(xxvii) Contributed equity

Ordinary shares are classifi ed as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Treasury shares are ordinary shares in the Company held by the employee share trust. These shares are issued in respect of the LTIP. Refer Note 1(xxix) for further details.

(xxviii) Earnings per share

Basic earnings per share is calculated by dividing net profi t for the year attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the fi nancial period. The number of ordinary shares outstanding includes any shares granted under the employee share incentive plan which have vested and settled.

Diluted earnings per share is calculated by dividing the net profi t attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year (adjusted for the effects of dilutive options and shares granted under the Challenger Performance Plan).

(xxix) Share based payment transactions

Long-term equity based incentive plan

The Group has an employee share incentive plan and an employee share trust for the granting of non-transferable options to executives and senior employees. Shares in the Company held by the employee share trust are classifi ed as treasury shares and presented in the balance sheet as a deduction from equity.

Employees of the Group receive remuneration in the form of share based payment transactions, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined using an option pricing model. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company (market conditions).

In accordance with AIFRS, the cost of equity-settled transactions is recognised in the consolidated accounts, together with a corresponding increase in equity, over the period in which the performance conditions are fulfi lled, ending on the date on which the relevant employees become fully entitled to the award (vesting date). At the parent entity level, the cost of the equity shares is recognised as an equity distribution, whereby the investment in subsidiary is increased with a corresponding increase in the share based equity reserve.

The cumulative expense or investment recognised for equity-settled transactions at each reporting date until the vesting date refl ects the extent to which the vesting period has expired and the number of awards that, in the opinion of the directors of the Group at that date, based on the best available estimate, that will ultimately vest.

No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date.

Where the terms of an equity-settled award are modifi ed, as a minimum an expense is recognised as if the terms had not been modifi ed. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modifi cation, as

Where an equity-settled award is cancelled during the vesting period (other than a grant cancelled forfeiture when the vesting conditions are not satisfi ed), it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately.

60

However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modifi cation of the original award, as described in the previous paragraph.

(xxx) Employee Share Acquisition Plan

Share based compensation benefi ts are provided to employees via the Challenger Performance Plan (CPP). The Group has formed a trust to administer the Group’s employee share acquisition plan. This trust is consolidated, as the substance of the relationship is that the trust is controlled by the Group.

Through contributions to the trust the consolidated entity purchases shares in the Company on market. Shares acquired are held by the Challenger Performance Plan Trust and are disclosed as ‘Treasury Shares’ and deducted from contributed equity. The cost of the shares acquired by the CPP is recognised as an employee benefi t expense with a corresponding increase in equity, being a share based payments reserve.

The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the shares.

(xxxi) Goods and Services Tax (GST)

Revenues, expenses and assets are recognised net of the amount GST, except where the amount of the GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of the acquisition of the asset or as part of the expense.

Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the Australian Taxation Offi ce (ATO) is included as an asset or liability in the balance sheet.

Cash fl ows are included in the statement of cash fl ows on a gross basis. The GST components of cash fl ows arising from investing and fi nancing activities which are recoverable from, or payable to, the ATO are classifi ed as operating cash fl ows.

(xxxii) Restrictions on assets

Investments held in Challenger Life Company Limited can only be used within the restrictions imposed under the Life Insurance Act 1995. The main restrictions are that the assets in a statutory Fund (‘Fund’) can only be used to meet the liabilities and expenses of that Fund, to acquire investments to further the business of the Fund or as distributions when solvency and capital adequacy requirements are met. Participating policyholders can receive a distribution when solvency requirements are met, whilst shareholders can only receive a distribution when the higher level of capital adequacy requirements is met.

(xxxiii) Signifi cant accounting judgements, estimates and assumptions

The carrying amount of certain assets and liabilities are often determined based on estimates and assumptions of future events.

The key estimates and assumptions that have a signifi cant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are:

Share based payments

The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the ordinary shares at the date at which they are granted.

The fair value is determined using the Black-Scholes formula, taking into account the terms and conditions upon which the equity instruments were granted, as discussed in Note 31. The fair value calculation is performed by an external valuer.

Policy liabilities

Life insurance policyholder liabilities are accounted for under AASB 1038: Life Insurance Business .

Policy liabilities are measured at net present values of estimated future cash fl ows or, where the result would not be materially different, as the accumulated benefi ts available to policyholders.

Changes in policy liabilities for non-deposit business are recognised in the income statement as revenues and expenses in the fi nancial year in which the changes occur.

A signifi cant area of judgement is in the determination of policyholder liabilities, which involve actuarial assumptions.

The areas of judgement where key actuarial assumptions are made in the determination of policyholder liabilities are:

• business assumptions including:

• duration of claims/policy payments;

• acquisition and maintenance expense levels;

• economic assumptions for discount and infl ation rates.

61

1. Summary of signifi cant accounting policies (continued)

(xxxiii) Signifi cant accounting judgements, estimates and assumptions (continued)

Policy liabilities (continued)

The determination of assumptions relies on making judgements on variances from forecast assumptions. Where experience differs from forecast assumptions:

• recent results may be a statistical aberration; or

• there may be a commencement of a new paradigm requiring a change in forecast assumptions.

The Group’s actuaries arrive at conclusions regarding the statistical analysis using their experience and judgement.

Additional information on the policyholder liabilities is set out in Note 21 Life contract liabilities.

Property valuations

Investment properties in Note 12 are stated at fair value, which has been determined based on valuations performed by independent valuers during the year ended 30 June 2009.

The Valuer or Valuation Practice are authorised to practise as a Valuer under the law of the relevant jurisdiction where the valuation takes place. The Valuer performing the valuation has at least fi ve years of continuous experience in the valuation of property of a similar type to the property being valued. Neither the Valuer, nor Valuation Practice, has a pecuniary interest that could confl ict with the valuation of the property. The Valuer and Valuation Practice comply with the Australian Property Institute (API) Code of Ethics and Rules of Conduct.

Valuations are prepared on the basis of Market Value as defi ned by The International Assets Valuation Standards Committee (TIAVSC) and endorsed by the API.

Market value is the estimated amount for which an asset could exchange on the date of valuation between a willing buyer and willing seller in an arm’s length transaction wherein the parties had each acted knowledgeably, prudently and without compulsion. In determining Market Value, Valuers have examined available market evidence and applied this analysis to both the traditional capitalisation approach and discounted cash fl ow approach.

Interest bearing liabilities

Subordinated debt is initially recognised at fair value and in subsequent periods is remeasured at fair value through the income statement. The determination of fair value includes the assessment of movements in interest rates, credit spreads and foreign exchange. These movements are reviewed at each reporting date to take into account market conditions.

Deferred tax assets

Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profi ts will be available to utilise those temporary differences. Factors considered include the ability to offset tax losses against taxable profi ts between members of the tax consolidated group within an appropriate future timeframe and whether the level of future taxable profi ts are expected to be suffi cient to allow recovery of deferred tax assets.

Unlisted investment valuations

Investments for which there is no active market or an external valuation available were valued with reference to the current market value of another instrument that is substantially the same; discounted cash fl ow analysis and other methods consistent with market best practice. Refer Note 27 for further disclosure.

Impairment of goodwill

The Group assesses whether goodwill is impaired at least annually in accordance with the accounting policy in Note 16. These calculations involve an estimation of the recoverable amount of the cash-generating units to which the goodwill is allocated.

62

(xxxiv) Comparatives

Where necessary comparative fi gures have been reclassifi ed to conform to the changes in presentation made in these

Cash equivalents that were categorised in fi nancial assets fair valued through the income statement in prior periods have been reclassifi ed into cash and cash equivalents category. This change as resulted in a restatement of cash to $804.1 million at 30 June 2008, an increase of $146.3 million.

An internal organisational restructure was undertaken during the year, resulting in a change to the composition of the Funds Management and Life (formerly Asset Management) divisions. The restructure has changed the fi nancial disclosure by division for management reporting only, and in particular is relevant to Note 2, Segment information.

The change in the composition of the two divisions resulted in the prior year comparative for operating loss before tax and noncontrolling interests, increasing for Life by $38 million with an equal and offsetting increase in profi t for Funds Management. The prior year comparative for the net assets of two divisions also changed with the net assets for Life decreasing by $10 million offset by a corresponding increase in Funds Management net assets.

Whilst divisions have changed to align with the management view of the operating result, the total consolidated profi t or loss after tax and net assets of the Group remain unchanged from the prior period.

During the period, the Group reassessed the application of AASB 112: Income Taxes for the presentation of deferred and current income tax balances for the tax-consolidated group and determined that the conditions for set off had been met. This had the effect of restating 2008 tax balances by reducing deferred tax assets by $198.0 million, reducing current tax liabilities by $63.3 million and reducing deferred tax liabilities by $134.7 million.

In addition, for the prior year comparative period the income tax credit relating to current year operating losses has been reclassifi ed between deferred income tax and current income tax. Note 6 Income tax has changed by a $33.3 million decrease in the deferred income tax benefi t offset in full by a corresponding increase in the current income tax benefi t. At a parent entity level the same change has resulted in a $25.3 million reclassifi cation.

(xxxv) Rounding of amounts

The fi nancial report is presented in Australian dollars and all amounts are rounded to the nearest hundred thousand dollars ($0.1 million) unless otherwise stated under the option available to the Company under ASIC Class Order 98/100.

63

2. Segment information

Business segments

The reporting segments of the Group have been identifi ed as follows:

			Reporting segments	Reporting segments
		Life	Mortgage Management
$M	2009	2008	2009	2008
Management view1
Total segment revenue	250.8	207.9	208.9	164.9
Operating expenses	(23.4)	(23.1)	(72.8)	(64.8)
Normalised EBIT	227.4	184.8	136.1	100.1
Interest and borrowing costs	–	–	–	–
Discontinued operations2	–	–	–	–
Normalised net prof t/(loss) before tax, impairment,
signif cant items and investment experience	227.4	184.8	136.1	100.1
Investment experience	(442.3)	(270.7)	–	–
Signif cant items	–	(45.8)	–	(22.0)
Net prof t/(loss) before tax	(214.9)	(131.7)	136.1	78.1
Income tax benef t
Net loss after tax from all operations
Segment assets	6,119.7	5,645.0	1,121.9	847.7
Segment liabilities	(5,413.4)	(4,736.0)	(608.9)	(276.6)
Net assets from all operations	906.3	909.0	513.0	571.1
Statutory view:
Revenue from external customers	(77.2)	68.4	241.0	169.9
Interest income	276.4	220.6	1,432.3	1,803.8
Interest expense	(85.8)	(86.6)	(1,098.3)	(1,566.0)
Intersegment revenue4	(2.5)	(9.0)	5.6	14.0
Impairment	(1.2)	(41.8)	–	(22.0)
Depreciation and amortisation	(2.8)	(3.3)	(78.2)	(90.0)

1 Management view is as described in the Directors’ report as this presentation more closely refl ects the key value drivers and core operations of the Group.

2 The Financial Planning division was disposed of on 30 June 2008 and so has been removed from the segment note as it is no longer reported to the chief operating decision maker.

3 Corporate and other includes expenses and revenue relating to Corporate and CDI reported to management.

4 Intersegment transactions are at arm’s length.

64

		Total reporting	Total reporting			Total consolidated	Total consolidated
Funds Management			segments	Corporate and other3		management view
2009	2008	2009	2008	2009	2008	2009	2008
114.4	187.3	574.1	560.1	4.7	6.4	578.8	566.5
(96.3)	(118.9)	(192.5)	(206.8)	(66.6)	(49.3)	(259.1)	(256.1)
18.1	68.4	381.6	353.3	(61.9)	(42.9)	319.7	310.4
–	–	–	–	(36.9)	(41.3)	(36.9)	(41.3)
–	–	–	–	–	10.1	–	10.1
18.1	68.4	381.6	353.3	(98.8)	(74.1)	282.8	279.2
–	–	(442.3)	(270.7)	–	–	(442.3)	(270.7)
–	–	–	(67.8)	–	(18.6)	–	(86.4)
18.1	68.4	(60.7)	14.8	(98.8)	(92.7)	(159.5)	(77.9)
						68.8	33.5
						(90.7)	(44.2)
108.2	161.0	7,349.8	6,653.7	17,888.0	20,503.6	25,237.8	27,157.3
(14.9)	(43.5)	(5,837.2)	(5,056.1)	(17,711.2)	(20,471.2)	(23,548.4)	(25,527.3)
93.3	117.5	1,512.6	1,597.6	176.8	32.4	1,689.4	1,630.0
128.3	247.2	292.1	485.5	(41.7)	4.9	250.4	490.4
0.6	4.9	1,709.3	2,029.3	14.5	9.1	1,723.8	2,038.4
(0.2)	(0.2)	(1,184.3)	(1,652.8)	(30.6)	(29.2)	(1,214.9)	(1,682.0)
(3.1)	(5.0)	–	–	–	–	–	–
–	–	(1.2)	(63.8)	–	–	(1.2)	(63.8)
(0.4)	–	(81.4)	(93.3)	(14.0)	(9.6)	(95.4)	(102.9)

65

2. Segment information (continued)

(i) Operating segments

The presentation of these results is the same as that provided to the chief operating decision maker as required under AASB 8 . The Group operates in Mortgage Management, Life, Funds Management and Corporate segments.

Life includes annuity and life insurance business carried out by Challenger Life Company Limited (CLC). CLC invests in assets providing long-term income streams for policy holders.

The Mortgage Management segment is a white label funding provider for the commercial and residential mortgage lending market. The segment also distributes mortgages through ownership of broker aggregation platforms.

Funds Management earns fees from its operations in the funds management and specialised funds fi elds, providing an end to end funds management business as well as managing four listed funds and a number of unlisted fund mandates.

Corporate and other in the segment note includes the income and expenses incurred by the corporate division. Corporate and other also includes eliminations and non-core activities of the Group. Corporate expenses consist of costs that fall outside the day-to-day operations of Life, Mortgage Management and Funds Management. These costs include the costs of the Group CEO and CFO, shared services across the Company, directors’ fees, corporate borrowings and associated borrowing costs and shareholder registry service for the Group.

(ii) Products and services

The Group’s divisional segment split represents the products that the Group supplies.

Life

Challenger offers a fi xed rate superannuation product and fi xed rate retirement product that are both designed for investors who are seeking a low-risk investment for a known period of time and want to protect their capital.

Mortgage management

Challenger specialises in funding residential and commercial loans to borrowers in Australia and New Zealand. These loans are delivered through a vast network of accredited Preferred Lenders. The Preferred Lenders include mortgage originators, mortgage managers and other professionals who offer loans under their own branding to their clients.

Funds management

Funds management offers a range of management investments across the major asset classes with funds in:

• Fixed interest and mortgage funds

• Australian shares

• Property funds

• International share funds.

(iii) Geographical areas

The Group operates predominantly in Australia and so no geographical split is provided to the chief operating decision maker.

(iv) Major customers

The Group does not rely on any major customer and so there is no concentration risk.

(v) Non-reportable segment reconciling items

Reconciling items in Corporate and other revenue includes interest income received by corporate entities.

Reconciling items in Corporate and other includes expenses incurred by the corporate divisions not recharged such as corporate division wages and salaries and depreciation costs.

The assets of the Corporate and other segment are made up of corporate assets of $226.7 million (2008: $594.1 million), SPV assets of $16.2 billion (2008: $19.9 billion), and CDI assets of $630.5 million (2008 nil).

The liabilities of the Corporate and other segment are made up corporate liabilities of $307.7 million (2008: $575 million), SPV liabilities of $16.3 billion (2008: $19.8 billion), and CDI liabilities of $359.1 million (2008: nil).

66

	Total
	2009 2008 $M $M
(vi) Reconciliation of segment revenue to statutory revenue Reportable segment revenue Other revenue relating to CDI and Corporate function reported to management	574.1 560.1 4.7 6.4
Management view of revenue1 SPV interest costs and fees offset against SPV income Commission expenses offset against commission income Amortisation of deferred portfolio and origination costs offset against mortgage fee income Property related expenses offset against property income Policyholder liabilities maintenance and expense offset against policyholder income Realised and unrealised gains and (losses) recognised as investment experience Normalised capital growth management assumptions Interest expense on controlled property trusts offset against income for management reporting Other expenses, other interest and impact of non-controlling interests offset against income for management reporting	578.8 566.5 1,059.9 1,551.7 316.6 197.6 78.2 90.6 35.1 20.8 190.7 194.5 (314.1) (141.4) (64.1) (64.6) 38.9 38.2 53.0 11.1
Statutory revenue	1,973.0 2,465.0
(vii) Reconciliation of segment prof t to statutory loss Reportable segment prof t before tax Other prof t relating to CDI and loss relating to Corporate function reported to management	381.6 353.3 (98.8) (74.1)
Management view of prof t Investment experience2 Signif cant items3 Treatment of discontinued operations Other	282.8 279.2 (442.3) (270.7) – (86.4) – 10.1 3.2 5.7
Statutory loss before tax	(156.3) (62.1)

(viii) Intersegment transactions

All intersegment transactions are at arm’s length.

1 ‘Net income’ and ‘Total operating expenses’ differs from ‘Revenue’ and ‘Expense’ as disclosed in the fi nancial report as certain direct costs including commissions and management fees are netted off against gross revenues in deriving ‘Net income’ above. These direct costs are classifi ed as ‘Expenses’ in the fi nancial report. In addition, the Mortgage Management Special Purpose Vehicle revenues, expenses and fi nance costs disclosed in the fi nancial report are netted off in Net income.

2 Investment experience is the realised and unrealised mark to market gains and losses on assets and liabilities. Investment experience is net of normalised capital growth.

3 Management view in 2008 included signifi cant items relating to impairment of assets and disposal of the Financial Planning division.

67

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
3. Revenue Derived from operating activities: Fees and other income Management fee income Fee income – SPV Other income Investment revenue Equity and infrastructure1investments Dividend income Dividend income from controlled entities Net realised losses on equity investments Net unrealised losses on equity investments Net realised gains on infrastructure investments Net unrealised losses on infrastructure investments Debt securities and cash Interest income Net realised losses on debt securities Net unrealised losses on debt securities2 Real estate investments Dividend income Property rental income Net realised (losses)/gains Net unrealised losses Discount on acquisition of controlled entities Other investments Interest income – SPV Impairment loss on equity accounted associates Impairment loss on f nancial assets available for sale Net realised exchange (losses)/gains on foreign exchange translation and foreign currency hedges Net unrealised gains/(losses) on foreign exchange translation and foreign currency hedges Net realised gains on interest rate derivative assets and liabilities Net unrealised gains/(losses) on interest rate derivative assets and liabilities Other revenue Gain on annuity book transfer Policyholder liability adjustment (losses)/gains3	319.3 338.0 – – 45.6 51.2 – – 12.2 21.4 – 0.3 72.8 103.4 – – – – 123.4 110.3 (21.0) (10.1) – – (69.2) (35.0) – – 17.5 0.9 – – (229.6) (123.1) – – 335.5 250.6 5.2 6.5 (89.9) (0.8) – – (17.9) (70.7) – – 12.1 22.9 – – 150.2 101.7 – – (1.0) 30.0 – – (148.9) (52.5) – – 66.4 – – – 1,388.3 1,787.8 – – – (22.0) – – (1.2) (41.8) – – (147.9) 117.1 – – 57.5 (64.0) – – 95.0 7.6 – – 106.0 (71.6) – – 30.8 – – – (9.6) 124.0 – –
	1,973.0 2,465.0 128.6 117.1

1 Infrastructure investments are designated as fair value through the income statement. Refer to Note 1(xvi) for further information.

2 Includes fair value movement in subordinated debt (Note 27).

3 Policyholder liability movements from changes in interest rates, infl ation rates, and valuation assumptions. Total change in policy liabilities is equal to the policyholder liability adjustment (above) plus the cost of policyholder liabilities (Note 4).

68

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
4. Expenses Derived from operating activities: Commission expenses Amortisation of deferred portfolio and origination costs Intangibles amortisation expense Depreciation expense Employee expenses Employee share based payments Superannuation Communications IT maintenance Occupancy expense – operating lease Property related expenses Management fees Professional fees Fee expenses – SPV Policyholder liabilities and maintenance expenses1 Other expenses	316.6 197.6 – – 78.2 90.0 – – 8.8 6.0 – – 8.0 6.9 – – 154.7 168.8 – – 26.9 22.4 – – 6.9 6.9 – – 9.7 9.4 – – 5.0 2.9 – – 15.8 8.9 – – 35.1 20.8 – – 12.9 14.7 – – 6.6 22.2 – – 6.7 7.0 – – 190.7 194.5 – – 34.9 68.2 2.6 0.1
Total	917.5 847.2 2.6 0.1

1 Cost of policy liabilities is made up of interest expense on policy liabilities plus fair value adjustments to policy liabilities at policy acquisition, less release of liability in respect of expenses incurred in the current year. Interest expense on policy liabilities is calculated at rates that applied during the current year. Movement in policy liabilities due to changes in absolute value of interest rates is captured in Note 3 Policy liabilities adjustment.

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
5. Finance costs Derived from operating activities: Interest and loan amortisation expenses incurred by: Mortgage Management SPVs Other entities Property trusts Other f nance costs	1,053.3 1,544.7 – – 118.4 96.5 – – 38.9 38.2 – – 4.3 2.6 – –
	1,214.9 1,682.0 – –

69

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
6. Income tax Major components of income tax expense are: (a) Income tax benef t/(expense) analysis: Current income tax benef t/(expense) Current income tax benef t – prior year adjustment Deferred income tax benef t/(expense)	58.6 28.4 (0.1) (0.2) 0.6 4.1 0.3 – 9.5 (1.1) (0.8) –
Net benef t/(expense)	68.7 31.3 (0.5) (0.2)
Deferred income tax benef t included in income tax expense comprises: Increase in deferred tax assets Increase in deferred tax liabilities	(81.8) (6.7) – – 91.3 5.6 0.8 –
	9.5 (1.1) 0.8 –
(b) Reconciliation of income tax benef t/(expense): Net (loss)/prof t from operations before non-controlling interests and income tax benef t/(expense) Add loss relating to non-controlling interests	(156.3) (70.6) 126.0 117.0 (3.1) (5.0) – –
Net accounting (loss)/prof t before tax Prima facie income tax based on the Australian company tax rate of 30% Tax effect of amounts which are not deductible/assessable in calculating taxable income: Previously unrecognised tax losses Non-deductible expenses Rate differential on offshore income Non-assessable items Other items	(159.4) (75.6) 126.0 117.0 47.8 22.7 (37.8) (35.1) – 2.2 – 2.2 (3.7) (1.8) – – 0.7 5.2 – 0.7 – 37.0 33.1 23.2 3.0 0.3 –
	20.9 8.6 37.3 35.3
Net benef t/(expense)	68.7 31.3 (0.5) 0.2
Tax losses Gross unused losses for which no deferred tax asset has been recognised	(82.5) (68.8) (82.5) (68.8)

All available revenue losses have been recognised in the balance sheet at 30 June 2009 and 30 June 2008.

70

Consolidated	Balance sheet Income statement
	2009 2008 2009 2008 $M $M $M $M
Deferred income tax Deferred income tax at 30 June relates to the following: Deferred income tax liabilities Deferred acquisition and origination costs Fixed asset temporary differences Future assessable trail commission Tax balances recognised on acquisitions Unrealised FX movements Unrealised gains on investment property Unrealised gains on external debt Other	(25.4) (41.4) 15.9 2.4 (16.0) (18.4) 2.4 (16.4) (51.7) (15.7) (102.9) (17.1) (35.9) (48.3) – 15.2 (9.3) (12.3) 2.9 (12.3) (129.6) (123.3) (6.3) 29.6 (49.0) – (49.0) – (34.9) (36.1) (21.1) (10.6) (351.8) (295.5) 54.6 10.8 43.8 (7.7) 3.2 2.7 0.5 2.9 99.6 37.6 62.0 4.8 79.4 11.1 67.5 4.3 138.3 74.6 17.7 – – – – (1.4) 6.2 4.6 1.6 (1.2) 8.4 56.6 (44.5) 8.6 389.7 198.0 37.9 (97.5)
Deferred income tax assets Accruals and provisions Employee entitlements Future deductible trail commission Investment write-down Losses Restructure provision Surplus lease space Other
Deferred tax asset/(liability)1
Deferred tax benef t/(expense)	(9.5) 1.1
Parent Deferred income tax assets Losses	124.9 70.6 (0.8) – 124.9 70.6
Deferred tax asset
Deferred tax benef t/(expense)	(0.8) –
1Netted by tax jurisdiction: Deferred income tax asset Deferred income tax liability	52.2 – (14.3) (97.5) 37.9 (97.5)

Tax consolidation

Challenger Financial Services Group Limited and its 100% owned Australian resident subsidiaries have formed a tax consolidated group with effect from 1 July 2002 and are therefore taxed as a single entity from that date. Challenger Financial Services Group Limited is the head entity of the tax consolidated group.

Tax effect accounting by members of the tax group

Members of the tax consolidated group have applied tax funding principles under which Challenger Financial Services Group Limited and each of the members of the tax consolidated group agree to pay tax equivalent payments to or from the head entity, based on the current tax liability or current tax asset of the member.

Such amounts are refl ected in the amounts receivable from or payable to each member and the head entity.

The group allocation approach is applied in determining the appropriate amount of current tax liability or current tax asset to allocate to members of the tax consolidated group.

Deferred taxes are allocated to members of the tax consolidated group in accordance with the principles of AASB 112 .

71

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
7. Dividends and distributions paid and proposed (a) Declared and paid during the year Final 60% franked dividend for the f nancial year 30 June 2008: 7.5 cents (2007: 7.5 cents fully franked) Interim franked dividend for the f nancial year 30 June 2009: 5.0 cents unfranked (2008: 5.0 cents fully franked)	47.4 45.8 47.4 45.8 29.6 31.8 29.6 31.8
	77.0 77.6 77.0 77.6
(b) Proposed (not recognised as a liability as at 30 June) Final unfranked dividend for the f nancial year 30 June 2009: 7.5 cents (2008: 7.5 cents 60% franked) (c) Franking Franking credit balance The amount of franking credits available for the subsequent f nancial year are: – franking account balance as at the end of the f nancial year at 30% – franking credits that will arise from the payment of income tax payable during the next f nancial year	44.7 47.4 44.7 47.4 3.1 4.4 – 7.8
– impact on the franking account of dividends proposed or declared before the f nancial report was authorised for issue but not recognised as a distribution to equity holders during the period	3.1 12.2 – (12.0)
	3.1 0.2

The 2008 fi nal dividend paid has been franked at 60%, resulting in an effective tax rate of 18%. The interim dividend and dividend proposed are unfranked, resulting in a 0% effective tax rate.

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
(d) Distributions paid or provided Distributions paid or provided represents amounts paid or payable to non-controlling interests of entities controlled by the Group. Distributions paid during the period to non-controlling interests Distributions provided during the period to non-controlling interests	13.4 7.5 – – 11.9 – – –
	25.3 7.5 – –

72

	Consolidated
	2009 2008 Cents Cents
8. Earnings per share The following ref ects the income and share data used in the basic and diluted earnings per share computations: From continuing operations Basic earnings per share Diluted earnings per share Total from all operations Basic earnings per share Diluted earnings per share	(16.2) (6.1) (15.9) (6.7) (16.2) (7.5) (15.9) (8.1)
	2009 2008 $M $M
Earnings used in calculating earnings per share For basic earnings per share: Loss from continuing operations Loss from discontinued operations	(90.7) (35.8) – (8.4)
Net loss attributable to ordinary shareholders for basic earnings per share	(90.7) (44.2)
For diluted earnings per share: Net loss from continuing operations Interest received on LTIP loans	(90.7) (35.8) – (4.4)
Net loss from continuing operations attributable to ordinary shareholders for diluted earnings per share adjusted for the impact of interest received on LTIP loans Loss from discontinued operations	(90.7) (40.2) – (8.4)
Net loss attributable to ordinary shareholders for diluted earnings per share	(90.7) (48.6)
Number of shares
	2009 2008 Number Number
Weighted average number of ordinary shares for basic earnings per share Effect of dilution: – Share options	558,725,530 586,651,463 10,734,605 16,932,072
Adjusted weighted average number of ordinary shares for diluted earnings per share	569,460,135 603,583,535

Treasury shares of 53.4 million and options of 141.5 million were not dilutive during the period.

There have been no other transactions involving ordinary shares or potential ordinary shares since the reporting date and before the completion of these fi nancial statements.

73

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
9. Cash and cash equivalents Cash at bank and on hand Cash equivalents Deposits at call	296.0 537.7 0.9 2.8 652.7 146.3 – – 123.0 120.1 – –
SPV cash1	1,071.7 804.1 0.9 2.8 737.0 956.0 – –
	1,808.7 1,760.1 0.9 2.8
1See Note 22 for full details of the SPV. 10. Receivables Trade debtors Amount receivable from controlled entities Amounts recoverable from managed trusts Dividends receivable Interest receivable Secured loans Tax refunds receivable Other debtors	434.6 189.8 – – – – 735.2 524.2 6.4 11.4 – – 17.0 36.3 – – 40.3 23.4 – – 37.7 67.0 – – – – – 2.4 46.4 53.4 – –
	582.4 381.3 735.2 526.6
Current Non-current	202.0 193.1 – 2.4 380.4 188.2 735.2 524.2
	582.4 381.3 735.2 526.6
Receivables – SPV	15,644.1 18,760.4 – –
	15,644.1 18,760.4 – –
Current Non-current	– – – – 15,644.1 18,760.4 – –
	15,644.1 18,760.4 – –
Provision for impairment of SPV receivables: Opening balance New and increased impairment charges Write-downs taken to provision	40.1 33.5 – – 62.6 27.9 – – (19.6) (21.3) – –
Closing balance1	83.1 40.1 – –

1 Shown netted against Receivables – SPV.

For further detail on the Special Purpose Vehicles (SPVs) operated by Mortgage Management refer to Note 22. Provisions for impairment are maintained against mortgage loan receivables within the respective SPVs.

The provision for impairment loss is measured as the difference between the carrying amount of the loan and the present values of the future cash fl ows discounted at the loan’s original effective interest rate, adjusted for insurance coverage.

The vast majority of the provision at reporting date relates to the provisioning by the SPVs against accrued high rate interest and fees related to loans in arrears which are generally not covered by lenders mortgage insurance. The rest of the provision relates to operational risks.

Importantly, whilst the SPVs are required to be consolidated into the Group’s accounts, the effective credit risk exposure in relation to the mortgage loans within the SPVs is held by the residential mortgage backed security note holders (where term securitisation has occurred) or the bank warehouse facility providers (where term securitisation has not yet occurred).

74

	Consolidated
	2009 2008 $M $M
11. Financial assets (i) Financial assets fair valued through income statement Debt investments held for trading Bonds Fixed interest notes Floating rate notes Preference shares	1,039.3 299.2 153.5 282.4 1,690.0 1,856.1 – 9.7
Equity investments held for trading Unlisted unit trusts, managed funds and equities Shares in listed and unlisted corporations Shares in listed corporations held in relation to endowment warrants	2,882.8 2,447.4 86.8 58.1 154.5 104.0 45.2 83.3
Infrastructure investments1 Shares in listed and unlisted trusts	286.5 245.4 653.8 914.0
Property investments Indirect property investments in listed and unlisted trusts2	653.8 914.0 185.9 335.7
Securities designated to be fair valued through income statement Seeding investments in funds of boutique partners	185.9 335.7 – 57.7
	– 57.7
Total f nancial assets fair valued through the income statement	4,009.0 4,000.2
Current Non-current	570.7 539.2 3,438.3 3,461.0
	4,009.0 4,000.2
(ii) Available-for-sale assets Other f nancial assets3	24.3 33.5
	24.3 33.5
Current Non-current	– – 24.3 33.5
	24.3 33.5

There are no fi nancial assets held in the parent entity.

• 1 Infrastructure investments are designated as fair value through the income statement. Refer to Note 1(xvi) for further information.

2 Indirect property investments include units held in listed and unlisted trusts and interest in joint ventures.

3 Impairment losses on available-for-sale assets were $1.2 million for 2009 (2008: $41.8 million loss).

75

	Consolidated
	2009 2008 $M $M
12. Investment property Investment property Investment property at fair value Investment property under development at cost Development property at cost	1,892.4 1,163.9 26.4 – 101.7 75.8
Total investment property	2,020.5 1,239.7
Reconciliation of carrying amount Investment property at fair value Carrying amount at beginning of period Acquisition – CDI1 Sale of properties at cost Sale of properties – reversal of unrealised gains2 Transfer from investment property under development Capital expenditure Foreign currency exchange gain Net revaluation (loss)/gain	1,163.9 1,164.8 824.2 – – (37.8) – (13.1) 0.2 – 8.4 27.4 (5.3) 2.1 (99.0) 20.5
Carrying amount at end of period	1,892.4 1,163.9
Investment property under development at cost Carrying amount at beginning of period Acquisition – CDI1 Transfer to investment property at fair value Capital expenditure	– – 25.2 – (0.2) – 1.4 –
Carrying amount at end of period	26.4 –
Development property at cost3 Carrying amount at beginning of period Acquisition – CDI1 Transfer to indirect property Development expenditure Net revaluation loss	75.8 74.2 14.3 – – (6.8) 17.4 8.4 (5.8) –
Carrying amount at end of period	101.7 75.8

There are no investment properties held in the parent entity.

All investment property is considered to be non-current.

1 At 31 December 2008, the Company acquired a controlling interest in the Challenger Diversifi ed Property Group (CDI), refer to Note 34 for further information.

2 Consideration received on disposal of properties less historical cost.

• 3 Development properties are valued at the lower of cost and net realisable value, being fair value less estimated selling costs.

76

	Notes	Acquisition	Total cost	Carrying	Cap	Date of	Carrying	Cap
		date	including	value	rate	latest	value	rate
			additions	2009	2009	valuation	2008	2008
Consolidated			$M	$M	%		$M	%
A. Investment property
Australian properties
Cinema/Retail
Century City		16-Oct-06 &
Walk, VIC	[a][d]	30-Jun-08	26.7	27.4	8.50%	30/06/09	–	–
Innaloo Cinema
Centre, WA	[b][e]	17-Dec-01	28.3	35.8	7.75%	31/12/08	14.2	7.50%
Jam Factory, VIC	[b][e]	4-Jul-00	102.3	110.1	8.00%	31/12/08	44.0	7.75%
George Street
Cinemas, NSW	[e]	4-Jul-00	75.0	84.0	8.25%	30/06/09	88.0	7.50%
Sub-sector cinema/
retail total			232.3	257.3			146.2
Retail
Kings Langley, NSW	[b][d]	29-Jul-01	16.5	16.0	8.25%	30/06/08	6.8	7.25%
Social infrastructure
County Court, VIC	[e]	30-Jun-00	200.9	273.0	6.75%	31/12/08	275.5	6.50%
Industrial hi-tech
CSIRO, NSW	[i]	27-Jun-01	150.7	159.0	8.20%	30/06/09	173.0	6.75%
Pacif c Brands, Port
Melbourne, VIC
(formerly Globe)	[b][e]	13-Nov-02	20.1	19.7	9.00%	30/06/09	9.0	7.75%
Goodman Fielder,
North Ryde, NSW	[b][f]	23-Feb-01	42.2	43.5	7.75%	31/12/08	18.7	7.25%
Heidelberg,
Waterloo, NSW	[b][f]	7-Jan-00	15.4	13.7	8.00%	31/12/08	6.6	7.25%
Kraft, Port
Melbourne, VIC	[b][e]	28-Jun-02	26.9	26.0	9.25%	30/06/09	11.4	8.00%
Rexel, North		30-Nov-06 &
Ryde, NSW	[a][f]	30-Jun-08	17.7	17.5	8.25%	30/06/09	–	–
Sub-sector industrial
hi-tech total			273.0	279.4			218.7
Off ce
ABS Building, ACT	[b][d]	1-Jan-00	115.2	140.0	8.00%	30/06/09	60.2	7.25%
DIAC Building, ACT	[b][d]	1-Dec-01	99.8	104.0	7.75%	30/06/09	44.5	7.50%
Discovery House, ACT	[b][f]	28-Apr-98	84.4	97.5	7.50%	31/12/08	40.4	7.00%
Elders House, SA	[b][d]	21-Jun-02	48.1	47.0	8.75%	30/06/09	20.8	7.75%
Executive Building,
Hobart, TAS	[b][i]	30-Mar-01	26.2	31.4	9.00%	30/06/09	12.4	8.25%
Makerston, QLD	[b][d]	14-Dec-00	52.8	75.0	7.50%	31/12/08	31.2	7.25%
417 St Kilda Road,
Melbourne, VIC	[i]	27-Jun-02	86.6	79.6	8.50%	30/06/09	82.0	7.50%
Taylors Institute,
Waterloo, NSW	[b][f]	16-May-01	41.0	43.4	8.25%	31/12/08	18.4	8.00%
The Forum, Cisco, NSW	[b][c]	5-Jan-01	114.9	110.5	7.75%	31/12/08	47.2	7.15%
The Forum, UUNet, NSW	[b][c]	5-Jan-01	72.2	68.0	8.10%	31/12/08	28.5	7.50%
Sub-sector
off ce total			741.2	796.4			385.6

77

12. Investment property (continued)

	Notes	Acquisition	Total cost	Carrying	Cap	Date of	Carrying	Cap
		date	including	value	rate	latest	value	rate
			additions	2009	2009	valuation	2008	2008
Consolidated			$M	$M	%		$M	%
A. Investment property (continued)
Australian properties (continued)
Distribution centres
Cosgrove Industrial
Park, Enf eld, NSW	[a][f]	31-Mar-07	21.3	21.9	7.50%	31/12/08	–	–
6 Foray Street,
(formerly Tetra Pak),
Fairf eld, NSW	[a][d]	23-Oct-06	21.1	16.9	10.00%	30/06/09	–	–
Spotlight, Laverton
North, VIC	[a][c]	16-Oct-06	15.8	16.4	8.25%	31/12/08	–	–
API Richlands,
Richlands, QLD	[a][f]	24-Oct-06	13.2	11.2	9.00%	30/06/09	–	–
12-30 Toll Drive,
Altona North, VIC	[a][c]	16-Oct-06	13.5	13.9	8.25%	31/12/08	–	–
2-10 Toll Drive,
Altona North, VIC	[a][c]	16-Oct-06	6.3	6.4	8.25%	31/12/08	–	–
1-9 Toll Drive,
Altona North, VIC	[a][e]	16-Oct-06	3.3	3.3	9.50%	30/06/09	–	–
Sub-sector
distribution total			94.5	90.0			–	–
Hotel
Rendezvous Hotels	[f]	8-Dec-05	56.0	56.5	8.50%	30/06/09	60.0	8.00%
Total Australia			1,614.4	1,768.6			1,092.8
Europe
Hungary Industrial	[d]	12-Apr-07	87.4	50.8	9.15%	30/06/09	71.1	8.24%
Rue Charles Nicolle,
Villeneuve les Beziers	[a][g]	06-Jun-07	17.9	14.0	8.35%	30/06/09	–	–
Avenue de Savigny,
Aulnay sous Bois	[a][g]	06-Jun-07	21.5	16.7	6.10%	30/06/09	–	–
105 Route d’Orleans,
Sully sur Loire	[a][g]	06-Jun-07	27.4	21.0	7.65%	30/06/09	–	–
140 Rue Marcel Paul,
Gennevilliers	[a][g]	06-Jun-07	13.7	11.0	8.20%	30/06/09	–	–
Zl du Papillon,
Parcay-Meslay	[a][g]	06-Jun-07	11.1	8.0	8.40%	30/06/09	–	–
Zl de Thibaud
8 Rue Doulaclouew,
Toulouse	[a][g]	06-Jun-07	3.3	2.3	8.60%	30/06/09	–	–
Sub-sector Europe			182.3	123.8			71.1
Total overseas			182.3	123.8			71.1
Total investment
property			1,796.7	1,892.4			1,163.9

78

	Notes	Acquisition	Total cost	Carrying	Cap	Date of	Carrying	Cap
		date	including	value	rate	latest	value	rate
			additions	2009	2009	valuation	2008	2008
Consolidated			$M	$M	%		$M	%
B. Development property
Maitland	[h]	6-Dec-06	78.4	78.4	n/a	30/06/09	67.8	n/a
Mavis Court	[h]	30-Apr-07	14.4	10.1	n/a	30/06/09	8.0	n/a
Enf eld	[a]	31-Mar-07	26.4	26.4	n/a	30/06/09	–	–
Smithf eld	[a][f]	3-Aug-07	20.1	13.2	n/a	30/06/09	–	–
Total development
property at cost			139.3	128.1			75.8
Total investment
and development
property			1,936.0	2,020.5			1,239.7

Notes:

Total cost – Total cost represents the original acquisition cost plus additions less full and partial disposals since acquisition date. In October 2006, CLC seeded Challenger Diversifi ed Property Group. This involved the full sale of fi ve industrial distribution centre properties and the partial (60%) sale of 18 other directly held properties.

Cap rate – The capitalisation rate is derived by dividing the net property income over the carrying value of an investment property.

Acquisition date shown for CDI properties is the date CDI acquired the properties not the date that CDI was consolidated into CLC. CDI was acquired by CLC on 31 December 2008.

• (a) Property is 100% owned by CDI.

• (b) Property is 60% owned by CDI and 40% owned by CLC. In 2009, the value shown is 100% as a result of the consolidation of CDI.

• (c) Valued by CBRE.

• (d) Valued by JLL.

• (e) Valued by Savills.

• (f) Valued by Colliers.

• (g) Valued by Cushman & Wakeman.

• (h) Valued at cost.

• (i) Valued by M3 Property.

• (j) Property was transferred from development property to indirect property during the 2008 year.

• (k) Property was classifi ed as an investment property under development at 30 June 2008.

The carrying values have been determined with reference to independent valuations using the market capitalisation and

As at 30 June 2009 the investment property portfolio occupancy rate was 95.95% (CLC) and 98.92% (CDI) with a weighted

average lease expiry of 8.1 years (CLC) and 5.7 years (CDI).

The properties listed above (other than the properties separately identifi ed below) are partially debt fi nanced with funding that contains a number of negative undertakings (including an undertaking not to create or allow encumbrances, and an undertaking not to incur fi nancial indebtedness which ranks in priority to existing debt). This debt funding is in place via a note issuance under a security trust structure.

CSIRO and County Court are each fi nanced via separate capital markets bond issuances. Security has been granted over these properties under the bond issuances, which includes a mortgage over the properties.

The development properties listed above (Maitland, Mavis Court) are partially funded by external debt. Security has been granted over each development in relation to that funding, which includes a mortgage over each property.

The Hungarian investments were not funded by debt as at 30 June 2009, and so were not subject to any security or charge at that time.

79

	Consolidated
	2009 2008 $M $M
13. Plant and equipment and infrastructure assets Leasehold improvements (CDI) – at cost1,2 Less: Accumulated depreciation	2.0 – – –
	2.0 –
Plant and equipment – at cost Less: Accumulated depreciation	47.2 45.6 (21.4) (14.9)
	25.8 30.7
Infrastructure assets and plant and equipment – at cost Less: Accumulated depreciation	33.2 33.7 (4.2) (2.7)
	29.0 31.0
Total plant and equipment	56.8 61.7

There is no plant and equipment or depreciation held in the parent company.

			Infrastructure
		Plant	and
Reconciliations	Leasehold	and	plant and
2009	improvements	equipment	equipment	Total
Consolidated	$M	$M	$M	$M
Opening balance (net of accumulated depreciation)
1 July 2008	–	30.7	31.0	61.7
Acquisition of subsidiaries	0.6	–	–	0.6
Additions	1.4	1.6	0.2	3.2
Disposals	–	–	(0.2)	(0.2)
Depreciation expense	–	(6.5)	(1.5)	(8.0)
Exchange gains/(losses) arising on the translation
of foreign PPE	–	–	(0.5)	(0.5)
Closing balance (net of accumulated depreciation)
30 June 2009	2.0	25.8	29.0	56.8
			Infrastructure
		Plant	and
	Leasehold	and	plant and
2008	improvements	equipment	equipment	Total
Consolidated	$M	$M	$M	$M
Opening balance (net of accumulated depreciation)
1 July 2007	–	28.4	36.5	64.9
Acquisition of subsidiaries	–	–	1.4	1.4
Additions	–	10.2	–	10.2
Disposals	–	(3.1)	–	(3.1)
Depreciation expense	–	(4.7)	(2.2)	(6.9)
Exchange losses arising on the translation of foreign PPE	–	(0.1)	(4.7)	(4.8)
Closing balance (net of accumulated depreciation)
30 June 2008	–	30.7	31.0	61.7

All plant and equipment and infrastructure assets are considered to be non-current.

1 At 31 December 2008, the Company acquired a controlling interest in the Challenger Diversifi ed Property Group (CDI), refer to Note 34 for further information.

2 In 2008, CDI entered into a lease to manage and upgrade the Domain car park located in the Sydney CBD.

80

	Consolidated
	2009 2008 $M $M
14. Other assets Deferred portfolio and origination costs Other Other SPV	85.7 138.0 6.3 9.9 0.4 1.3
	92.4 149.2
Current Non-current	30.1 39.4 62.3 109.8
	92.4 149.2

There are no other assets held in the parent.

	Consolidated
	2009 2008 $M $M
15. Goodwill and other intangible assets Reconciliation of carrying amounts at the beginning and end of the year Goodwill Cost Less: Accumulated impairment	968.7 904.0 (280.0) (280.0)
Total goodwill	688.7 624.0
Other intangible assets Software – at cost Less: Accumulated amortisation	26.7 26.7 (23.7) (17.2)
	3.0 9.5
Operating lease intangible – Infrastructure Terminal – at cost Less: Accumulated amortisation Less: Decrease in intangibles translation to closing rate	22.8 24.8 (2.0) (1.2) (2.7) (4.2)
	18.1 19.4
Total other intangible assets	21.1 28.9

There are no goodwill or intangible assets held in the parent.

81

15. Goodwill and other intangible assets (continued)

Consolidated	Goodwill Software Operating lease
	2009 2008 2009 2008 2009 2008 $M $M $M $M $M $M
Opening balance (net of accumulated amortisation and impairment) Acquisitions through business combinations Additions Disposals Reappraisal of fair value of net assets acquired Increase or decrease in goodwill translation to closing rate1 Amortisation expense Deferred acquisition costs	624.0 577.3 9.5 12.3 19.4 24.8 57.6 175.4 – – – – – 1.4 4.4 – – – (133.6) – (2.5) – – (0.5) 3.0 – – – – (0.5) (0.8) – – (0.5) (4.2) – – (7.9)2 (4.7) (0.8) (1.2) 8.1 2.7 – – – –
Closing balance (net of accumulated amortisation and impairment)	688.7 624.0 3.0 9.5 18.1 19.4

1 In accordance with AASB 121 , any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Thus they shall be expressed in the functional currency of the foreign operation and shall be translated into the presentation currency of the acquirer at the closing rate, with a resultant movement in goodwill refl ected in the income statement.

2 Amortisation of software includes $3.1 million of accelerated depreciation on software after a review of useful life.

(a) Description of the Group’s goodwill and intangible assets

(i) Goodwill

After initial recognition, goodwill acquired in a business combination is measured at cost less any accumulated impairment losses. Goodwill is not amortised but is subject to impairment testing on an annual basis or whenever there is an indication of impairment.

(ii) Software

Software development costs are carried at cost less accumulated amortisation and accumulated impairment losses. This intangible asset has been assessed as having a fi nite life and is amortised using the straight-line method over not more than fi ve years. The amortisation has been recognised in the income statement in the line depreciation. If an impairment indication arises, the recoverable amount is estimated and an impairment loss is recognised to the extent that the recoverable amount is lower than the carrying value.

(iii) Operating lease

Clashfern Investments (UK) Limited, a subsidiary of the Group, holds a 99 year lease for the rental of a site. The lease expires in 2032.

82

16. Impairment testing of goodwill

Goodwill acquired through business combinations has been allocated to the following cash-generating units for impairment testing as follows:

• Mortgage Management;

• Funds Management;

• Life.

The recoverable amount of goodwill for each cash-generating unit has been determined based on a value in use calculation.

To calculate this, cash fl ow projections are based on fi nancial budgets approved by senior management covering an appropriate horizon for each cash-generating unit.

The discount rates applied to cash fl ow projections are set out below and are based on the Group’s weighted average cost of capital.

	2009	2008	Cash
	Discount	Discount	f ow
	rate	rate	horizon
Cash-generating unit	%	%
Mortgage Management	12.0	12.5	101
Funds Management	12.0	12.5	5
Life	12.0	12.5	5

1 The 10 year period has been used because this business has a proven history of mortgage market growth which allows easier determination of longer term cash fl ow assumptions. Further, the business’ fi nancial budgets and forecasts are modelled from 10 year forecasts.

Carrying amount of goodwill

$M	Mortgage Funds Management Management Life Total
	2009 2008 2009 2008 2009 2008 2009 2008
Consolidated	460.0 394.3 78.0 78.0 150.7 151.7 688.7 624.0

The following describes each key assumption used on which management has based its cash fl ow projections to undertake impairment testing of goodwill:

• Budgeted gross margins – the basis used to determine the value assigned to the budgeted gross margins is the average gross margins achieved in the year ended immediately before the budgeted year, adjusted for expected impact of competitive pressure on margins and any expected effi ciency improvements.

• Bond rates – the yield on a government bond rate at the beginning of the budgeted year is utilised and the value assigned to the key assumption is consistent with external information sources. Values assigned to key assumptions refl ect past experiences, except for effi ciency improvements.

• Growth rates – the growth rates used are consistent with long-term trends in the industry segments in which the businesses operate.

The cash fl ow projections derived values for the cash-generating units (CGU) that were in excess of the carrying value of goodwill.

Sensitivity to changes in assumptions

Management is of the view that reasonably possible changes in the key assumptions, such as a change in the discount rate of 1% or a change in cash fl ow of 5%, would not cause the respective recoverable amounts for each CGU to fall short of the carrying amounts as at 30 June 2009.

All goodwill is considered to be non-current.

There is no goodwill held in the parent.

83

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
17. Payables Trade creditors and accruals Present value of trail liabilities Warrant liability1 Other creditors Unsettled trades payable Amounts payable to controlled entities Payables – SPV2	126.2 161.6 – – 376.2 128.9 – – 46.3 83.7 – – 45.2 63.9 – – 13.9 42.3 – – – – 447.0 162.3 6.7 12.4 – –
	614.5 492.8 447.0 162.3
Current Non-current	289.0 311.0 – – 325.5 181.8 447.0 162.3
	614.5 492.8 447.0 162.3

1 Does not represent an in substance liability of Challenger as the company has a Deed of Assignment – refer Note 36 (b) for additional information.

2 See Note 22 for details of SPV.

	Consolidated
	2009 2008 $M $M
18. Financial liabilities Fair valued through the income statement: Equity securities held for trading	– 43.6
	– 43.6
Current Non-current	– 43.6 – –
	– 43.6

There are no fi nancial liabilities held in the parent.

84

Consolidated	2009 2008
	Outstanding Facility Outstanding Facility $M $M $M $M
19. Interest bearing liabilities Bank loans Recourse Corporate Non-recourse Controlled property trusts Controlled property trusts – CDI1,2 Repurchase arrangements	130.0 300.0 – 350.0 470.3 490.8 497.6 505.7 333.8 500.0 – – 59.8 59.8 – –
Total bank loans	993.9 1,350.6 497.6 855.7
Non-bank loans Recourse Medium term note Non-recourse Controlled property trusts Corporate Loan note f nance Subordinated debt issuance Other interest bearing liabilities	206.0 206.0 250.0 250.0 7.0 7.0 6.6 6.6 130.0 130.0 130.0 130.0 62.5 62.5 54.8 54.8 418.8 418.8 554.7 554.7 – – 0.3 0.3
Total non-bank loans	824.3 824.3 996.4 996.4
Total interest bearing liabilities	1,818.2 2,174.9 1,494.0 1,852.1
Current3 Non-current3	890.7 56.1 927.5 1,437.9
	1,818.2 1,494.0
Interest bearing liabilities – SPV	16,310.2 17,485.1 19,523.7 21,217.2
Total interest bearing liabilities – SPV	16,310.2 17,485.1 19,523.7 21,217.2
Current4 Non-current	5,092.0 6,958.2 11,218.2 12,565.5
	16,310.2 19,523.7

There are no interest bearing liabilities held in the parent.

As at 30 June 2009, the weighted average interest rate for interest bearing liabilities was 5.57% (2008: 8.1%).

• 1 At 31 December 2008, the Company acquired a controlling interest in the Challenger Diversifi ed Property Group (CDI), refer to Note 34 for further information.

• 2 CDI bank loans are net of $0.4 million of unamortised fi nance costs.

• 3 The current balance includes CDI bank loans of $128.9 million. The Non-current balance includes CDI bank loans of $204.9 million.

• 4 Of this current balance, $5,004 million (2008: $6,940.6 million) is held in warehouse lines, which, in the event they are not rolled over, repayment of the debt is limited in recourse to the value of loans in the warehouse SPV.

Bank loans

Corporate

The corporate bank facility amounting to $300 million is secured by cross guarantees in place between certain Group companies. A fl oating interest rate was applied to this facility during the year.

Controlled property trusts

Bank loans in the wholly owned unlisted property trusts are secured solely by fi xed and fl oating fi rst mortgages over investment properties.

85

19. Interest bearing liabilities (continued)

Bank loans (continued)

Controlled property trust – CDI

CDI has entered into a multi-option syndicated fi nance facility with Westpac Banking Corporation Limited (WBC) and Commonwealth Bank of Australia Limited (CBA).

The loan facility comprises a Non-recourse secured and unsecured component.

In relation to the unsecured component, CDI has not granted security over its properties but provided a number of negative undertakings, including undertaking not to create or allow encumbrance over its properties.

The secured component relates to the funding of property acquisitions in France. Part of the funding for that acquisition was provided by WBC to CDI’s controlled entities in France and part of the funding was provided by WBC and CBA to Challenger Diversifi ed Property Trust 1 (CDPT1). Security was granted by way of mortgages of shares in, and of debts between, entities established to acquire the French properties.

Repurchase arrangements

During the period, the Group entered into repurchase agreements with the Reserve Bank of Australia (RBA) whereby a portfolio of debt securities has been sold to the RBA for cash whilst simultaneously agreeing to repurchase the debt securities at a fi xed price and fi xed date in the future. These arrangements are interest bearing with interest paid on maturity. The maturity date of the repurchased amount outstanding is 15 December 2009.

Non-bank loans

Medium term notes

Challenger Treasury Limited issued $250 million of Australian dollar fi xed rate medium-term notes on 23 April 2007. The notes are secured by cross guarantees in place between certain Group companies. The notes are fi xed at 7% and mature on 23 April 2010.

During the year, $44 million of the medium-term note was bought back at a $2.5 million (5.4%) discount to face value.

Controlled property trusts

Non-bank loans in the wholly owned unlisted property trusts are secured solely by fi xed and fl oating fi rst mortgages over properties.

Corporate

Working capital was raised via a Net Interest Margin Bond securitisation through the NIM Master Trust Series 2004-A2, 2004-A3 and 2006-A1. The facility is limited in its recourse to the manager to the extent of $1 and holds security over the residual incomes of all Australian securitised trusts. Interest is fi xed and is payable monthly.

CLC has entered into a restricted recourse £25 million loan that is secured by investment properties. The fi xed rate interest applied will be capitalised and is expected to be repaid together with the principal in 2012 (but no later than 2015).

Subordinated debt – Challenger Life Company Limited (CLC)

CLC issued A$400 million of subordinated notes into the US private placement market in November 2007.

The notes were issued under an APRA approved Instrument of Issue and, when issued, count as Approved Subordinated Debt for regulatory capital purposes. The notes are unsecured and will mature in 30 years with a non-call period of 10 years.

CLC also issued US$150 million of subordinated notes into the US private placement market in December 2006.

These notes were also issued under an APRA approved Instrument of Issue and, when issued, count as Approved Subordinated Debt for regulatory capital purposes. The notes are unsecured and were issued in two maturities (US$125 million at 10 years with a non-call period of fi ve years; and US$25 million at 20 years with a non-call period of 10 years). A portion of this subordinated debt has a fi xed interest rate with the remaining portion being fl oating.

The proceeds from the issuance of both the November 2007 and the December 2006 notes were made available to Statutory Fund No. 2 of CLC. The repayment obligations and other liabilities of CLC in respect of the principal, interest and other amounts owing with respect to the notes are liabilities of, and referable to, Statutory Fund No. 2.

The notes rank in right of payment either pari passu with or senior to all other unsecured and subordinated indebtedness of CLC allocated to Statutory Fund No. 2, except for such indebtedness preferred by operation of bankruptcy laws or similar laws of general application.

After initial recognition, subordinated debt is measured at fair value through the revenue statement and adjusted for movements in interest rates, credit spreads and foreign exchange.

86

Interest bearing liabilities – SPV

The Mortgage Management business establishes and services special purpose vehicles which fund pools of residential loans via the issuance of residential mortgage backed securities in its normal course of business. All borrowings are limited in recourse to the assets of the securitised trusts; Mortgage Management is the residual benefi ciary of the fund loans via a nominal investment.

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
20. Provisions Employee entitlements (Note 31) Surplus lease provision Relocation provision Restructuring provision Deferred acquisition consideration Other provisions	13.5 19.1 – – 21.0 15.4 – – 2.8 2.4 – – – 1.1 – – – 1.1 – – 15.6 14.2 5.1 7.5
	52.9 53.3 5.1 7.5

	Consolidated
	Surplus Employee lease Relocation Restructuring entitlements provision provision provision $M $M $M $M
Opening balance at 1 July 2008 Arising during the year Amounts utilised	19.1 15.4 2.4 1.1 42.6 13.0 0.4 – (48.2) (7.4) – (1.1)
Closing balance at 30 June 2009	13.5 21.0 2.8 –

	Consolidated Parent
	Deferred acquisition costs Other Other $M $M $M
Opening balance at 1 July 2008 Arising during the year Amounts utilised	1.1 14.2 7.5 – 14.5 – (1.1) (13.1) (2.4)
Closing balance at 30 June 2009	– 15.6 5.1

Surplus lease provision represents the Group’s net rental expense obligation on fl oors in leased buildings in Sydney and Melbourne. The Group’s lease obligation on these leases expires in 2015 and 2016 respectively.

Relocation provision represents the Group’s net make-good obligations on building leases.

Restructuring provision includes provisions for corporate entity restructuring and employee termination benefi ts. Employee entitlements exclude termination benefi ts. The restructuring provision was fully utilised during the year.

Provision for deferred acquisition consideration was in respect of the acquisition of Interstar Securities Holdings Pty Limited and its controlled entities (Interstar) which was acquired as part of the acquisition of Zed Capital Markets Australia Structured Finance Pty Limited and its controlled entities on 29 September 2003. Final settlement of the provision was made during 2009.

Other provisions includes distribution provision for CDI representing the fi nal distribution payable to the non-controlling interest for the period ended 30 June 2009.

87

	Consolidated
	2009 2008 $M $M
21. Life contract liabilities Life contract liabilities 1 Life investment contract liabilities – at fair value Life insurance contract liabilities – at MoS2value	3,964.4 3,663.4 609.4 79.7
Total	4,573.8 3,743.1

1 In accordance with AASB 1038: Life Insurance Contracts , policy liabilities are required to be classifi ed as Life Insurance contracts or Life Investment contracts.

2 Margin on Services methodology.

Reconciliation of movements in life contract liabilities	Life investment Life insurance Total contract contract liabilities contract liabilities liabilities
	2009 2008 2009 2008 2009 2008 $M $M $M $M $M $M
Total life contract liabilities at beginning of period Key movements in Statutory Funds: New business deposit and premiums recognised as an increase in policy liabilities Policy withdrawals, payments and claims recognised as a decrease in policy liabilities Transfer under court approved Part 9 scheme of arrangement1 Policyholder liability adjustments (Note 3) Cost of policyholder liabilities (Note 4) Other movements	3,663.4 2,027.1 79.7 83.0 3,743.1 2,110.1 514.0 766.6 0.0 – 514.0 766.6 (1,137.6) (998.9) (33.0) (6.9) (1,170.6) (1,005.8) 636.5 1,802.1 651.7 – 1,288.2 1,802.1 117.6 (123.6) (108.0) (0.3) 9.6 (123.9) 171.5 190.4 19.2 4.0 190.7 194.4 (1.0) (0.3) (0.2) (0.1) (1.2) (0.4)
Total life contract liabilities at end of period	3,964.4 3,663.4 609.4 79.7 4,573.8 3,743.1

1 Policy liabilities transferred to CLC on the acquisition of annuity portfolios from other insurance companies. In the current reporting period, CLC acquired a $1.29 billion portfolio of business from the National Mutual Life Insurance Association of Australia Limited (AXA). In the prior year, CLC acquired a $1.8 billion portfolio of business from Metlife Insurance Limited.

There are no life contract liabilities held in the parent entity.

88

Life insurance contract liabilities	Consolidated
	2009 2008 $M $M
Analysis of life insurance contract liabilities (a) Analysis of life insurance contract premium and related revenue Total life insurance contract premium and related revenue (b) Analysis of life insurance contract claims and related expenses Total life insurance contract claims paid and payable Inwards reinsurance claims	– – 33.2 6.8 0.1 0.1
Life insurance contract claims expense	33.3 6.9
Less: Component recognised as a change in life insurance contract liabilities	(33.3) (6.9)
Total life insurance contract claims and related expenses	– –
(c) Analysis of life insurance contract operating expenses Life insurance contract maintenance expenses – Commission – Other	0.5 0.2 2.2 0.5
	2.7 0.7
(d) Life insurance contract liabilities Best estimate liability – Value of future life insurance contract benef ts – Value of future expenses	579.8 71.6 28.1 8.1
Total best estimate liability	607.9 79.7
– Value of future prof t margins	1.5 –
Total policy liability	609.4 79.7

(e) Assumptions and methodology applied in the valuation of life insurance contract liabilities

Life insurance contract liabilities, and hence the net profi t from life insurance contracts have been calculated using the Margin on Services (MoS) method in accordance with the requirements of Life Prudential Standard 1.04 ‘Valuation of Policy Liabilities’ under section 114 of the Life Insurance Act 1995. The Prudential Standard requires the value of life insurance contracts to be calculated in a manner that allows for the systematic release of planned margins on services as services are provided to policyholders and premiums are received.

Challenger maintains one policy type being individual annuities and utilises annuity payments as the profi t carrier when calculating the value of life insurance contracts under the projection method.

Key assumptions used in the calculation of life insurance liabilities are:

(i) Discount rate

Discount rates are determined based on the current observable, objective rates that relate to the nature, structure and term of the future liability cash fl ows.

(ii) Maintenance expenses

The assumption is based on budgeted maintenance expenses for the year ending 30 June 2010. These expenses are converted to a per policy unit cost or percentage of account balance, depending on their nature, based on an expense analysis for the funds.

(iii) Infl ation

The assumption is based on long-term expectations of infl ation and is reviewed annually for changes in the market environment. The current assumption is 1.03% for short-term infl ation, and 2.47% for long-term infl ation (at June 2008 it was 3.65% for short-term infl ation, and 4.02% for long-term infl ation).

(iv) Shareholder tax

The corporate tax rate of 30% has been used.

89

21. Life contract liabilities (continued)

(e) Assumptions and methodology applied in the valuation of life insurance contract liabilities (continued)

(v) Voluntary discontinuances

No voluntary discontinuances are assumed.

(vi) Surrender values

Not applicable as no voluntary discontinuances are assumed.

(vii) Mortality – annuity products

The assumption is based on a review of recent mortality experience for the portfolio. This is adjusted for expected mortality improvements both before the valuation date and after. Expected mortality improvements have been estimated based on observed historic levels of improvement in Australian mortality.

(f) Impact of changes in assumptions

Under MoS, for life insurance contracts valuations using the projection method, changes in actuarial assumptions are generally recognised by adjusting the value of future profi t margins in life insurance contract liabilities. Future profi t margins are generally released over future periods.

Changes in actuarial assumptions do not include market related changes in discount rates such as changes in benchmark market yields caused by changes in investment markets and economic conditions. These are refl ected in both life insurance contract liabilities and asset values at the balance date.

(g) Life insurance risk

The Group is exposed to longevity risk on its insurance liabilities, the risk that annuitants may live longer than expectations implicit in liability calculations. The Group manages this risk in part by using reinsurance (ceding) in addition to the regular review of the portfolio to confi rm continued survivorship of annuitants receiving income; and regular review of mortality experience for the CLC portfolio to ensure that mortality assumptions remain appropriate.

(h) Insurance risk sensitivity analysis – life insurance contracts

For life insurance contracts which are accounted for under MoS, amounts of liabilities and associated income or expense recognised in the period are unlikely to be sensitive to changes in variables even if those changes may have an impact on future profi t margins.

The table below reports the sensitivity of life insurance contract liabilities, current shareholder period profi t after income tax, and equity, to changes in assumptions relating to insurance risk.

Variable	Changes in shareholder Changes in life insurance prof t after income contract liabilities tax and equity
	Gross of Net of Gross of Net of reinsurance reinsurance reinsurance reinsurance $M $M $M $M
Annuitant mortality 50% increase in the rate of mortality improvement Maintenance expenses 10% increase in maintenance expenses	(43.4) (42.5) (30.4) (29.7) (0.9) (0.9) (0.6) (0.6)

Other life insurance and investment contracts disclosure	Consolidated
	2009 2008 $M $M
(a) Analysis of life insurance and investment contract prof t Losses arising from difference between actual and assumed experience Losses related to life insurance and investment contract liabilities Attributable to: – Life insurance contracts – Investment contracts	(170.0) (52.5) 5.9 (1.1) (175.9) (51.4)
Losses arising from difference between actual and assumed experience Investment earnings/(losses) on assets in excess of life insurance and investment contract liabilities	(170.0) (52.5) 7.8 (89.0)
Total loss	(162.2) (141.5)

90

(b) Restrictions on assets

Investments held in the CLC funds can only be used within the restrictions imposed under the Life Insurance Act 1995. The main restrictions are that the assets in a fund can only be used to meet the liabilities and expenses of that fund, to acquire investments to further the business of the fund or as distributions when solvency and capital adequacy requirements are met.

(c) Actuarial information

Mr A Bofi nger FIAA, as the Appointed Actuary of CLC, is satisfi ed as to the accuracy of the data used in the valuations of policy liabilities and solvency reserves in the fi nancial report and in the tables in this note. The policy liabilities and solvency reserves have been determined at the reporting date in accordance with the Life Insurance Act 1995.

Investment assets of the life statutory funds comprising cash, equity securities, debt securities, property securities, other fi nancial assets and investment property are held to back investment contract liabilities amounting to $3,964.4 million (2008: $3,663.4 million) and life insurance contract liabilities amounting to $609.4 million (2008: $79.7 million). Investment assets are traded on a regular basis taking into account the movements in liabilities as well as incoming cash fl ows.

For the majority of life investment contract liabilities, there is a fi xed settlement date. Based on CLC assumptions as to likely withdrawal patterns in the various product groups, it is estimated that approximately $636.4 million (2008: $628.0 million) may be settled within 12 months of the reporting date.

22. Mortgage Management Special Purpose Vehicles (SPV)

The Mortgage Management business establishes and services a number of SPVs which fund pools of residential mortgage loans via the issuance of residential mortgage backed securities. All borrowings of the SPVs are limited in recourse to the assets of the SPVs.

Mortgage Management retains a nominal benefi cial interest in each SPV which entitles it to an income stream from the SPVs in the form of a net interest margin in addition to the fees it receives as servicer and trust manager. Mortgage Management is generally entitled to its fees for servicing and acting as trust manager in priority to obligations to note holders being paid and is entitled to the residual income after all other obligations of the trust have been met. Payments to note holders are made according to the terms of the notes but are generally monthly or quarterly.

Mortgage Management’s residual income may be impacted in the event of an impairment in the mortgage loans within the SPVs in excess of the security held and any lenders mortgage insurance cover. Mortgage Management maintains a prudent level of provisioning within its SPVs for impairment against the outstanding SPVs’ mortgage receivables as a consequence of this potential risk. In the event that impairments exceed the residual income due to Mortgage Management then the SPV note holders bear the credit risk in accordance with the priority of their respective note holdings.

While the Group has neither ownership rights to the underlying mortgages nor any obligation or duty to repay any of the residential mortgage backed securities, the Group is required to consolidate all securitisation SPVs as a consequence of holding the benefi cial interest to the residual income streams. This results in a gross up of assets and liabilities, separately disclosed as they are not considered part of the Group’s assets and liabilities from management’s perspective.

Transactions between the SPV and Challenger Mortgage Management are eliminated on consolidation into Group in accordance with accounting standards. There is no impact on total equity, other than for amounts refl ected in a cash fl ow hedge reserve explained hereunder, which has also been separately disclosed.

AASB 139: Financial Instruments: Recognition and Measurement requires all derivatives to be recognised on the balance sheet and measured at fair value. Gains and losses arising from changes in fair value will be recognised in the income statement, unless hedge accounting is applied.

Where cash fl ow hedge accounting requirements are met, the carrying value of the hedged item is not adjusted, and the fair value changes on the related hedging instrument (to the extent that the hedge is effective) are deferred in the cash fl ow hedge reserve. This amount will then be transferred to the income statement at the time the hedged item affects the income statement. Ineffective hedges are recognised in the income statement immediately.

The SPVs’ exposures to interest rate and exchange rate risk are hedged using derivative fi nancial instruments. All derivatives in the SPVs are designated as cash fl ow hedges, thereby protecting the Group’s income statement from signifi cant volatility. The consolidated balance sheet and cash fl ow statement for the securitised SPVs before intersegment eliminations with Mortgage Management is contained over page.

91

Balance sheet	Consolidated Special Purpose Vehicles
	2009 2008 $M $M
22. Mortgage Management Special Purpose Vehicles (SPV) (continued) Assets – securitised Cash and cash equivalents Receivables Derivative assets Other assets	737.0 956.0 15,772.0 18,888.3 – 19.0 – 6.0
Total assets	16,509.0 19,869.3
Liabilities – securitised Payables Derivative liability Interest bearing liabilities	65.1 90.7 13.7 – 16,443.9 19,765.3
Total liabilities	16,522.7 19,856.0
Net assets	(13.7) 13.3
Net assets attributable to unitholders Cash f ow hedge reserve	(13.7) 13.3
Total net assets attributable to unitholders	(13.7) 13.3
Statement of cash f ows	Consolidated Special Purpose Vehicles
	2009 2008 $M $M
Cash f ows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST)	1,441.9 1,849.4 (1,207.9) (1,627.2)
Net cash inf ow from operating activities	234.0 222.2
Cash f ows from investing activities Mortgage loans – advanced and purchased Mortgage loans repaid and sold	(7,011.6) (10,723.7) 10,116.7 11,755.6
Net cash inf ows from investing activities	3,105.1 1,031.9
Cash f ows from f nancing activities Proceeds from borrowings Repayment of borrowings	8,177.8 10,890.5 (11,735.9) (12,302.7)
Net cash outf ows from f nancing activities	(3,558.1) (1,412.2)
Net outf ow in cash and cash equivalents held	(219.0) (158.1)
Cash and cash equivalents at the beginning of the year	956.0 1,114.1
Cash and cash equivalents at the end of the year	737.0 956.0

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Reconciliation of reserves		Consolidated Special Purpose Vehicles
		2009 2008 $M $M
SPV reserves Cash f ow hedge reserve		(13.7) 13.3
		(13.7) 13.3
Movements in reserves Cash f ow hedge reserve Opening balance Net (losses)/gains from changes in fair value		13.3 (4.1) (27.0) 17.4
Closing balance		(13.7) 13.3
	Consolidated
	2009 2008 No. of No. of shares shares M $M M $M
23. Contributed equity Shares on issue Ordinary shares issued LTIP shares treated as treasury shares CPP shares held in trust and treated as treasury shares	596.0 1,563.0 632.4 1,622.1 (40.7) (117.5) (46.2) (135.2) (12.7) (44.1) (4.5) (24.5)
Contributed equity consolidated	542.6 1,401.4 581.7 1,462.4
Movement in shares on issue Opening balance Issue of new shares Net shares cancelled under share based payment plan Shares purchased and cancelled under share buy-back	632.4 1,622.1 596.3 1,427.1 – – 40.0 207.5 (5.3) (17.3) (3.9) (12.5) (31.1) (41.8) – –
Closing balance	596.0 1,563.0 632.4 1,622.1
LTIP Opening balance Shares forfeited Vested shares released from LTIP plan	46.2 135.2 57.5 167.2 (5.3) (17.3) (3.9) (12.5) (0.2) (0.4) (7.4) (19.5)
Closing balance1	40.7 117.5 46.2 135.2
CPP Trust Opening balance Shares purchased held in trust and treated as treasury shares Shares released to employees	4.5 24.5 – – 9.9 26.2 4.7 25.8 (1.7) (6.6) (0.2) (1.3)
Closing balance	12.7 44.1 4.5 24.5

The parent entity has $1,455.5 million shares on issue. The difference to the consolidated number is due to the treatment of $44.1 million shares in the Challenger Performance Plan Trust as treasury shares on consolidation.

1 The shares listed on the ASX exclude unvested shares under the executive share based payments scheme (LTIP). This can be represented as follows:

	2009	2008
	$M	$M
Ordinary shares
Listed on ASX	569.3	600.4
Unvested LTIP shares not listed on the ASX	26.7	32.0
Total ordinary shares issued	596.0	632.4

93

23. Contributed equity (continued)

(a) Terms and conditions of shares

Ordinary shares

A holder of a share is entitled to certain rights, including rights:

• to receive dividends as declared;

• to be provided with copies of annual reports and other information in respect of the Company;

• to receive notice of, and vote at, meetings of holders of shares, either in person or by proxy;

• after liquidation of the Company, to receive the distribution of the net proceeds of Company assets according to the number of shares registered at termination; and

• to transfer shares and on death, to pass the shares to a surviving joint holder, or by will or otherwise to the holder’s estate.

A holder of a share is entitled to one vote on a show of hands and on a poll; each shareholder will have one vote for each fully paid share, determined from the sale of such shares on the ASX on the trading day immediately before the day on which the poll is taken.

Shares issued under LTIP

The terms and conditions of shares issued under the LTIP are disclosed in Note 31 of the fi nancial report. The shares held under the LTIP are treated as treasury shares and deducted from equity.

Challenger Performance Plan Trust

On 24 August 2007, the Challenger Performance Plan Trust was established to hold shares in the Company for allocations made under the Challenger Performance Plan. The trust is treated as a special purpose entity and consolidated. The Trust’s shareholding in the Company is disclosed as treasury shares and deducted from equity.

(b) Capital risk management

A company is generally limited in the risk-taking activities that it can engage in by the amount of capital it holds (with reference to different stakeholder expectations). The amount of capital that a company holds therefore acts as a buffer against risk, to ensure that the company is able to continue normal business in the event of an unexpected loss.

Capital risk management involves the management of this risk. The Group manages capital risk management via Capital Management Plans at both the Group level and at the prudentially regulated Challenger Life Company Limited (CLC) level. Broadly, the Capital Management Plans have an objective of maintaining the fi nancial stability of the Group and CLC whilst ensuring the shareholders earn an appropriate risk adjusted return through the optimisation of the capital structures. The Capital Management Plans are approved by the respective boards and are reviewed at least annually.

Capital Management Plan – Group

At the Group level, the Capital Management Plan aims to maintain an investment grade credit rating and robust capital ratios in order to support its business objectives and maximise shareholder wealth. The Group believes that maintaining an investment grade rating is the most appropriate target from a capital structure perspective in order to secure access to capital at a reasonable cost.

Long-term credit ratings for the Group and CLC as at the balance date is shown below. There were no changes to these ratings throughout the fi nancial year. The outlook for both entities has been revised to negative from stable, refl ecting the impact of ongoing diffi cult global fi nancial conditions.

Entity	Ratings agency	Long-term credit rating	Outlook
Group	Standard & Poor’s	BBB+	Negative
CLC	Standard & Poor’s	A	Negative

The capital structure of the Group primarily consists of Net Recourse Debt and Common Equity.

The Group monitors its capital structure on the basis of the gearing ratio which is calculated as Net Recourse Debt divided by Net Recourse Debt plus Common Equity. Net Recourse Debt is calculated as Recourse Debt less cash and cash equivalents that are available to the Group (which excludes amongst other things cash and cash equivalents within the CLC statutory funds). Common Equity is calculated as the aggregate of Contributed Equity, Reserves, and Retained Profi ts, and excludes equity entitlements of Non-controlling Interests.

94

To maintain the preferred investment grade rating the Capital Management Plan targets a gearing ratio within a range of 25% – 35%. The gearing ratio at balance date is shown in the table below and throughout the fi nancial year the gearing ratio was maintained consistently below the Capital Management Plan targets.

ratio was maintained consistently below the Capital Management Plan targets.
	Consolidated
	2009 2008 $M $M
Recourse debt Corporate banking facility Medium term notes	130.0 – 206.0 250.0
Less: Cash and cash equivalents (available to Group)	336.0 250.0 157.1 240.8
Net recourse debt Total parent equity	178.9 9.2 1,381.9 1,612.9
Total capital	1,560.8 1,622.1
Net gearing ratio (%)	11.5% 0.6%

The details of the recourse debt are provided at Note 19.

The Group’s current distribution target is a payout ratio of approximately 30% of profi t after tax.

There were no material changes to the Group’s Capital Management Plan during the fi nancial year.

Capital Management Plan – CLC

CLC is a life insurance company regulated under the Life Insurance Act 1995 (the Act). The Act imposes minimum statutory capital requirements, as set out in Prudential Standards issued by APRA, on all life insurance companies. At all times during the fi nancial year CLC complied with these requirements.

Separate and distinct from the Group’s Capital Management Plan, CLC’s Capital Management Plan integrates the statutory capital and solvency requirements, insurer fi nancial strength rating as assessed by Standard & Poor’s, and economic capital requirements. There were no material changes to CLC’s Capital Management Plan during the fi nancial year.

CLC’s resources available to meet statutory capital requirements at balance date are set out in the table below:

Capital resources	2009 2008 $M $M
Shareholder equity Subordinated debt	793.4 924.6 418.9 554.6
Total regulatory capital	1,212.3 1,479.2
Solvency reserve Solvency reserve % Coverage of solvency reserve (times)	34.9 31.6 1.5 1.8

95

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
24. Reserves Equity option premium reserve Opening balance Options issued to Colony Marlin-Holdings, LLC Amortisation of issue costs	125.1 61.7 125.1 61.7 – 63.4 – 63.4 0.1 – 0.1 –
Closing balance	125.2 125.1 125.2 125.1
Share based payments premium reserve Opening balance Share based payments for the year	34.2 23.6 34.2 23.6 23.6 10.6 23.6 10.6
Closing balance	57.8 34.2 57.8 34.2
Available-for-sale investment revaluation reserve Opening balance Revaluation loss net of tax taken to reserve Impairment loss taken to income statement	(2.4) – – – 1.7 (44.2) – – 1.2 41.8 – –
Closing balance	0.5 (2.4) – –
Cash f ow hedge reserve Opening balance Transfer of gain to income statement Charged to equity	– 1.7 – – – (1.7) – – (1.3) – – –
Closing balance	(1.3) – – –
Cash f ow hedge reserve from SPV Opening balance Charged to equity	13.3 (4.1) – – (27.0) 17.4 – –
Closing balance	(13.7) 13.3 – –
Foreign currency translation reserve – CDI 1 Opening balance Loss on translation of foreign operation	– – – – (0.6) – – –
Closing balance	(0.6) – – –
Total reserves	167.9 170.2 183.0 159.3

1 At 31 December 2008, the Company acquired a controlling interest in the Challenger Diversifi ed Property Group (CDI); refer to Note 34 for further information.

Nature and purpose of reserves

Equity option premium reserve

This reserve represents the valuation assigned to options issued to Consolidated Press Holdings and to Colony Marlin-Holdings LLC.

	Grant	Expiry	Exercise
Shares under option	date	date	price	Number
Consolidated Press Holdings Limited2	22 Dec 2003	22 Dec 2013	$3.25	60,000,000
Colony Marlin-Holdings LLC3	07 Nov 2007	07 Nov 2012	$7.00	57,142,857

2 Options issued to Consolidated Press Holdings Limited are non-transferable call options and may be exercised at any time within 10 years from their grant date (22 December 2003).

• 3 Options issued to Colony Marlin-Holdings, LLC are non-transferable call options and may be exercised at any time within fi ve years from their grant date (7 November 2007).

96

Nature and purpose of reserves (continued)

Share based payments premium reserve

Under AASB 2: Share Based Payments , an expense is recognised over the vesting period of share options, performance rights and capped performance rights granted to employees as part of the Challenger Performance Plan and the long-term Incentive Plan. This expense is based on the valuation of the equity benefi ts granted at the grant date. When an instrument is granted, and an expense incurred, there is a corresponding increase in the share based payments reserve recognised as a separate component of equity. The total of this reserve is net of any gain or loss realised on the disposal of forfeited shares held within the schemes.

Available-for-sale investment revaluation reserve

This reserve includes the cumulative net change in the fair value of available-for-sale investments until the investment is derecognised or sold.

Cash fl ow hedge reserve

The cash fl ow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash fl ow hedging instruments related to hedged transactions that have not yet occurred.

Cash fl ow hedge reserve from SPV

Refer Note 22.

Foreign currency translation reserve – CDI

The foreign currency translation reserve is used to record exchange differences arising from the translation of the fi nancial statements of the foreign subsidiaries.

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
25. Accumulated losses Opening balance Net (loss)/prof t for the period Dividends paid	(19.7) 102.1 (128.4) (168.0) (90.7) (44.2) 125.5 117.2 (77.0) (77.6) (77.0) (77.6)
Balance at end of year	(187.4) (19.7) (79.9) (128.4)

	Consolidated
	2009 2008 $M $M
26. Non-controlling interests Interest in: Share capital Reserves Prior year retained earnings (includes distributions paid) Prof t after tax for the period attributable to non-controlling interests	349.3 20.6 4.2 – (49.1) (8.5) 3.1 5.0
	307.5 17.1

There are no non-controlling interests in the parent company.

97

27. Financial risk management

Governance and risk management framework

The Group’s activities expose it to a variety of fi nancial risks, these are:

• market risk (including currency risk, interest rate risk, equity price risk and credit spread risk);

• credit default risk; and

• liquidity risk.

The Board has ultimate responsibility for the approval of the Group’s fi nancial risk management policies. The Group Capital Risk and Strategy Committee is responsible for monitoring and reporting to the Board on the fi nancial risks that impact the Group. The management of these risks is supported by a comprehensive range of policies.

Governance and risk management framework

==> picture [296 x 214] intentionally omitted <==

----- Start of picture text -----

Challenger Trustee/
Other Board Financial Challenger Responsible
Committees Services Life Company Entity/Subsidiary
Board
Group Limited Boards
Audit and
Board Audit Board Audit
Compliance
and Compliance and Compliance Committee
Committee Committee
(as appointed)
Credit Risk,
Capital, Risk Investment
Market Risk,Liquidity Risk andInvestment Decisions and StrategyCommittee Asset LiabilityCommittee (as appointed)Committees
Compliance and
Operational Risk
Group Compliance and Operational Risk
Management
----- End of picture text -----

Risks and mitigation

In the normal course of the Group’s business there is exposure to market, credit and liquidity risks. Derivative fi nancial instruments are used to hedge exposures to fl uctuations in foreign exchange rates and interest rates. Instruments used include interest rate futures contracts, forward foreign exchange contracts, cross currency swaps and interest rate swap contracts. Via the utilisation of these instruments the Group aims to reduce these risks to a minimal level.

Within the consolidated Group, hedges are accounted for in different ways within the different divisions. All derivative fi nancial instruments held within Challenger Life Company Limited legal entity (CLC) are stated at fair value with any gains or losses arising from changes in fair value being taken directly to the income statement for the year. CLC legal entity has not elected to undertake the cash fl ow hedge accounting treatment available under AASB 139 .

For all other entities within the Group, for the purpose of hedge accounting, hedges are classifi ed as either fair value hedges when they hedge the exposure to changes in the fair value of a recognised asset or liability; or cash fl ow hedges where they hedge exposure to variability in cash fl ows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecasted transaction. For those that do not qualify for hedge accounting under the requirements of AASB 139 , the derivative instruments are stated. The Group’s principal fi nancial instruments, other than derivatives, comprise cash and cash equivalents, receivables, payables, interest bearing liabilities, available-for-sale assets and fi nancial assets and liabilities fair valued through the income statement.

The main purpose of using fi nancial instruments is to raise fi nance for the Group’s operations. The use of derivative fi nancial instruments minimises fi nancial risk from movements in interest rates and foreign exchange rates. Details of the signifi cant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of fi nancial instruments, are disclosed in Note 1.

98

Fair value refl ects the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The fair value of investments that are actively traded in organised fi nancial markets are determined by reference to quoted market bid prices at the close of business on reporting date.

As at 30 June 2009, the Consolidated Entity held $551.6 million (2008: $591.0 million) of investments for which there is no active market and no external valuation available for the specifi c asset or similar assets. These investments were valued using discounted cash fl ow analysis and other methods consistent with market best practice, using market observable inputs. Of this, $266.1 million (48%) (2008: $390.0 million (66%)) relates to the Challenger Infrastructure Fund Redeemable Preference Shares and Commercial loans secured by a fi rst lien over commercial and residential property. The total net change in fair value recognised during the period for assets not traded in an active market or where no external valuation is available was a net unrealised loss of $33.1 million (2008: loss $13.0 million). As at 30 June 2009 the estimated impact for +/- 1% change in the assumed price would result in a fair value movement of $5.5 million (2008: $5.9 million). In addition, the Consolidated Entity holds $555.7 million (2008: $457.0 million) of investments for which there is no external valuation available for the specifi c asset, but an external valuation is available for similar assets. These have been valued using market observable inputs including the prices of similar assets.

Market values from active liquid markets have been used to determine the fair value of listed held for trading and available-forsale assets. The fair values of interest bearing liabilities have been calculated by discounting the expected future cash fl ows at prevailing interest rates. The fair value of receivables and payables with a remaining life of less than one year is deemed to be the notional amount. The fair values of derivative fi nancial instruments are calculated using quoted prices. Discounted cash fl ow analysis using the applicable yield curves is used where quoted prices are not available. Investments in unlisted managed funds are primarily valued based on fi nancial reports produced by the relevant fund.

As at 30 June 2009, $4.0 billion (2008: $3.7 billion) of life investment contract liabilities and $0.6 billion of insurance contracts were valued in accordance to prudential standard LPS 1.04. Life investment contract liabilities are determined as the present value future benefi t payments, investment expenses and maintenance expenses. The fair value discount rate is based on the zero-coupon inter-bank swap curve with an adjustment for fair value based observable market returns appropriate for the term of the liabilities. This calculation basis can result in the liability established at the sale of a contract being different from the premium received, and therefore a profi t or loss being recognised, where the implied yield in the policy (allowing for commissions and expenses) is different from the discount rate curve. For the year ending 30 June 2009, a loss of $5.0 million was recognised (2008: loss of $19.6 million).

The maintenance expense assumption is based on budgeted maintenance expenses for the year ending 30 June 2010, and projected future business volumes. Future business volumes and future expenses cannot be forecast with certainty, so there is a range of possible assumptions which could reasonably be used. The total net change in fair value recognised during the period for life investment contract liabilities was an increase of $283.0 million (2008: $67 million). As at 30 June 2009, the estimated impact of a 10% change in the maintenance expense assumption results in an increase or decrease in the fair value of the life investment contract liability of $10.0 million (2008: $14.0 million).

99

Notes	Consolidated Parent
	Carrying Fair Carrying Fair value value value value
	2009 2008 2009 2008 $M $M $M $M
27. Financial risk management (continued) Financial risks impact the f nancial assets and liabilities of the Group. Details of the carrying values of the assets and their corresponding fair values are outlined in the below table: Financial assets Cash and cash equivalents 9 Cash and cash equivalents – SPV 9 Other assets 14 Financial assets at fair value through income statement Financial assets held for trading 11 Financial assets initially designated 11 Derivative assets 28 Indirect property investments 11 Loans and receivables Receivables 10 Receivables – SPV 10 Available-for-salessets Other f nancial assets 11	1,071.9 1,071.9 804.1 804.1 737.0 737.0 956.0 956.0 92.4 92.4 149.2 149.2 3,169.3 3,169.3 3,086.2 3,086.2 653.8 653.8 914.0 914.0 191.7 191.7 83.3 83.3 185.9 185.9 335.7 335.7 582.4 532.5 381.3 381.3 15,644.1 16,145.9 18,760.4 18,760.4 24.3 24.3 33.5 33.5
Total f nancial assets	22,352.8 22,804.7 25,503.6 25,503.6
Financial liabilities Financial liabilities held for trading 18 Derivative liabilities 28 Payables 17 Payables – SPV 17 Interest bearing liabilities 19 Interest bearing liabilities – SPV 19 Life contract liabilities 21	– – 43.6 43.6 164.5 164.5 75.7 75.7 607.8 705.9 480.4 480.4 6.7 6.7 12.4 12.4 1,818.2 1,817.2 1,494.0 1,493.0 16,310.2 16,310.2 19,523.7 19,523.7 4,573.8 4,573.8 3,743.1 3,743.1
Total f nancial liabilities	23,481.2 23,578.3 25,372.9 25,371.9

For the parent, the Directors consider that the carrying amounts of fi nancial assets and liabilities at the reporting date approximate their fair value.

(a) Market risk

Market risk is the risk that the fair value or future cash fl ows of a fi nancial instrument will fl uctuate because of changes in market factors. Market risk comprises (amongst others) four types of risk: currency risk (due to fl uctuations in foreign exchange rates), interest rate risk (due to fl uctuations in interest rates), equity price risk (due to fl uctuations in market prices) and credit spread risk (due to changes in credit spreads).

Each of the divisions is responsible for managing market risks that arise in their own businesses with oversight from a centralised treasury team. It is the policy of the Group to monitor the policies adopted by all divisions to ensure that the overall risk to the Group is monitored and hedged (if required).

A summary of each of the divisions and the way they are managed is shown below:

1. Life business (including Challenger Life Company Limited (CLC)): Viewed as a total return investor which hedges all relevant interest rate and currency within the business line. The Life division consolidates Challenger Diversifi ed Property Group (CDI). CDI runs its own hedging strategy and is considered separately to the rest of the Life division.

2. Funds Management (FM): Viewed as a fee income business with equity cash fl ows that are unhedged at a business line level.

100

1. Mortgage Management (MM): Viewed as a fee income business with equity cash fl ows that are unhedged at a business line level.

2. Corporate (Corp): Provides services and funding for Group activities.

As a result, the market risks detailed below refer specifi cally to the risks faced at a Group level from operating these businesses.

(i) Currency risk

The consolidated entity is exposed to currency risk in respect of its net foreign currency exposures. It is the Group’s policy to hedge the exposure of all balance sheet items to movements in foreign exchange rates.

Life

It is CLC’s policy to hedge, as close to neutral, the economic exposure of fi nancial assets and liabilities against movements in foreign exchange rates. Financial assets and liabilities include both investments directly held on CLC’s balance sheet and those investments indirectly held through various funds. CLC primarily holds investments in the United Kingdom, Europe and the United States in addition to immaterial holdings in other countries. The currencies impacted are primarily British Pounds, Euro and US Dollars. In order to protect against exchange rate movements the business has entered into forward currency and cross currency derivatives.

CDI was acquired on 31 December 2008. CDI’s exposure to foreign currency risk relates primarily to revenue, expenses, investment properties, borrowings, other assets and other liabilities that are denominated in Euros. CDI manages these exposures by borrowing in foreign currency to implement a 100% natural capital hedge. CDI has a policy to undertake economic income hedges through foreign exchange hedging (using fi nancial instruments) of the expected distributions from the European portfolio to insulate against movements in exchange rates, both favourable and unfavourable. The policy is to arrange foreign exchange hedges on a rolling basis equivalent to 80-100% of CDI’s estimated distributions for fi ve years and up to 90% for years six to ten. The Responsible Entity within the Challenger Group has hedged 100% of estimated distributions for the fi rst fi ve years and 90% of estimated distributions for years six and seven. CDI has not entered into any income hedges for years eight to ten.

Mortgage Management

The Mortgage Management SPV entities hedge exposure to foreign currency risk arising from issuing mortgage backed securities in foreign currency using cross currency swaps. The currencies impacted are primarily British Pounds, Euro and US Dollars. All derivatives in these special purpose vehicles are designated as cash fl ow hedges. These hedges are effective and there is no material impact on the results.

Corporate

Within the corporate division, the Group hedges its exposure to potential movements in foreign exchange. Corporate has entered into forward currency derivatives and future contracts to hedge international investment exposure. The currencies impacted are primarily British Pounds, Euro and US Dollars.

All contracts are held at fair value with movements in fair value being recognised in the income statement.

The following table details the consolidated entity’s net exposure to foreign currency as at the reporting date (Australian dollar equivalent amounts). These fi gures are shown net of any hedges in place.

Consolidated	2009 2008
	GBP USD Euro Other GBP USD Euro Other $M $M $M $M $M $M $M $M
Financial assets Financial liabilities Foreign currency forward contracts and cross currency swaps	343.3 721.1 573.8 44.2 915.2 940.8 786.7 29.3 – (162.9) (0.1) – (57.7) (158.3) (0.6) – (334.3) (552.5) (564.1) (42.6) (862.0) (761.7) (768.0) (19.2)
Net FX exposure in AUD1	9.0 5.7 9.6 1.6 (4.5) 20.8 18.1 10.1

1 Net FX exposure at 30 June 2009 includes the consolidated result of Challenger Diversifi ed Property Group (CDI).

101

27. Financial risk management (continued)

(a) Market risk (continued)

(i) Currency risk (continued)

The analysis below shows the impact on profi t after income tax and equity of a movement in foreign currency exchange rates against the Australian dollar on our major currency exposures using residual exposure at the balance date.

All underlying exposures and related hedges are included in the analysis. A sensitivity of 10% has been chosen as this is a reasonable measurement with the current level of exchange rates and the volatility observed on an historic basis.

reasonable measurement with the current level of exchange rates and	the volatility observed on an historic basis.
Movement in variable against A$	Financial impact
	Net prof t/ Equity Net prof t/ Equity (loss) 2009 2009 (loss) 2008 2008 $M $M $M $M
British Pounds (GBP) + 10% – 10% US Dollar (USD) + 10% – 10% Euro (EUR)1 + 10% – 10% Other + 10% – 10%	(0.6) (0.6) 0.3 0.3 0.6 0.6 (0.3) (0.3) (0.4) (0.4) (1.7) (1.5) 0.4 0.4 1.7 1.5 (0.6) (0.6) (1.3) (1.3) 0.6 0.6 1.3 1.3 (0.1) (0.1) (0.7) (0.7) 0.1 0.1 0.7 0.7

1 2009 fi nancial impact includes the consolidated result of Challenger Diversifi ed Property Group (CDI).

Calculation of NPAT is based on 30% tax rate.

The risks faced and methods used in the sensitivity analysis did not change from the previous period.

As shown above a 10% movement in exchange rates would have minimal impact on the consolidated Group’s fi nancial position.

Parent

The parent company does not have any fi nancial assets or liabilities with currency risk.

(ii) Interest rate risk

Interest rate risk is the risk to the Group’s earnings and equity arising from movements in the interest rates, including changes in the absolute levels of interest rates, the shape of the yield curve, the margin between the different yield curves and the volatility of the interest rates.

It is the Group’s policy to minimise the impact of interest rate movements on our debt servicing capacity, Group profi tability, business requirements and company valuation.

The Group targets to hedge between 30% and 70% of corporate interest bearing liabilities. The amount of corporate interest bearing liabilities and their duration are determined with reference to the annual budget and the most current forecasts.

The Group’s strategy is to have no interest rate hedges with duration greater than fi ve years.

Life

CLC’s Market Risk Policy is approved by the Board and sets out the relevant risk limits for interest rate exposure. It is CLC’s policy to minimise the impact of interest rate movements on its ability to service policyholders. Net interest rate exposures are reported regularly to the Asset Liability Committee. The management of the risk associated with life investment and insurance contracts including the interest rate risk are subject to the prudential requirements of the Life Act. This includes satisfying solvency requirements, which in turn include consideration of how the interest rate sensitivity of assets and liabilities are matched.

It is CDI’s policy to manage the impact of interest rate movements on its debt servicing capacity, profi tability and business requirements by entering into interest rate derivatives. CDI’s exposure to interest rate risk arises predominantly from liabilities bearing variable interest rates. CDI’s policy is to enter into interest rate derivatives to effectively hedge a minimum of 60% of its borrowings over the life of the underlying lease from exposure to movements in interest rates. Hedging activity is performed using interest rate swaps.

These derivative instruments are fair valued with changes recognised in the income statement.

102

Mortgage Management

Mortgage Management is impacted by two elements of interest rate risk:

• The impact of a rising/falling BBSW benchmark over the Reserve Bank of Australia’s target cash rate can have a signifi cant increase/decrease in the cost of funding and therefore on the net spread earned on the mortgages funded in the respective Special Purpose Vehicle.

• The business manages this risk by actively adjusting the interest rate charged to borrowers if a sustained adverse differential to the benchmark is evidenced.

• The impact of borrowers fi xing the rates on their mortgage.

• Interest rate risk is managed by using a cash fl ow hedge whereby the fi xed rate is swapped for a fl oating rate for an amount of notes equal to notional value of the mortgage that is fi xed.

Corporate

The corporate division is impacted by interest rate risk on its fl oating rate interest bearing liabilities. This exposure is immaterial to the consolidated Group and is effectively hedged.

None of the other divisions has any signifi cant exposure to interest rate risk.

Consolidated Group

The consolidated Group’s sensitivity to movements of interest rates in relation to the value of interest bearing fi nancial assets and liabilities is shown in the table below. It is assumed that the change happens at the balance date and that there are concurrent movements in interest rates and parallel moves in the yield curve. All material underlying exposures and related hedges are included in the analysis.

concurrent movements in interest rates and parallel moves in the yield hedges are included in the analysis.	curve. All material underlying exposures and related
Movement Asset class in variable	Financial impact
	Net prof t/ Equity Net prof t/ Equity (loss) 2009 2009 (loss) 2008 2008 $M $M $M $M
Life1 + 100bps Life – 100bps MM + 100bps MM – 100bps	9.0 9.0 0.2 0.2 (9.3) (9.3) (0.2) (0.2) (9.7) (9.7) (11.5) (11.5) 9.7 9.7 11.5 11.5

1 In line with the CLC Asset and Liability Committee-approved practice note, it is assumed that all underlying exposures, including related hedges, are included in the sensitivity analysis. 2009 fi nancial impact includes the consolidated result of Challenger Diversifi ed Property Group (CDI) + 100bps $10.3 million and – 100bps ($10.7 million).

Calculation of NPAT is based on 30% tax rate.

The risks faced and methods used in the sensitivity analysis did not change from the previous period. As shown above, 100bps movement in interest rate risk would have minimal impact on the consolidated Group’s fi nancial position apart from any potential effect on Mortgage Management’s cost of funds that is limited to approximately one month’s exposure as the business has the opportunity to reprice the mortgage portfolio.

Parent

The parent company does not have any fi nancial assets or liabilities with interest rate risk.

(iii) Equity price risk

Equity price risk is the risk that the fair value of future cash fl ows of a fi nancial instrument will fl uctuate because of changes in market prices (other than those arising from interest rate or currency risk), whether those changes are caused by factors specifi c to the individual fi nancial instrument or its issuer, or factors affecting all similar fi nancial instruments traded on the market.

The consolidated Group is exposed to price risk on its investments in equities and uses derivative fi nancial instruments to manage this risk.

It is the Group’s policy to hedge the exposure resulting from movements in the value of listed equity portfolio investments except for investments regarded as ‘operational’ or ‘strategic’.

103

27. Financial risk management (continued)

(a) Market risk (continued)

(iii) Equity price risk (continued)

Life

As a life insurance company, CLC is required to fair value all equities held against policyholder liabilities.

CLC is a major investor in several listed specialised funds and is exposed to the equity price risk on these and other investments in its portfolio of assets. CLC also has international and domestic exposure to price risk on equity investments in 5Oceans World Fund and Greencape High Conviction Fund which were acquired and consolidated through controlling interests during the year.

None of the other divisions have any material direct exposure to equity price risk.

Consolidated Group

The potential impact of movements in the market value of listed and unlisted equities on the consolidated Group’s income statement and balance sheet is shown in the below sensitivity analysis. This sensitivity analysis has been performed to assess the direct risk of holding equity instruments; therefore any potential indirect impact on fees from the Group’s investment linked business has been excluded. It is assumed that the relevant change occurs as at the reporting date.

The analysis below shows the impact on profi t after income tax and equity of a 10% movement in equity prices. It is assumed that the change happens at the balance date.

that the change happens at the balance date.
Movement Asset class in variable	Financial impact
	Net prof t/ Equity Net prof t/ Equity (loss) 2009 2009 (loss) 2008 2008 $M $M $M $M
Indirect property investment + 10% – 10% Infrastructure investment + 10% – 10% Available-for-sale assets + 10% – 10% Other assets + 10% – 10%	12.2 12.2 22.7 22.7 (12.2) (12.2) (22.7) (22.7) 41.0 41.0 45.4 45.4 (41.0) (41.0) (45.4) (45.4) – 1.0 – 2.3 (1.0) (1.0) (2.3) (2.3) 19.6 19.6 11.7 11.7 (19.6) (19.6) (11.7) (11.7)

Calculation of NPAT is based on 30% tax rate.

The risks faced and methods used in the sensitivity analysis did not change from the previous period. As shown above a 10% movement in equity prices may have a material impact on the consolidated Group’s fi nancial position.

As at 30 June 2009, a $1.2 million (June 2008: $42 million) impairment charge was recognised due to the impairment of an available-for-sale asset (equity holding in FBR Capital Markets).

Parent

The parent company does not have any fi nancial assets or liabilities with equity price risk.

(iv) Credit spread risk

The consolidated Group is exposed to movements in credit spreads above the interbank swap curve through its Debt Security investments. As at 30 June 2009, a fi fty basis point increase/decrease in credit spreads would have resulted in a $65.0 million unrealised loss/gain in the income statement (2008: a fi fty basis point increase/decrease resulted in a $45.0 million unrealised loss/gain in the income statement).

104

(b) Credit default risk

Credit default risk is the risk of loss in value of an asset due to a counterparty failing to discharge an obligation and/or a change in the value of the asset due to a widening of credit spreads.

The Group’s approach to credit management utilises a credit risk framework to ensure that the following principles are adhered to:

• independence from risk originators;

• recognition of the different risks in the various Group businesses;

• credit exposures are systematically controlled and monitored;

• credit exposures are regularly reviewed in accordance with existing credit procedures; and

• credit exposures include such exposures arising from derivative transactions.

Each of the divisions is responsible for managing credit risks that arise in their own businesses with oversight from a centralised credit risk management team. It is the policy of the Group to monitor the policies of all divisions to ensure that the risk to the Group is monitored and if necessary hedged.

Credit exposure by credit rating consolidated Group

The Group makes use of external ratings (Standard & Poor’s, Moody’s or another reputable credit rating agency) and will ordinarily adopt a rating no greater than the lowest external rating assigned. Where an external rating is not available, an internal or implied rating will be used. Internal ratings are expressed on the basis of Standard & Poor’s rating defi nitions. All credit exposures are additionally rated internally and this rating is cross referenced to the external ratings in place. Internal credit ratings are assigned by appropriately qualifi ed and experienced credit personnel who are independent from risk originators.

Life

CLC’s Credit Policy is approved by the CLC Board and sets out the relevant limits for interest rate exposure to individual counterparties and credit rating band. Exposures are reported regularly to the CLC Asset and Liability Committee.

Mortgage Management

Credit risk exposure of the SPV loan portfolio

Mortgage Management is a leading provider of ‘white label’ residential lending solutions which are funded via a combination of wholesale term securitisation markets and warehouse facilities provided via a panel of international and domestic banks through Special Purpose Vehicles (SPVs – refer Note 22).

Importantly, the credit risk of the loans within the SPVs is that of the residential mortgage backed security bondholders (where term securitisation has occurred) or the bank warehouse facility providers (where term securitisation has not yet occurred). As a result, Challenger does not bear the credit risks on the loans originated for the SPVs. MM’s exposure is limited to investments in the SPVs and residual income receivable from the SPVs totalling $176.7 million (2008: $187.0 million).

Funds Management

Within the FM division, Challenger Managed Investments Ltd (CMIL) is the responsible entity for various managed schemes. CMIL aims to ensure that at all times it has appropriate credit risk management in place and that the Board and senior management are appropriately informed of the entity’s credit risks.

The following table provides information regarding the maximum credit risk exposure of the consolidated entity and the parent at the balance date in respect of the major classes of fi nancial assets. The analysis classifi es the assets according to the internal credit ratings.

Assets rated investment grade are assets rated BBB– or above (based on Standard & Poor’s methodology). Assets rated non-investment grade are assets rated below BBB–.

105

27. Financial risk management (continued)

(b) Credit default risk (continued)

Credit exposure by credit rating consolidated Group (continued) Funds Management (continued)

(b) Credit default risk (continued) Credit exposure by credit rating consolidated Group (continued) Funds Management (continued)
Consolidated 2009	Equivalent credit rating
	Investment grade Non-investment grade
	Non- investment AAA AA A BBB grade Other Total $M $M $M $M $M $M $M
Cash and cash equivalents Cash and cash equivalents – SPV Receivables1 Receivables – SPV Financial assets fair valued through income statement2 Derivative assets	1,071.7 – – – – – 1,071.7 737.0 – – – – – 737.0 0.3 0.3 0.1 39.2 31.3 511.2 582.4 9,338.8 5,839.0 344.2 63.1 59.0 – 15,644.1 1,281.9 274.6 232.8 436.1 657.4 – 2,882.8 – 88.7 101.7 – – 1.3 191.7
Total	12,429.7 6,202.6 678.8 538.4 747.7 512.5 21,109.7

Consolidated 2008	Equivalent credit rating
	Investment grade Non-investment grade
	Non- investment AAA AA A BBB grade Other Total $M $M $M $M $M $M $M
Cash and cash equivalents 657.8 – – – – – 657.8 Cash and cash equivalents – SPV 956.0 – – – – – 956.0 Receivables1 – 2.9 – 23.6 – 354.8 381.3 Receivables – SPV 10,977.8 7,214.6 371.3 63.1 133.6 – 18,760.4 Financial assets fair valued through income statement 761.2 245.4 328.9 464.2 794.0 – 2,593.7 Derivative assets – 72.7 4.0 – – 6.6 83.3
Total 13,352.8 7,535.6 704.2 550.9 927.6 361.4 23,432.5

1 Receivables are primarily related to trade debtors and for 2009 includes the consolidated result of Challenger Diversifi ed Property Group (CDI). Refer to Note 10 for further details.

2 The credit duration of Debt Security investments at 30 June 2008 is approximately three years.

Parent

At reporting date the parent company had cash and cash equivalents of $0.9 million (2008: $2.8 million) rated AAA. Receivables of $642.1 million (2008: $526.6 million) are not rated by the company as they are amounts due from controlled entities.

Management of credit default risk concentration

At reporting date, the Group has no signifi cant concentrations of credit risk. The credit quality of all fi nancial instruments is consistently monitored in order to identify any adverse changes in the credit quality.

The below tables give information regarding the carrying value of the consolidated Group’s fi nancial assets that are neither past due nor impaired, an ageing analysis is of those assets that are past due but not impaired and fi nancial assets that are past due and impaired at the balance sheet date.

106

Consolidated As at 30 June 2009	Past due Past due but not impaired and impaired Total
	Investment grade Non-investment grade
	Neither past Greater due nor 0-1 1-3 3-6 than impaired months months months 6 months $M $M $M $M $M $M $M
Receivables2 Receivables SPV1 Mortgages	558.4 – 7.2 6.4 7.7 – 579.7 14,706.6 547.3 291.4 39.3 – 59.5 15,644.1 – – – 0.7 2.0 – 2.7
Total loans and receivables	15,265.0 547.3 298.6 46.4 9.7 59.5 16,226.5
As at 30 June 2008 Receivables Receivables – SPV1 Mortgages	372.0 – 6.3 0.2 2.3 0.3 381.1 17,665.0 619.6 268.5 171.1 – 36.2 18,760.4 – – 0.1 0.1 – – 0.2
Total loans and receivables	18,037.0 619.6 275.0 171.5 2.3 36.5 19,141.7

1 Receivables – SPVs is represented by the weighted average loan to valuation ratio (LVR) of property value at original settlement. As at reporting date the fair value of collateral held for SPV receivables was $26,714.5 million (2008: $26,314.9 million).

2 Receivables for 2009 includes the consolidated result of Challenger Diversifi ed Property Group (CDI).

CDI minimises concentration of credit risk in relation to trade receivables by providing leases to a number of different tenants who are considered creditworthy third parties. It is CDI’s policy that all customers who wish to trade on credit terms are subject to credit verifi cation procedures. In addition, rent receivable balances are monitored on an ongoing basis to ensure the Group’s exposure to bad debts is managed through normal payment terms and review of any rental in arrears.

Parent

The parent company has amounts due from controlled entities of $642.1 million (2008: $526.6 million) which are neither past due nor impaired.

Life

Included in fi nancial assets are debt securities that are not quoted in an active market. The net change in the fair value of these assets due to credit risk was $26.3 million negative (2008: $6.0 million negative).

CLC has issued subordinated notes of A$400,000,000 (November 2007) and US$150,000,000 (December 2006). These notes are designated as fi nancial liabilities through profi t and loss. The change in fair value recognised in the income statement is $135.9 million, of which $176.0 million was due to credit risk (2008: nil). The carrying amount is $163.0 million below the amount CLC is contractually required to pay at maturity.

CLC has estimated the change in fair value due to credit risk by comparing the carrying value of the instruments to the estimated value using benchmark interest rates at balance date, but assuming credit risk had not been changed.

Mortgage Management

The Mortgage Management SPVs’ hold a provision to protect against impaired assets (see Note 10 for details).

None of the other divisions has any material credit risk exposure.

Repossessed collateral

In the event of a default in any of the SPV’s, in compliance with the Mortgage deed, the Lender, Perpetual Trustees Victoria Limited (PVTL) may exercise the power vested under the applicable law and take possession of the secured property. It may exercise any power of sale conferred by applicable law as a recovery action against settlement of the outstanding mortgage balance. At all times of possession, the risks and rewards associated with ownership of the property are held by PVTL as the lender and not the Challenger Group.

(c) Liquidity risk

Liquidity risk is the risk that the Group will encounter diffi culty in raising funds to meet cash commitments associated with fi nancial instruments. This may result from either the inability to sell fi nancial assets at their face values; a counterparty failing on repayment of a contractual obligation; or the inability to generate cash infl ows as anticipated.

The Group aims to ensure that it has suffi cient liquidity to meet its obligations on a short-term and medium-term basis. In setting the level of suffi cient liquidity, the Group considers new business activities in addition to current contracted obligations. In summary it considers: minimum cash requirements; collateral and margin call buffers; AFS Licence requirements; cash fl ow forecasts; associated reporting requirements; other liquidity risks; and contingency plans.

107

27. Financial risk management (continued)

(c) Liquidity risk (continued)

The basis of the approach to liquidity management is on targeting suffi cient liquidity to meet the regulatory guidelines set out in ASIC Policy Statement 166 for holders of an AFS Licence and a Working Capital Reserve.

ASIC Policy Statement 166 currently requires AFS Licence holders to maintain cash fl ow projections over at least the next three months, based on a reasonable estimate of what is likely to happen and demonstrate that a Liquidity Buffer will exceed 20% of the greater of:

• cash outfl ows for the forecast three month average (equivalent to 18 days’ outgoings); or

• cash outfl ow for the most recent fi nancial year, adjusted to produce a three month average.

A Working Capital Reserve is to be used as a reserve to pay unexpected cash calls. To determine this fi gure, generally a review of the last 18 months’ cash fl ows is undertaken. In addition, a number of fi nancial market stresses on the business are undertaken quarterly.

Life

Life aims to ensure that it has suffi cient liquidity to meet its obligations on a short-term, medium-term and long-term basis. The Liquidity Management Policy is approved by the CLC Board and sets out liquidity targets and mandated actions depending on actual liquidity levels relative to those targets. Detailed forecast cash positions are reported regularly to the CLC Asset and Liability Committee. At the reporting date, all requirements of the CLC Board approved liquidity management policy

The table below summarises the maturity profi le of the Group’s and the parent’s undiscounted fi nancial liabilities. This is based on contractual undiscounted repayment obligations, except for life investment contract liabilities.

Undiscounted maturity prof le					Total
	1 year				contractual
Consolidated	or less	1-3 years	3-5 years	> 5 years	amount
2009	$M	$M	$M	$M	$M
Financial liabilities
Payables	327.1	213.3	125.8	75.5	741.7
Payables – SPV	6.7	0.0	0.0	0.0	6.7
Interest bearing liabilities	844.2	324.4	141.6	1,774.8	3,085.0
Interest bearing liabilities – SPV	5,331.9	–	–	13,454.3	18,786.2
Life investment contract liabilities	1,119.9	1,383.0	965.1	2,722.4	6,190.4
Equity securities held for trading	–	–	–	–	–
Derivative f nancial liabilities	24.8	14.3	8.3	80.0	127.4
Total f nancial liabilities1	7,654.6	1,935.0	1,240.8	18,107.0	28,937.4
2008
Financial liabilities
Payables2	314.1	81.8	111.4	17.3	524.6
Payables – SPV	12.4	–	–	–	12.4
Interest bearing liabilities	141.4	731.8	224.2	1,766.6	2,864.0
Interest bearing liabilities – SPV	7,410.3	138.4	–	18,574.9	26,123.6
Life investment contract liabilities	1,079.6	1,202.7	804.5	2,022.4	5,109.2
Equity securities held for trading	43.6	–	–	–	43.6
Derivative f nancial liabilities3	99.9	41.2	35.7	84.6	261.4
Total f nancial liabilities	9,101.3	2,195.9	1,175.8	22,465.8	34,938.8

1 Financial liabilities for 2009 includes the consolidated result of Challenger Diversifi ed Property Group (CDI).

2 Payables, interest bearing liabilities and interest bearing liabilities for SPV Trusts have been restated for 30 June 2008 in order to achieve consistency of comparative with the current period.

3 To protect against movements in foreign exchange rates and foreign interest rates, the SPV Trusts enter into interest rate basis swaps which exactly match the repayment terms to the underlying notes. Repayment of the face value of the notes is based on periodic repayment of the principal balance of the underlying mortgage assets/liabilities that can occur at any time. The notional value of the interest rate swap basis swaps reduces in line with the pay down of the notes. On this basis, the amounts payable as well as maturity bands for the cross currency swap are unable to be determined, and therefore not included in the 2008 table above. At 30 June 2008 the total cross currency swaps were positive net $3.6 million.

108

The Group uses derivative fi nancial instruments such as foreign currency contracts and interest rate swaps to hedge its risks associated with interest rate and foreign currency fl uctuations. The Group does not hold derivative fi nancial instruments for trading purposes.

All derivative fi nancial instruments are stated at fair value. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profi les. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments.

Challenger Life Company Limited (CLC) has elected not to undertake the hedge accounting treatment available under AASB 139: Financial Instruments: Recognition and Measurement for its derivative fi nancial instruments as the business’ underlying assets and liabilities are predominantly fair valued through the income statement.

With the exception of CLC, all entities within the Group have elected for the purpose of hedge accounting under AASB 139: Financial Instruments: Recognition and Measurement to classify derivative fi nancial instruments as either fair value hedges or cash fl ow hedges. Fair value hedges relate to hedging the exposure to changes in the fair value of a recognised asset or liability. Cash fl ow hedges relate to exposure to variability in cash fl ows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecasted transaction. For those that do not qualify for hedge accounting under the requirements of AASB 139 , the derivative instruments are stated at fair value with any gains or losses arising from changes in fair value being taken directly to the income statement.

Hedging instruments fair valued through the income statement

(i) Interest rate swaps and futures fair valued through the income statement

Hedging activity is performed using interest rate swaps and futures. A swap transaction obliges the two parties to the contract to exchange a series of cash fl ows at specifi ed intervals known as payment or settlement dates. A futures contract obliges its owner to buy a specifi c underlying commodity or fi nancial instrument at a specifi ed price on the contract maturity date (or to settle the value for cash). Futures contracts are exchange traded.

The Group hedges a portion of its variable interest rate exposures arising from corporate interest bearing liabilities using an interest rate swap. The change in fair value of the interest rate swap is taken directly to the income statement .

As at reporting date the Group had the following interest rate swaps:

Consolidated	Notional/Principal	Net fair value	Net fair value	Net fair value
	contract value		assets	liabilities
Interest rate swaps	$M		$M	$M
2009
Less than 1 year	403.0		4.3	(0.7)
1-3 years	895.3		23.3	(6.6)
3-5 years	732.4		29.2	(2.9)
Greater than 5 years	2,155.7		85.8	(31.3)
Total	4,186.4		142.6	(41.5)
2008
Less than 1 year	115.7		7.0	–
1-3 years	510.0		–	(7.7)
3-5 years	390.0		–	(8.7)
Greater than 5 years	1,495.9		0.2	(51.8)
Total	2,511.6		7.2	(68.2)

109

28. Derivative fi nancial instruments (continued)

Hedging instruments fair valued through the income statement (continued)

(i) Interest rate swaps and futures fair valued through the income statement (continued) As at reporting date the Group had the following interest rate futures:

Consolidated	Notional/Principal	Net fair value	Net fair value	Net fair value	Net fair value
	contract value		assets	liabilities
Future contracts	$M		$M		$M
2009
Less than 1 year	1,006.3		–		(1.0)
1-3 years	–		–		–
3-5 years	–		–		–
Greater than 5 years	–		–		–
Total	1,006.3		–		(1.0)
2008
Less than 1 year	–		–		–
1-3 years	26.6		1.4		–
3-5 years	–		–		–
Greater than 5 years	–		–		–
Total	26.6		1.4		–

Life holds the majority of contracts per interest rate swaps and interest rate futures. Movements during the year are in line with its adopted investment strategy.

(ii) Forward currency contracts held for trading

The Group uses forward currency contracts to hedge net foreign currency exposures. Life and Corporate businesses treat forward currency contracts at fair value with movements in fair value taken to the income statement.

Details of outstanding foreign currency contracts, cross currency swaps, fair values and maturities as at reporting date are as follows:

	Notional/Principal	Net fair value	Net fair value	Net fair value
	contract value		assets	liabilities
Consolidated	$M		$M	$M
2009
FX forwards	2,713.3		19.5	(17.9)
Cross currency swaps	173.7		–	(59.4)
	2,887.0		19.5	(77.3)
2008
FX forwards	2,572.4		50.0	(3.7)
Cross currency swaps	159.3		1.6	–
	2,731.7		51.6	(3.7)

110

The maturity profi le table below illustrates the AUD equivalent of the foreign currency buy and sell contracts.

Outstanding contracts	Maturity prof le
	< 1 year 1-3 years 3-5 years > 5 years $M $M $M $M
2009 Buy USD Dollars GBP Sterling EUR Euro NZD Dollars Sell USD Dollars EUR Euro GBP Sterling SEK Krona NZD Dollars JPY Yen	(669.8) – – – (8.1) – – – (236.8) – – – (1.2) – – – 933.0 – 11.3 – 436.1 3.0 3.5 4.8 312.9 – – – 26.2 – – – 17.5 – – – 6.1 – – –
	815.9 3.0 14.8 4.8
2008 Buy USD Dollars GBP Sterling EUR Euro NZD Dollars CAD Dollars JPY Yen Sell USD Dollars EUR Euro GBP Sterling SEK Krona NZD Dollars	(143.9) – – – (13.1) – – – (10.4) – – – (1.4) – – – (1.0) – – – (8.1) – – – 829.6 – – 8.5 658.6 – – – 515.3 184.5 – – 14.6 – – – 15.8 – – –
	1,856.0 184.5 – 8.5

Hedging instruments designated as cash fl ow hedges

Mortgage Management hedges the SPV trusts using interest rate swaps, interest rate futures and cross currency swaps to reduce any potential exposures in interest rate fl uctuations and adverse foreign currency movements. In accordance with AASB 139: Financial Instruments: Recognition and Measurement these instruments have been designated as cash fl ow hedges and movements in the fair value of the hedges have been taken through the cash fl ow hedge reserve.

These hedge relationships have been structured ensuring all the principal terms of the hedged item and hedging instrument are perfect and as a result a qualitative method for assessing hedge effectiveness is considered appropriate.

The hedges are highly effective from inception because the cash fl ows of the hedging instrument fully offset the cash fl ows of the hedged item due to:

• The derivative notional value automatically tracking the principal value of the hedged item throughout the life of the trust.

• The hedging instrument and hedged item have identical terms to maturity.

• The hedging instrument and hedged item have identical reset dates based on the applicable foreign cash rate.

• Interest and principal payment dates are identical for the hedging instrument and hedged item.

• The swap counterparty has a high investment grade credit rating ensuring minimal counterparty risk.

At each fi nancial reporting date an examination is carried out to ensure the hedge is still effective (i.e. the critical terms still match), combined with a review of the credit rating of the counterparty.

All hedges in place are with high grade credit counterparties and there has been no impact to the income statement for ineffective portions during the period.

111

28. Derivative fi nancial instruments (continued)

Hedging instruments designated as cash fl ow hedges (continued)

Mortgage Management SPVs

As at reporting date a loss of $27.0 million (2008: $17.4 million) was recognised in equity for the below fi nancial instruments designated as cash fl ow hedges.

Consolidated Group

As at reporting date a gain of $nil (2008: $1.7 million) was removed from equity and included in the income statement. This was included in unrealised gain/(loss) on interest rate derivative assets in Note 3.

(i) Interest rate swaps and futures designated as cash fl ow hedges

Mortgage Management hedges exposure to interest rates arising from funding fi xed rate loans with fl oating rate mortgage backed securities using interest rate swaps.

Mortgage Management uses futures contracts to hedge the interest rate basis risk between variable rate loans, which generally reprice with changes in offi cial interest rates, and issued mortgage backed securities which reprice with changes in 30 day and 90 day BBSW.

As at reporting date the Group had the following cash fl ow hedge interest rate swaps in place:

Consolidated	Notional/Principal	Net fair value	Net fair value	Net fair value
	contract value		assets	liabilities
Interest rate swaps	$M		$M	$M
2009
Less than 1 year	450.8		1.1	(6.5)
1-3 years	848.1		–	(21.4)
3-5 years	355.0		–	(15.5)
Greater than 5 years	–		–	–
Total	1,653.9		1.1	(43.4)
2008
Less than 1 year	124.0		2.1	–
1-3 years	836.4		14.0	–
3-5 years	376.8		6.3	–
Greater than 5 years	22.7		0.4	–
Total	1,359.9		22.8	–

As at reporting date the Group had the following cash fl ow hedge interest rate futures in place:

Consolidated	Notional/Principal	Net fair value	Net fair value	Net fair value	Net fair value
	contract value		assets	liabilities
Future contracts	$M		$M		$M
2009
Less than 1 year	12,246.0		–		(1.3)
1-3 years	–		–		–
3-5 years	–		–		–
Greater than 5 years	–		–		–
Total	12,246.0		–		(1.3)
2008
Less than 1 year	9,517.4		0.3		(0.2)
1-3 years	–		–		–
3-5 years	–		–		–
Greater than 5 years	–		–		–
Total	9,517.4		0.3		(0.2)

112

(ii) Cross currency swap contracts designated as cash fl ow hedges

Mortgage Management SPV trusts use cross currency swaps to hedge foreign denominated securities and any potential impact of adverse changes in the foreign exchange rate on RMBS.

As at reporting date the Group had the following cash fl ow hedge cross currency swaps in place:

Consolidated	Notional/Principal	Net fair value	Net fair value	Net fair value	Net fair value
	contract value		assets	liabilities
Cross currency swaps	$M		$M		$M
2009
Less than 1 year	–		–		–
1-3 years	–		–		–
3-5 years	–		–		–
Greater than 5 years	3,286.5		28.5		–
Total	3,286.5		28.5		–
2008
Less than 1 year	–		–		–
1-3 years	–		–		–
3-5 years	–		–		–
Greater than 5 years	7,749.4		–		(3.6)
Total	7,749.4		–		(3.6)

Mortgage Management has varied its holdings in interest rate swaps, future contracts and cross currency swaps in line with its strategic outlook for the business.

29. Commitments

Operating leases

Group as lessee

The Group has entered into commercial operating leases for the rental of properties where it is not in the best interests of the Group to purchase these properties. These leases have an average life of between one and 10 years with renewal terms included in the contracts. Renewals are at the specifi c option of the entity that holds the lease.

Surplus lease space under non-cancellable operating leases has been subleased, and the revenue from these leases calculated on a straight-line basis. The leases have a life of up to seven years with renewal terms included in the contract. Renewals are at the specifi c option of the entity that holds the lease.

A surplus lease provision has been created representing the Group’s net rental expense obligation – refer to Note 20.

In 2006, the Group entered into operating leases for the rental of new premises in Sydney. The Group relocated Sydney staff to the new premises in the Hilton in March 2007.

During the year ended 30 June 2008, CDI entered into a four year operating lease over the Domain Car Park with Botanical Gardens Trust. A further 21 year lease over the Domain Car Park is available to CDI conditional on completion of commitments under the Development Deed.

Group as lessor

All investment properties owned by the Group are leased to third parties under operating leases at 30 June 2009 and measured at fair value as the properties are held to earn rentals. Lease terms vary between tenants and some leases include percentage rental payments based on sales volume.

Capital expenditure commitments

Amounts payable in relation to capital expenditure commitments are contracted for at the reporting date but not recognised as liabilities. This includes amounts in relation to the investment property portfolio.

Remuneration commitments

Amounts disclosed as remuneration commitments include commitments arising from contracts (retention bonus, termination payment, interest) of Key Management Personnel referred to in the remuneration report that are not recognised as liabilities at balance date.

113

	Consolidated
	2009 2008 $M $M
29. Commitments (continued) Commitments Non-cancellable operating leases – Group as lessee Capital expenditure Remuneration Non-cancellable operating leases – Group as lessor1 Operating leases – Group as lessee Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Not later than 1 year Later than 1 year but not later than 2 years Later than 2 years but not later than 5 years Later than 5 years	118.6 140.5 50.7 28.3 8.2 15.4 (879.9) (494.3) 20.5 18.0 20.9 19.6 51.1 53.1 26.1 49.8
	118.6 140.5

1 At 31 December 2008, the Company acquired a controlling interest in the Challenger Diversifi ed Property Group (CDI), refer to Note 34 for further information.

	Consolidated
	2009 2008 $M $M
Capital expenditure commitments Commitments payable in relation to capital expenditure commitments contracted for at the reporting date but not recognised as liabilities: Not later than 1 year Later than 1 year but not later than 5 years Later than 5 years	16.4 1.3 17.0 9.9 17.3 17.1
	50.7 28.3
Remuneration commitments Commitments payable for salaries and other remuneration under long-term employment contracts in existence at the reporting date but not recognised as liabilities: Not later than 1 year Later than 1 year but not later than 5 years	4.7 6.0 3.5 9.4
	8.2 15.4
Operating leases – Group as lessor Commitments for minimum lease rentals in relation to non-cancellable operating leases are receivable as follows:1 Not later than 1 year Later than 1 year but not later than 2 years Later than 2 years but not later than 5 years Later than 5 years	(138.5) (63.5) (122.3) (68.3) (304.3) (150.5) (314.8) (212.0)
Total minimum lease payments	(879.9) (494.3)

There are no commitments for expenditure held in the parent entity.

1 At 31 December 2008, the Company acquired a controlling interest in the Challenger Diversifi ed Property Group (CDI), refer to Note 34 for further information.

114

30. Related parties

(a) Subsidiaries

Transactions with related parties in the wholly owned group

Transactions with related parties (except otherwise disclosed) are conducted on an arm’s length basis under normal commercial terms and conditions. Amounts receivable and payable in respect of transactions between entities in the Group are disclosed in Notes 10 and 17.

Ultimate parent entity

Challenger Financial Services Group Limited is the ultimate parent entity.

(b) Other related parties

During the year, there were transactions between the Group and Challenger specialised funds (Challenger Infrastructure Fund, Challenger Kenedix Japan Trust Fund, Challenger Wine Trust and Challenger Diversifi ed Property Group) for the provision of investment management, transaction advisory and other professional services. From 31 December 2008, the Group held a controlling interest in the Challenger Diversifi ed Property Group (CDI). Any transactions between the Group and CDI that occurred after the date of control are eliminated on consolidation. Transactions were also entered into between the Group and associate entities (refer to Note 37) for the provision of distribution and administration services.

The Group earned fee income during the year of $47.5 million (2008: $90.4 million) from transactions entered into with specialised funds and associates. Transactions are conducted on an arm’s length basis under normal commercial terms and conditions.

(c) Directors and key executives

The Directors and key executives of Challenger Financial Services Group Limited at any time during the fi nancial year are as follows:

Directors

Current

Peter Polson Chairman Thomas Barrack Jr. Non-Executive Director Graham Cubbin Non-Executive Director Russell Hooper Non-Executive Director Ashok Jacob Non-Executive Director James Packer Non-Executive Director Tetsuya Wada Non-Executive Director (appointed 21 May 2009) Leon Zwier Non-Executive Director

Past

Tatsuo Tanaka Non-Executive Director (resigned 21 May 2009) Executive Directors Current Dominic Stevens Chief Executive Offi cer and Managing Director (appointed 1 September 2008) Past Michael Tilley Chief Executive Offi cer and Managing Director (retired 31 August 2008) Executives Current Mr Rob Adams Joint Chief Executive, Funds Management Mr Brian Benari Group Chief Financial Offi cer/Group Chief Operating Offi cer Mr Drew Hall Chief Executive, Mortgage Management[ 1] Mr Richard Howes Chief Executive, Life Mr Paul Rogan Executive General Manager, Capital Risk and Strategy Mr Robert Woods Joint Chief Executive, Funds Management

1 Mr Hall became Chief Executive, Mortgage Management in November 2008. Prior to this appointment he was Chief Financial Offi cer, Mortgage Management.

115

30. Related parties (continued)

(c) Directors and key executives (continued)

Loans to Directors and executives

There were no loans made to Directors and specifi ed executives as at 30 June 2009 (2008: nil).

Directors and key executive compensation for the year ended 30 June 2009

			Short-			Other
			term		Share	long-
			employee	Post	based	term
		Year	benef ts	employment	payments	benef ts	Total
			$	$	$	$	$
Directors		~~2009~~	~~926,251~~	~~13,745~~	~~–~~	~~–~~	~~939,996~~
		2008	1,357,135	36,876	–	–	1,394,011
Executive Directors		~~2009~~	~~1,167,500~~	~~16,036~~	~~1,149,666~~	~~2,985,468~~	~~5,318,670~~
		2008	5,298,807	13,129	2,546,856	250,000	8,108,792
Executives		~~2009~~	~~3,469,091~~	~~76,743~~	~~8,120,144~~	~~2,869,047~~	~~14,535,025~~
		2008	13,341,842	91,904	6,879,564	550,000	20,863,310
Total		~~2009~~	~~5,562,842~~	~~106,524~~	~~9,269,810~~	~~5,854,515~~	~~20,793,691~~
		2008	19,997,784	141,909	9,426,420	800,000	30,366,113
The Company has taken advantage	of the relief provided by ASIC Class Order 06/50 and has transferred the detailed
remuneration disclosures to the Directors’ report. The relevant information can be found in the Remuneration Report at Note 12
of the Directors’ report.
Shareholdings in Challenger Financial Services Group Limited of Directors and executives
Shareholdings of Directors at 30 June 2009 were acquired at arm’s length prices. Details of the Directors’ and Executives’
shareholdings in the Company as at	30	June 2009 and their aff liates are set out below:
For the year ended 30 June 2009				Movement during the year
		Held	Granted as		Net change	Held at	Vested/
		at	remuneration	Forfeited	other	30 June 2009	exercisable
Shares held in Challenger		1 July	during	during	during	(vested and	during
Financial Services Group Limited		2008	2009	2009	2009	unvested)	2009
		Number	Number	Number	Number	Number	Number
Directors
P Polson		99,500	–	–	–	99,500	–
T Barrack Jr.		–	–	–	–	–	–
G Cubbin		177,702	–	–	–	177,702	–
R Hooper		160,000	–	–	–	160,000	–
A Jacob		20,000	–	–	–	20,000	–
J Packer	122,788,278		–	–	–	122,788,278	–
T Tanaka3		–	–	–	–	–	–
T Wada4		–	–	–	–	–	–
L Zwier		–	–	–	–	–	–
Executive Directors
D Stevens1		7,500,000	82,655	–	200,000	7,782,655	82,655
M Tilley2		11,072,999	–	–	(11,072,999)	–	–
Executives
R Adams		2,000,000	29,947	–	–	2,029,947	29,947
B Benari		5,118,491	73,071	–	40,000	5,231,562	73,071
D Hall5		–	5,989	–	560,000	565,989	5,989
R Howes		4,000,000	101,821	–	–	4,101,821	101,821
P Rogan		3,520,000	33,541	–	–	3,553,541	33,541
R Woods		4,900,000	113,800	–	–	5,013,800	113,800
Total	161,356,970		440,824	–	(10,272,999)	151,524,795	440,824

• 1 Mr Stevens was formerly an executive and became an executive director during the year.

• 2 Mr Tilley retired as an executive director during the year so his holding disclosure is removed under ‘Net change other’ column.

• 3 Mr Tanaka resigned as a director during the year.

• 4 Mr Wada was appointed as a director during the year.

116 5 Mr Hall became an executive during the period. Previously held shares are reported under ‘Net change other’ column.

For the year ended 30 June 2008			Movement during the year	Movement during the year
		Granted		Net	Held at
	Held	as		change	30 June	Vested/
	at	remuneration	Forfeited	other	2008	exercisable
Shares held in Challenger	1 July	during	during	during	(vested and	during
Financial Services Group Limited	2007	2008	2008	2008	unvested)	2008
	Number	Number	Number	Number	Number	Number
Directors
P Polson	97,000	–	–	2,500	99,500	–
T Barrack Jr.3	–	–	–	–	–	–
G Cubbin	177,702	–	–	–	177,702	–
R Hooper	125,000	–	–	35,000	160,000	–
A Jacob	20,000	–	–	–	20,000	–
J Packer	122,788,278	–	–	–	122,788,278	–
S Russo1	–	–	–	–	–	–
J Service2	50,001	–	–	(50,001)	–	–
B Shanahan2	1,150,854	–	–	(1,150,854)	–	–
T Tanaka3	–	–	–	–	–	–
L Zwier	–	–	–	–	–	–
Executive Director
M Tilley	7,022,999	–	–	4,050,000	11,072,999	800,000
Executives
R Adams	3,500,000	–	–	(1,500,000)	2,000,000	600,000
B Benari	5,500,000	–	–	(381,509)	5,118,491	100,000
R Howes	5,000,000	–	–	(1,000,000)	4,000,000	400,000
G Kirk	2,500,000	–	(2,500,000)	–	–	–
P Rogan	1,500,000	2,000,000	–	20,000	3,520,000	–
D Stevens	7,500,000	–	–	–	7,500,000	1,100,000
R Woods	5,585,000	–	–	(685,000)	4,900,000	700,000
Total	162,516,834	2,000,000	(2,500,000)	(659,864)	161,356,970	3,700,000

1 Ms Russo resigned as a director during 2008.

2 Mr Service and Ms Shanahan retired as directors during 2008.

3 Mr Barrack Jr. and Mr Tanaka were appointed as directors during 2008.

Options for shares in Challenger Financial Services Group Limited held by Directors and executives Details of Executives’ options over shares in the Company as at 30 June 2009 and their affi liates are set out below:

For the year ended 30 June 2009			Movement during the year	Movement during the year
		Granted		Net	Held at
	Held	as		change	30 June	Vested/
	at	remuneration	Forfeited	other	2009	exercisable
Options held in Challenger	1 July	during	during	during	(vested and	during
Financial Services Group Limited	2008	2009	2009	2009	unvested)	2009
	Number	Number	Number	Number	Number	Number
Executive Director
D Stevens	1,900,000	5,500,000	–	–	7,400,000	–
M Tilley	4,000,000	–	(4,000,000)	–	–	–
Executives
R Adams	1,100,000	600,000	–	–	1,700,000	–
B Benari	1,900,000	1,500,000	–	–	3,400,000	–
D Hall1	–	600,000	–	750,000	1,350,000	–
R Howes	1,900,000	1,500,000	–	–	3,400,000	–
P Rogan	900,000	600,000	–	–	1,500,000	–
R Woods	1,900,000	1,500,000	–	–	3,400,000	–
Total	13,600,000	11,800,000	(4,000,000)	750,000	22,150,000	–

1 Mr Hall became an executive during the period. Previously held options are reported under the ‘Net change other’ column.

117

30. Related parties (continued)

(c) Directors and key executives (continued)

Terms and conditions of option allocations for the year ended 30 June 2009

				Fair	Start	Last
	Granted	Grant	Exercise	value at	vesting	vesting
	number	date	price	grant	date	date
			$	$
Executive Director
D Stevens	5,500,000	1 Dec 2008	2.36	0.23/0.241	24 Aug 2011	24 Aug 2011
Executives
R Adams	200,000	22 Dec 2008	1.34	0.482	22 Dec 2008	22 Dec 2009
	200,000	22 Dec 2008	1.34	0.520	22 Dec 2009	22 Dec 2010
	200,000	22 Dec 2008	1.34	0.497	22 Dec 2010	22 Dec 2011
B Benari	500,000	22 Dec 2008	1.34	0.482	22 Dec 2008	22 Dec 2009
	500,000	22 Dec 2008	1.34	0.520	22 Dec 2009	22 Dec 2010
	500,000	22 Dec 2008	1.34	0.497	22 Dec 2010	22 Dec 2011
D Hall	200,000	22 Dec 2008	1.34	0.482	22 Dec 2008	22 Dec 2009
	200,000	22 Dec 2008	1.34	0.520	22 Dec 2009	22 Dec 2010
	200,000	22 Dec 2008	1.34	0.497	22 Dec 2010	22 Dec 2011
R Howes	500,000	22 Dec 2008	1.34	0.482	22 Dec 2008	22 Dec 2009
	500,000	22 Dec 2008	1.34	0.520	22 Dec 2009	22 Dec 2010
	500,000	22 Dec 2008	1.34	0.497	22 Dec 2010	22 Dec 2011
P Rogan	200,000	22 Dec 2008	1.34	0.482	22 Dec 2008	22 Dec 2009
	200,000	22 Dec 2008	1.34	0.520	22 Dec 2009	22 Dec 2010
	200,000	22 Dec 2008	1.34	0.497	22 Dec 2010	22 Dec 2011
R Woods	500,000	22 Dec 2008	1.34	0.482	22 Dec 2008	22 Dec 2009
	500,000	22 Dec 2008	1.34	0.520	22 Dec 2009	22 Dec 2010
	500,000	22 Dec 2008	1.34	0.497	22 Dec 2010	22 Dec 2011

1 Value per option if the EPS hurdle is achieved is 0.24c. Value per option if the TSR hurdle is achieved is 0.23c.

Performance rights held for shares in Challenger Financial Services Group Limited of Executive Directors’ and Executives Details of the executives’ performance rights for shares in the Company as at 30 June 2009 and their affi liates are set out below:

For the year ended 30 June 2009			Movement	during the year
				Net
	Held			change		Held at
	at	Granted	Forfeited	other	Vested	30 June
Performance rights held in Challenger	1 July	during	during	during	during	2009
Financial Services Group Limited	2008	2009	2009	2009	2009	(unvested)
	Number	Number	Number	Number	Number	Number
Executive Directors
D Stevens	283,901	567,555	–	–	(82,655)	768,801
M Tilley2	269,527	–	–	(269,527)	–	–
Executive
R Adams	89,842	106,416	–	–	(29,947)	166,311
B Benari	255,151	567,555	–	–	(73,071)	749,635
D Hall1	–	70,944	–	17,968	(5,989)	82,923
R Howes	341,400	310,382	–	–	(101,821)	549,961
P Rogan	109,607	212,832	–	–	(33,541)	288,898
R Woods	377,337	310,382	–	–	(113,800)	573,919
Total	1,726,765	2,146,066	–	(251,559)	(440,824)	3,180,448

1 Mr Hall became an executive during the period. Previously held options are reported under the ‘Net change other’ column.

2 Mr Tilley ceased to be Executive Director on 31 August 2008.

Performance rights are exercised on vesting and shares are transferred out of the plan to the individual.

Vested shares are transferred into the name of the executive but remain subject to trading restrictions.

118

Terms and conditions of performance rights allocations for the year ended 30 June 2009

			Share	Fair	Start	Last
	Granted	Grant	price at	value at	vesting	vesting
	number	date	grant	grant	date	date
			$	$
Executive Director
D Stevens	283,777	15 Sep 2008	2.82	2.52	15 Sep 2008	15 Sep 2009
	283,778	15 Sep 2008	2.82	2.39	15 Sep 2008	15 Sep 2010
Executive
R Adams	53,208	15 Sep 2008	2.82	2.52	15 Sep 2008	15 Sep 2009
	53,208	15 Sep 2008	2.82	2.39	15 Sep 2008	15 Sep 2010
B Benari	283,777	15 Sep 2008	2.82	2.52	15 Sep 2008	15 Sep 2009
	283,778	15 Sep 2008	2.82	2.39	15 Sep 2008	15 Sep 2010
D Hall	35,472	15 Sep 2008	2.82	2.52	15 Sep 2008	15 Sep 2009
	35,472	15 Sep 2008	2.82	2.39	15 Sep 2008	15 Sep 2010
R Howes	155,191	15 Sep 2008	2.82	2.52	15 Sep 2008	15 Sep 2009
	155,191	15 Sep 2008	2.82	2.39	15 Sep 2008	15 Sep 2010
P Rogan	106,416	15 Sep 2008	2.82	2.52	15 Sep 2008	15 Sep 2009
	106,416	15 Sep 2008	2.82	2.39	15 Sep 2008	15 Sep 2010
R Woods	155,191	15 Sep 2008	2.82	2.52	15 Sep 2008	15 Sep 2009
	155,191	15 Sep 2008	2.82	2.39	15 Sep 2008	15 Sep 2010

Capped performance rights for shares in Challenger Financial Services Group Limited held by executives Details of the executives’ capped performance rights for shares in the Company as at 30 June 2009 and their affi liates are set out below:

out below:
For the year ended 30 June 2009			Movement	during the year
		Max		Net
	Held	granted as		change		Held at
Capped Performance Rights	at	remuneration	Forfeited	other	Vested	30 June
held in Challenger Financial	1 July	during	during	during	during	2009
Services Group Limited	2008	2009	2009	2009	2009	(unvested)
	Number	Number	Number	Number	Number	Number
Executives
R Adams	–	285,714	–	–	–	285,714
B Benari	–	571,428	–	–	–	571,428
D Hall	–	285,714	–	–	–	285,714
R Howes	–	571,428	–	–	–	571,428
P Rogan	–	285,714	–	–	–	285,714
R Woods	–	571,428	–	–	–	571,428
Total	–	2,571,426	–	–	–	2,571,426

119

30. Related parties (continued)

(c) Directors and key executives (continued)

Terms and conditions of capped performance rights allocations for the year ended 30 June 2009

	Max			Fair	Start	Last
	granted	Grant	Grant	value at	vesting	vesting
	number	date	price	grant	date	date
			$	$
Executives
R Adams	285,714	22 Dec 2008	1.50 – 3.50	0.532	22 Dec 2008	15 Sep 2010
B Benari	571,428	22 Dec 2008	1.50 – 3.50	0.532	22 Dec 2008	15 Sep 2010
D Hall	285,714	22 Dec 2008	1.50 – 3.50	0.532	22 Dec 2008	15 Sep 2010
R Howes	571,428	22 Dec 2008	1.50 – 3.50	0.532	22 Dec 2008	15 Sep 2010
P Rogan	285,714	22 Dec 2008	1.50 – 3.50	0.532	22 Dec 2008	15 Sep 2010
R Woods	571,428	22 Dec 2008	1.50 – 3.50	0.532	22 Dec 2008	15 Sep 2010

Final number of capped rights granted under the Challenger Performance Plan is dependent on the share price at the fi nal vesting date. The maximum number of rights is achieved at a share price of $3.50 and above. Below $1.50 no rights will vest. For full details of this scheme see Note 31.

Participation in deferred loan scheme for shares in Challenger Financial Services Group Limited held by executives Details of the executives’ participation in the deferred loan scheme for shares in the Company as at 30 June 2009 and their

aff liates are set out below:
For the year ended 30 June 2009			Movement	during the year
				Net	Held at
	Held	Granted as		change	30 June	Vested/
	at	remuneration	Forfeited	other	2009	(exercisable)
Shares held in Challenger	1 July	during	during	during	(vested and	during
Financial Services Group Limited	2008	2009	2009	2009	unvested)	2009
	Number	Number	Number	Number	Number	Number
Executive
P Rogan	2,000,000	–	–	–	2,000,000	–
Total	2,000,000	–	–	–	2,000,000	–

31. Employee entitlements

31. Employee entitlements
	Consolidated
	2009 2008 $M $M
Employee entitlements	13.5 19.1

There are no employee entitlements held in the parent.

Employees of the Group at balance date totalled 837 (2008: 911).

Challenger Performance Plan

The Challenger Performance Plan is a fl exible plan that provides for the award of either options or performance rights (with awards being satisfi ed from the issue of new shares or shares acquired on market). A two tiered approach provides optimal fl exibility and ensures the equity based reward instrument being applied addresses the particular needs of the individual.

Directors other than Executive Directors are not eligible to participate in the plan.

120

The key features of the plan are as follows:

Performance share rights

• The instrument is a performance right which converts into a fully paid Challenger share at the end of the vesting period.

• The core purpose of the plan is the retention of key resources and a vehicle to align compulsorily deferred bonuses which have already been earned, with the longer term interests of shareholders.

• Allocations of performance rights will generally be made to participants in the following circumstances:

• to key resources as retention awards;

• granted to those employees with existing compulsory short-term incentive deferral;

• as sign-on bonuses for new employees in lieu of equity forgone with former employer.

• The vesting period will be typically over two years.

• Once performance rights are converted to ordinary fully paid shares upon vesting, the shares may remain in the plan for a period up to the 10th anniversary of the date of the grant (may be subject to change once government legislation is fi nalised), unless the employee submits a withdrawal notice to the Board.

• Performance rights (whether vested or unvested) will lapse where a participant acts fraudulently or dishonestly or where a participant is in material breach of their obligations (either under the plan or to Challenger), unless the Board determines otherwise.

• Generally, performance rights will lapse where a participant leaves Challenger before the vesting date due to resignation or dismissal, unless the Board determines otherwise.

• If a participant’s role becomes redundant, Board discretion will apply.

Options

• These are options over Challenger shares with an exercise price set at the prevailing market price at the time of the grant. The option becomes exercisable at the end of a vesting period, subject to the achievement of performance conditions.

• The core purpose of the plan is to directly align key senior executives, whose responsibilities provide them with the opportunity to signifi cantly infl uence long-term shareholder value, with shareholders through the provision of share options which vest subject to a performance hurdle.

• The vesting period is fl exible but typically vesting over three years from date of grant.

• The structure of option allocations under the plan provides a critical linkage between remuneration, Challenger’s performance and shareholder value, by linking an executive’s reward to the achievement of specifi ed performance targets.

• The Challenger Performance Plan provides the Board with fl exibility round the form of the performance hurdle it attaches to particular grants of options to ensure that there is appropriate alignment with shareholders and executives in the Board’s assessment at the time of grant.

• Options must generally be exercised within 90 days of them vesting.

• Options will lapse where a participant leaves Challenger before the options vest due to resignation or dismissal, unless the Board determines otherwise.

• Options (whether vested or unvested) will lapse where an executive acts fraudulently or dishonestly or where a participant is in material breach of their obligations (under the plan or to Challenger), unless the Board determines otherwise.

• If a participant’s role becomes redundant, Board discretion will apply.

• Options lapse immediately at the end of the vesting period if the performance hurdle has not been achieved.

Capped performance rights

A restricted issue of capped performance rights was issued on 22 December 2008. The rights, which convert into fully paid Challenger shares, vest on 15 September 2010 subject to the achievement of certain performance conditions. The performance conditions are employment with Challenger at the time of vesting and a share price performance condition. If the fi ve day volume-weighted average price (VWAP) of Challenger is less than $1.50 at the vesting date there is no benefi t to the employees. If the fi ve day VWAP is $3.50 or greater at the vesting date the employee receives 100% of the benefi t. There is pro-rata grant of the benefi t if the fi ve day VWAP is between $1.50 and $3.50. There is no exercise price payable by the participants.

121

31. Employee entitlements (continued)

Performance rights

The following table sets out the details of the share rights granted under the Challenger Performance Plan during 2009 and movements on previous issues:

								Total
	Latest		Fair	Out-	Granted	Vested	Expired	out-
	date		value	standing	during	during	during	standing
	for	Reference	at	at 1 July	the	the	the	at 30 June
Grant date	exercise	price	grant	2008	year	year	year	20091
06 Mar 07	01 Oct 09	4.67	4.40	75,000	–	–	–	75,000
28 Mar 07	15 Mar 09	4.69	4.54	8,192	–	(8,192)	–	–
14 Sep 07	15 Sep 08	5.57	5.52	1,052,351	–	(1,048,606)	(3,745)	–
14 Sep 07	15 Sep 09	5.57	5.38	1,052,349	–	(69,475)	(11,120)	971,754
14 Sep 07	15 Sep 10	5.57	5.24	1,052,424	–	(68,733)	(11,124)	972,567
14 Sep 07	15 Sep 10	5.57	5.24	1,108,386	–	(75,777)	(211,376)	821,233
11 Jan 08	15 Sep 09	4.42	4.29	228,002	–	(228,002)	–	–
31 Mar 08	15 Nov 08	1.82	1.76	15,912	–	(15,912)	–	–
15 Sep 08	15 Sep 09	2.82	2.52	–	2,780,545	(68,910)	(69,421)	2,642,214
15 Sep 08	15 Sep 10	2.82	2.39	–	2,780,612	(62,387)	(75,956)	2,642,269
1 Oct 2008	15 Sep 09	2.39	2.25	–	14,185	–	–	14,185
1 Oct 2008	15 Sep 10	2.39	2.12	–	14,190	–	–	14,190
Total				4,592,616	5,589,532	(1,645,994)	(382,742)	8,153,412

1 At the date of vesting performance rights are transferred to the individual and released from the Challenger Performance Plan Trust.

Options

The following table sets out the details of the performance share options granted under the Challenger Performance Plan during 2009 and movements on previous issues:

								Total
	Latest		Fair	Out-	Granted	Exercised	Expired	out-
	date		value	standing	during	during	during	standing
	for	Exercise	taken at	at 1 July	the	the	the	at 30 June
Grant date	vesting	price	grant	2008	year	year	year	2009
27 Feb 07	1 Feb 11	4.00	1.061	7,150,000	–	–	(600,000)	6,550,000
14 Sep 07	14 Sep 11	5.57	1.281	4,600,000	–	–	(900,000)	3,700,000
28 Sep 07	28 Sep 09	5.57	1.041	666,666	–	–	–	666,666
28 Sep 07	28 Sep 10	5.57	1.301	666,666	–	–	–	666,666
28 Sep 07	28 Sep 11	5.57	1.561	666,668	–	–	–	666,668
31 Mar 08	31 Mar 12	2.14	0.331	1,750,000	–	–	(1,500,000)	250,000
30 Jun 08	30 Aug 09	2.20	0.19	2,400,000	–	–	(100,000)	2,300,000
30 Jun 08	30 Aug 10	2.20	0.27	2,400,000	–	–	(100,000)	2,300,000
30 Jun 08	30 Aug 11	2.20	0.32	2,400,000	–	–	(100,000)	2,300,000
22 Dec 08	22 Dec 09	1.34	0.46	–	4,366,667	–	(166,667)	4,200,000
22 Dec 08	22 Dec 10	1.34	0.52	–	4,366,667	–	(166,667)	4,200,000
22 Dec 08	22 Dec 11	1.34	0.57	–	4,366,666	–	(166,666)	4,200,000
09 Mar 09	22 Dec 09	1.13	0.18	–	66,667	–	–	66,667
09 Mar 09	22 Dec 10	1.13	0.22	–	66,667	–	–	66,667
09 Mar 09	22 Dec 11	1.13	0.22	–	66,666	–	–	66,666
30 Jun 09	30 Aug 10	2.29	0.56	–	116,667	–	–	116,667
30 Jun 09	30 Aug 11	2.29	0.65	–	116,667	–	–	116,667
30 Jun 09	30 Aug 12	2.29	0.68	–	116,666	–	–	116,666
CEO options
27 Nov 08	24 Aug 11	2.36	0.24	–	5,500,000	–	–	5,500,000
Former CEO options
19 Oct 07	19 Oct 11	5.20	1.821	4,000,000	–	–	(4,000,000)	–
Total				26,700,000	19,150,000	–	(7,800,000)	38,050,000

1 The valuation method has changed from EPS to TSR.

122

Capped Rights

The following table sets out the details of the capped performance rights issued under the Challenger Performance Plan during 2009:

			Fair		Maximum			Total
	Latest		value	Out-	granted	Exercised	Expired	out-
	date	Vesting	taken at	standing	during	during	during	standing
	for	price	grant	at 1 July	the	the	the	at 30 June
Grant date	vesting	$	$	2008	year	year	year	2009
22 Dec 08	15 Sep 10	1.50-3.50	0.532	–	3,857,137	–	–	3,857,137

All Challenger options have been externally valued and the valuer has used a Monte Carlo simulation model to value the Options with the TSR share price hurdles and a binomial option pricing model to value the option with the EPS hurdle, and a Black Scholes model to value the Rights.

We have used the below inputs in the Challenger Performance Plan valuation model and in the LTIP modifi cation:

			27 Nov
	15 Sep	1 Oct	2008	22 Dec	09 Mar
Grant date	2008	2008	CEO	2008	2009
Plan	rights1	rights1	options	options1	options1
Dividend yield (%)	5.4	6.1	5.5	5.5	5.5
Risk free rate (%)	5.64-5.88	5.1	3.83	2.86-3.42	2.9-3.4
Volatility (%)2	–	50	55	55-75	55-75
Valuation ($)	2.455	2.185	–	–	–
TSR valuation ($)	n/a	n/a	0.23	0.41	0.17
EPS valuation ($)	n/a	n/a	0.24	0.50	0.20
			22 Dec	10 Aug	04 Dec
		30 Jun	2008	2008	2008
Grant date		2009	capped	LTP	LTP
Plan		options1	rights	modif cation	modif cation
Dividend yield (%)		5.85	5.5	5.5	5.5
Risk free rate (%)		3.45-4.56	2.83	6.21	3.04
Volatility (%)2		55-65	70	45	70
TSR valuation ($)		0.51	n/a	n/a	n/a
EPS valuation ($)		0.63	n/a	n/a	n/a
Valuation ($)		n/a	0.532	n/a	n/a
LTIP modif cation ($)		n/a	n/a	0.26	0.05

1 Staggered vesting applies to this grant, valuation given is average value.

2 Forecast volatility rate implied from historic trend.

Deferred Loan Plan

A small number of executives had outstanding future commitments under the LTIP at the time it was suspended.

In lieu of a number of those commitments an arrangement was entered into with Deutsche Bank AG to provide the individual with a loan over a similar number of Challenger shares as their prior LTIP commitment, known as the Deferred Loan Plan.

Challenger is responsible for meeting the interest payable on the loan over its term, net of any dividends paid on the shares. Shares vest progressively over four years, commencing at the end of year 2, subject to continued employment with Challenger.

Shares are forfeited and the arrangement unwound in the event that the employment condition is not satisfi ed. In certain special circumstances (such as death, total and permanent disablement and redundancy) individuals may be entitled to retain their unvested shares if they fully discharge the outstanding loan amount.

The loans are limited in their recourse to Challenger and the Challenger Performance Plan Trust has the option of taking ownership of the shares and using them to satisfy other share awards in the event of forfeiture by the executive.

Long-term Equity Based Incentive Plan (LTIP) – Loan Funded Share Plan (suspended in December 2006)

The former long-term Incentive Plan (LTIP) was a share scheme provided by way of a limited recourse loan. Under this Plan, shares vest over a fi ve year period, subject to the achievement of a 15% compound Total Shareholder Return (TSR) performance hurdle. If the hurdle is not satisfi ed at a relevant anniversary test date no awards vest.

Loans over vested shares must be repaid before shares are released and the maximum term of the loan is six years.

123

31. Employee entitlements (continued)

Long-term Equity Based Incentive Plan (LTIP) – Loan Funded Share Plan (suspended in December 2006) (continued)

For the majority of participants (including those participants who received grants in FY07), subject to the hurdle being met, 20% of the shares vest at the end of years 2, 3 and 4, with the remaining 40% of shares vesting at the end of year 5.

The performance hurdles in respect of participants are summarised as follows:

• subject to performance hurdles being met, 20% of the participating shares issued to participants will be released on each of the second, third and fourth anniversaries of the date the shares are issued with the remaining 40% balance released on the fi fth anniversary;

• the performance hurdle is 15% per annum compounded annually, based on total shareholder return (TSR). The TSR is determined by reference to the 20 day volume weighted average share price (VWAP) for Challenger shares adjusted for capital restructures and distributions (dividends, capital returns and other distributions excluding franking credits);

• if the TSR for a period equals or exceeds the performance hurdle for that period, the relevant proportion of participating shares will be immediately released. This may include participating shares that have not been released in an earlier period because the TSR for that earlier period was not achieved;

• unreleased participating shares are forfeited upon the resignation of participants; and

• on the release of participating shares (once vesting and performance hurdles have been met) participants may, but are not obliged to sell the shares.

The Challenger Board resolved to suspend the LTIP in December 2006. As such, the fi nal award under the LTIP was made on 15 September 2006.

The Directors have extended the fi nal test date for LTIP and cash LTIP awards with a grant date 1 August and 4 December 2004 (reference date 1 August 2003 and 4 December 2003 and hence a fi nal test date of 1 August 2008 and 4 December 2008) to 30 November 2009. The cost of the modifi cation is 0.26 cents per unit (total cost $1.4 million) and 0.05 cents per units (total cost $0.1 million) and these amounts will be expensed over the revised time to maturity.

Dividends received on shares that have been issued under the LTIP must be paid to the Company as interest on the associated non-recourse loans. All grants of shares during the period were issued and placed on trust on behalf of the employee.

Details of the movement and fair value of employee shares under the LTIP are detailed in the following table:

	Opening
	balance at			FV at			Balance
	1 June		Issue	grant			at 30 June
Grant date	2008	Granted	price1	date2	Vested	Forfeited	2009
	Number	Number	$	$	Number	Number	Number
Initial participants
22-Jan-04	–	–	2.65	0.43	–	–	–
23-Feb-04	9,420,000	–	2.65	0.41	–	(1,300,000)	8,120,000
01-Apr-04	80,000	–	2.65	0.38	–	(40,000)	40,000
15-Mar-05	–	–	3.19	0.42	–	–	–
Participants
03-Mar-04	2,460,000	–	2.50	0.33	–	(2,460,000)	–
01-Apr-04	330,000	–	2.50	0.32	–	(330,000)	–
15-Sep-04	2,370,000	–	2.24	0.28	–	(180,000)	2,190,000
15-Mar-05	780,000	–	3.19	0.42	–	(200,000)	580,000
26-Apr-05	1,440,000	–	3.20	0.41	–	–	1,440,000
15-Sep-05	3,580,000	–	3.77	0.51	–	(260,000)	3,320,000
15-Mar-06	3,700,000	–	3.67	0.50	–	(550,000)	3,150,000
15-Sep-06	2,400,000	–	3.55	0.54	–	(900,000)	1,500,000
Former CEO participant
23-Dec-04	600,000	–	2.65	0.19	–	–	600,000
19-Dec-05	1,800,000	–	2.65	1.32	–	–	1,800,000
Total	28,960,000	–			–	(6,220,000)	22,740,000

• 1 The issue price of grants in respect of participating shares is the VWAP of the shares over the fi ve trading days up to and including the effective date of issue of that participating share.

2 Grant fair value represents the fair value of the shares issued at grant date calculated after taking into account all relevant factors including vesting timeframes, performance hurdles, share price volatility, dividend rates and interest rates.

124

Cash LTIP

Prior to corporatisation, certain executives were entitled to incentive payments under a cash based shadow scheme. All cash LTIP was forfeit in 2009 as the target share price is not likely to be achieved.

Other short-term employee benefi ts

Challenger pays interest on loans taken out by certain key executives to acquire Challenger shares on market. The loans are fully secured against the underlying shares and are not margin loans.

Challenger has no exposure in relation to the loan principal advanced to the key executives by the third party for the purposes of

acquiring the shares.

In the Board’s view, this arrangement when considered with the key executive’s other long-term incentive arrangements provides signifi cant alignment with shareholders’ interests.

CEO remuneration

Mr Stevens was granted 5,500,000 options during the period following shareholder approval at the Company Extraordinary General Meeting on 20 November 2008.

Challenger also pays interest on a loan taken out by Mr Stevens to acquire Challenger shares on market. The loan is fully secured against the underlying shares and is not a margin loan.

Reconciliation of profi t after income tax to net cash fl ows from operating activities:

	Consolidated Parent
	2009 2008 2009 2008 $M $M $M $M
(Loss)/prof t after tax Adjustments for: (Prof t)/loss on sale of investments Net unrealised losses on investments Prof t from non-controlling interests Share of associates’ net prof t Amortisation and depreciation Impairment loss on f nancial assets available for sale Impairment loss on equity accounted associates Interest rate differential on FX forward contracts Policy liabilities fair value (gain)/loss Policy liabilities acquisitions and maintenance expenses Gain on annuity book transfer Share based payments Change in assets and liabilities, net of effects from purchase of controlled entity: Increase in receivables Decrease/(increase) in other assets Increase/(decrease) in payables (Decrease)/increase in provisions and employee benef ts Decrease in policy liabilities Increase in deferred tax assets/liabilities	(90.7) (44.2) 125.5 117.2 147.2 (127.0) – – 235.9 399.2 – – 3.1 5.0 – – (3.1) (2.1) – – 95.4 102.9 – – 1.2 41.8 – – – 22.0 – – – 24.1 – – 9.6 (124.0) – – 190.6 194.5 – – (30.8) – – – 26.9 22.4 – – (238.6) (27.6) – – 17.2 22.3 – (1.2) 165.0 (134.5) 4.9 (0.9) (15.2) 9.7 (2.3) – (657.8) (237.3) – – (74.9) (48.8) (4.7) (1.0)
Net cash inf ow from operating income	(219.0) 172.3 123.4 114.1

125

33. Remuneration of auditor

33. Remuneration of auditor
	Consolidated Parent
	2009 2008 2009 2008 $’000 $’000 $’000 $’000
Amounts received or due and receivable by Ernst & Young for: Audit of full year and half year review of the f nancial report of the entity and any other entities in the consolidated entity. Other audit services – audit and review of trusts and funds Other services in relation to the entity and any other entity in the consolidated entity Taxation services Due diligence services Other assurance services	1,687.0 1,566.0 – – 932.0 1,796.0 – – 236.0 470.0 – – 34.0 442.0 – – 504.0 967.0 – –
	3,393.0 5,241.0 – –

Auditor’s remuneration for the Group is paid by Challenger Group Services Limited, a wholly owned subsidiary of the Company.

34. Signifi cant transactions

(a) Business combinations

On 30 September 2008, the Group announced that it had acquired the remaining 85% of Plan Group Holdings Pty Limited (PLAN) (15% was acquired in December 2005).

The transferred operations contributed revenues of $174.7 million and net profi t after tax of $9.6 million to the Group from 1 October 2008 to 30 June 2009. If the transfer had occurred on 1 July 2008, consolidated revenue and consolidated profi t after tax for the year ended 30 June 2009 would have been $224.5 million and $9.0 million respectively.

During the period, the Group has purchased a number of units in the Challenger Diversifi ed Property Group (CDI). This is an ASX listed group comprising Challenger Diversifi ed Property Trust 1 and Challenger Diversifi ed Property Trust 2, resulting in a total unitholding of 42.53% of CDI at 31 December 2008.

At this date it was determined that the Challenger Group had achieved control over CDI and its assets and liabilities have been consolidated into the Group at balance date. A discount on acquisition has arisen after the Group’s reassessment of the acquired entities’ identifi able assets and liabilities and the cost of acquisition, and has been recognised in the Group’s statutory net profi t in the current period. Since 31 December 2008 a further 0.18% of CDI has been acquired bringing the total holding to 42.71%. All subsequent acquisition movements have been taken to reserves.

Given the acquisition date of 31 December 2008, there was no operating profi t or loss in the income statement from CDI for the period. CDI incurred losses after tax of $58.6 million for the six months ended 31 December 2008. For the six months since 1 January 2009, a profi t of $11.2 million and revenue of $35.2 million has been consolidated.

126

(b) Purchase consideration of PLAN and CDI

Details of the fair value of the assets and liabilities acquired and goodwill/(discount) on acquisition are as follows:

	PLAN1	CDI2
	$M	$M
Cash and other assets	78.1	0.6
Total purchase consideration	78.1	0.6
Non-controlling interest in acquiree	–	275.0
Fair value of previously held equity interest	10.6	136.5
Less: Fair value of net identif able assets acquired	(31.1)	(478.5)
Goodwill/(discount on acquisition)	57.6	(66.4)

1 Goodwill relates to the future expected earnings arising from the PLAN assets acquired. PLAN numbers are provisional.

2 Uplift on CDI represents difference between market value of the 43% held and that proportion of the fair value of net assets acquired. Fair value of previously held equity interest is calculated using listed unit market price at date of acquisition.

Assets and liabilities acquired

The assets and liabilities arising from the acquisition are as follows:

Assets and liabilities acquired The assets and liabilities arising from the acquisition are as follows:
$M	PLAN CDI
	Acquiree’s Acquiree’s carrying Fair carrying Fair amount value amount value
Cash Receivables Investment properties Deferred tax asset Intangible assets/goodwill Investments Other assets Payables Provisions Derivative liabilities Interest bearing liabilities	– 1.3 3.0 3.0 2.2 252.6 4.8 4.8 – – 865.4 865.4 0.6 – 0.3 0.3 126.5 68.6 – – 4.4 – – – – – 0.7 0.7 (64.7) – (29.6) (29.6) – (291.4) (0.7) (0.7) – – (21.9) (21.9) – – (343.5) (343.5)
Net assets	69.0 31.1 478.5 478.5

(c) AXA transfer

On 25 November 2008 the Federal Court of Australia approved the transfer of the AXA annuity liabilities to Challenger Life Company Limited (CLC). The transfer was successfully completed on 28 November 2008.

The transfer resulted in a $1.319 billion increase in cash and debt security assets and an increase of $1.288 billion in life investment and insurance contract liabilities of CLC. A gain of $30.8 million was recognised on the transfer. This gain arose as a result of reversing previously recognised losses on life insurance contracts and the application of the CLC valuation assumptions.

AXA transfer details

Details of the fair value of the assets and liabilities transferred from AXA are as follows:

	Fair
$M	value
Assets
Cash	607.4
Receivables	0.4
Debt securities	711.2
	1,319.0
Liabilities
Policy liabilities	1,288.2
	1,288.2
Net value release on transfer	30.8

127

35. Discontinued operations

The disposal of the Financial Planning Division was completed on 30 June 2008. The results and earnings per share impact of the Financial Planning Division for the year ended 30 June 2008 are presented below:

	2008
	$M
Revenue	169.8
Expenses	(160.1)
Share of net prof ts associates	0.4
Gross prof t	10.1
Loss on disposal	(18.6)
Loss before tax on discontinued operations	(8.5)
Tax benef t	0.1
Loss from discontinued operations	(8.4)
	2008
Earnings per share – cents per share	cents
– Basic from discontinued operations	(1.4)
– Diluted from discontinued operations	(1.4)
The net cash f ows of the Financial Planning Division for the year prior to disposal are as follows:
	2008
	$M
Operating cash f ows	9.4
Investing cash f ows	(6.9)
Financing cash f ows	(1.8)
Net cash inf ow	0.7
Consideration received:
Cash	150.0
Associated costs	(10.3)
Total disposal consideration	139.7
Less: Net assets disposed of	(158.3)
Loss on disposal before income tax	(18.6)
Income tax benef t	2.9
Loss on disposal after income tax	(15.7)
Net cash inf ow on disposal:
Consideration	150.0
Less: Cash and cash equivalents disposed of	(13.1)
Ref ected in the consolidated cash f ow statement	136.9

128

36. Investments in controlled entities

(a) Controlled entities

			Equity	Equity
	Country	Class	holding	holding
	of	of	2009	2008
Name of entity	incorporation	shares	%	%
Directly controlled by Challenger Financial
Services Group Limited:
Challenger Financial Services Group	Australia	Ordinary	100	100
CFSG Holdings No.2 Victoria Pty Limited	Australia	Ordinary	100	100
Directly controlled by CFSG Holdings
No.2 Victoria Pty Limited:
Challenger Group Holdings Limited	Australia	Ordinary	100	100
FXF Holdings Pty Limited	Australia	Ordinary	100	100
Directly controlled by Challenger Group Holdings Limited:
Challenger Group Services Pty Limited	Australia	Ordinary	100	100
Challenger Superannuation Pty Limited	Australia	Ordinary	100	100
Challenger Treasury Limited	Australia	Ordinary	100	100
Challenger Commercial Lending Limited	Australia	Ordinary	100	100
Challenger Group Pty Limited(i)	Australia	Ordinary	100	100
Endowment Warrants Limited(i)	Australia	Ordinary	100	100
Challenger Mortgage Management Holdings Pty Limited	Australia	Ordinary	100	100
Challenger Strategic Capital Pty Limited	Australia	Ordinary	100	100
Challenger Life Holdings Pty Limited	Australia	Ordinary	100	100
Challenger Funds Management Holdings Pty Limited
(formerly Challenger Wealth Management Pty Limited)	Australia	Ordinary	100	100
Directly controlled by Challenger Group Pty Limited:
Challenger Limited (formerly Challenger Hedging Limited)	Australia	Ordinary	100	100
Directly controlled by Challenger Mortgage
Management Holdings Pty Limited:
ZCM Australia Asset Holdings Limited	Bermuda	Ordinary	100	100
Interstar Non-Conforming Finance Management Pty Limited	Australia	Ordinary	100	100
Challenger Non-Conforming Finance Pty Limited	Australia	Ordinary	100	100
Challenger Special Servicing Pty Limited	Australia	Ordinary	100	100
Challenger Inventory Finance Servicing Pty Limited	Australia	Ordinary	100	100
Pennley Pty Limited	Australia	Ordinary	100	100
Mortgage Support Services Pty Limited	Australia	Ordinary	100	100
Challenger Broker Support Services	Australia	Ordinary	100	100
Choice Lend Pty Limited	Australia	Ordinary	100	–
Plan Group Holdings Pty Limited	Australia	Ordinary	100	–
Directly controlled by Pennley Pty Limited:
Fintrack Members Pty Limited	Australia	Ordinary	100	100
Directly controlled by Mortgage Support
Services Pty Limited:
MSS MF Pty Limited	Australia	Ordinary	100	100
MSS MFA Pty Limited	Australia	Ordinary	100	100
Directly controlled by Challenger Inventory
Finance Servicing Pty Limited:
TMA C Warehouse C Trust	Australia	Ordinary	100	100
Directly controlled by Challenger
Non-Conforming Finance Pty Limited:
INC C Warehouse C Trust	Australia	Ordinary	100	100
Challenger Titanium Series 2004-1 Trust	Australia	Ordinary	100	100
Challenger Titanium Series 2005-1 Trust	Australia	Ordinary	100	100
Challenger Titanium Series 2006-1 Trust	Australia	Ordinary	100	100
Directly controlled by ZCM Australia Asset Holdings Limited:
Interstar Wholesale Finance Holdings Pty Ltd	Australia	Ordinary	100	100

129

36. Investments in controlled entities (continued)

(a) Controlled entities (continued)

			Equity	Equity
	Country	Class	holding	holding
	of	of	2009	2008
Name of entity	incorporation	shares	%	%
Directly controlled by Plan Group Holdings Pty Limited:
Plan Connect Pty Limited	Australia	Ordinary	100	–
Plan Lending Pty Limited	Australia	Ordinary	100	–
Women in Mortgage Business Network Pty Limited	Australia	Ordinary	100	–
Plan Australia Financial Services Pty Limited	Australia	Ordinary	100	–
Plan NZ Limited	New Zealand	Ordinary	100	–
Professional Lenders Association Network of New Zealand Limited	New Zealand	Ordinary	100	–
Plan Group Nominees Pty Limited	Australia	Ordinary	100	–
Plan Technologies Pty Limited	Australia	Ordinary	100	–
Professional Lenders Association Network of Australia Pty Limited	Australia	Ordinary	100	–
Plan Australia Operations Pty Limited	Australia	Ordinary	100	–
Plan Australia Pty Limited	Australia	Ordinary	100	–
Directly controlled by Professional Lenders
Association Network of Australia Pty Limited:
Plan Australia Pty Limited	Australia	Ordinary	100	–
Plan Australia Operations Pty Limited	Australia	Ordinary	100	–
Directly controlled by Interstar Wholesale
Finance Holdings Pty Ltd:
Challenger Mortgage Management Pty Limited	Australia	Ordinary	100	100
Interstar Securities (International) Pty Limited	Australia	Ordinary	100	100
Challenger Securities (NZ) Pty Limited	Australia	Ordinary	100	100
Directly controlled by Challenger Mortgage
Management Pty Limited:
Interstar Home Loan Corporation Pty Limited	Australia	Ordinary	100	100
Challenger Securitisation Management Pty Limited	Australia	Ordinary	100	100
Challenger Millennium Series 2001-1C Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2001-1E Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2001-2 Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2001-3 Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2002-1G Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2002-2 Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2003-1G Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2003-2 Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2003-3G Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2003-4 Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2003-5G Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2004-1E Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2004-2G Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2004-3P Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2004-4E Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2004-5 Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2005-1G Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2005-2L Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2005-3E Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2006-1 Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2006-2G Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2006-3L Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2006-4H Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2007-1E Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2007-2L Trust	Australia	Ordinary	100	100
Challenger Millennium Series 2008-1 Trust	Australia	Ordinary	100	–
Challenger Millennium Series 2008-2 Trust	Australia	Ordinary	100	–
Challenger Millennium Series 2009-1 Trust	Australia	Ordinary	100	–
Challenger Millennium NPL Trust	Australia	Ordinary	100	100

130

			Equity	Equity
	Country	Class	holding	holding
	of	of	2009	2008
Name of entity	incorporation	shares	%	%
Directly controlled by Challenger Mortgage
Management Pty Limited (continued):
NIM Master Trust Series	Australia	Ordinary	100	100
Challenger Millennium Warehouse A Trust	Australia	Ordinary	100	100
Challenger Millennium Warehouse B Trust	Australia	Ordinary	100	100
Challenger Millennium Warehouse B1 Trust	Australia	Ordinary	100	–
Challenger Millennium Warehouse B2R Trust	Australia	Ordinary	100	–
Challenger Millennium Warehouse C Trust	Australia	Ordinary	100	100
Challenger Millennium Warehouse F Trust	Australia	Ordinary	100	100
Challenger Millennium Warehouse G Trust	Australia	Ordinary	100	100
Challenger Millennium Warehouse H Trust	Australia	Ordinary	100	100
Challenger Millennium Warehouse J Trust	Australia	Ordinary	100	100
Challenger Millennium Warehouse JP Trust	Australia	Ordinary	100	–
Challenger Millennium Warehouse N Trust	Australia	Ordinary	100	100
Challenger Millennium Warehouse R Trust	Australia	Ordinary	100	100
Challenger Millennium Warehouse S Trust	Australia	Ordinary	100	100
Challenger Millennium Warehouse U Trust	Australia	Ordinary	100	100
Challenger Millennium Warehouse V Trust	Australia	Ordinary	100	100
Challenger NZ Millennium Series 2004-A Trust	New Zealand	Ordinary	100	100
Challenger NZ Millennium Series 2007-AP Trust	New Zealand	Ordinary	100	100
Challenger NZ Millennium Warehouse W Trust	New Zealand	Ordinary	100	100
Directly controlled by Challenger Securities (NZ) Pty Limited:
Challenger Mortgage Management NZ Limited	New Zealand	Ordinary	100	100
Interstar Mortgage Management Pty Limited	Australia	Ordinary	100	100
Directly controlled by Challenger Life Holdings Pty Limited:
Challenger Group Services (UK) Pty Ltd	UK	Ordinary	100	100
Challenger Life Company Holdings Pty Limited
(formerly Challenger Life Pty Limited)	Australia	Ordinary	100	100
Challenger Listed Investments Limited	Australia	Ordinary	100	100
Challenger Life Nominees No. 2 Pty Limited
(formerly Challenger Property Funds Management Limited)	Australia	Ordinary	100	100
Challenger Property Asset Management Pty Limited	Australia	Ordinary	100	100
Challenger Life Nominees Pty Limited
(formerly Challenger Property Nominees Pty Ltd)	Australia	Ordinary	100	100
Wyetree Asset Management Limited (UK)
(formerly Challenger Structured Credit
Management Limited (UK))	UK	Ordinary	85	85
Encap Funds Management Pty Limited	Australia	Ordinary	100	100
EMIF Holdings Pty Limited	Australia	Ordinary	100	100
Challenger Skybridge (Hastings) Holdings Company Pty Limited	Australia	Ordinary	100	100
Challenger Management Services Limited	Australia	Ordinary	100	100
Challenger Management Services (UK) Limited	UK	Ordinary	100	100
Challenger Retirement Services Pty Limited	Australia	Ordinary	100	100
Challenger Life (UK) Limited (now deregistered)	UK	Ordinary	100	100
Directly controlled by Challenger Life Company Holdings
Pty Limited (formerly Challenger Life Pty Limited):
Challenger Life Company Limited
(formerly Challenger Life No.2 Limited)	Australia	Ordinary	100	100
Challenger Capital Markets Limited	Australia	Ordinary	100	100
CPHIC Investments Pty Limited	Australia	Ordinary	100	100
Challenger Originator Finance Pty Limited	Australia	Ordinary	100	100
Challenger US Infrastructure Holdings Pty Limited	Australia	Ordinary	100	100
Allf ne Holdings Pty Limited	Australia	Ordinary	100	100
Bluezen Pty Limited	Australia	Ordinary	100	100
Challenger Skybridge (Fund) Holding Company Pty Limited	Australia	Ordinary	100	100
Challenger Skybridge (Group) Holding Company Pty Limited	Australia	Ordinary	100	100

131

36. Investments in controlled entities (continued)

(a) Controlled entities (continued)

			Equity	Equity
	Country	Class	holding	holding
	of	of	2009	2008
Name of entity	incorporation	shares	%	%
Directly Controlled by Challenger Life Company Limited
Challenger Diversif ed Property Group	Australia	Ordinary	43	–
Directly controlled by Challenger Listed Investments Limited:
Inexus Australian Holding Company Pty Limited	Australia	Ordinary	100	100
CSPP1 Investment Company 1 Pty Limited(ii)	Australia	Ordinary	–	100
CSPP1 Broadbeach Pty Limited(ii)	Australia	Ordinary	–	100
CSPP1 Mavis Court Pty Limited(ii)	Australia	Ordinary	–	100
CSPP1 Maitland Pty Limited(ii)	Australia	Ordinary	–	100
CDPG Australia Pty Limited	Australia	Ordinary	100	100
Challenger LBC Terminals Australia Pty Limited	Australia	Ordinary	100	100
Challenger Diversif ed Property Development Pty Limited	Australia	Ordinary	100	100
Directly Controlled by Challenger Management Services Limited:
CMS (UK) Pty Limited	UK	Ordinary	100	100
Directly controlled by Challenger Funds Management
Holdings Pty Limited (formerly Challenger Wealth
Management Pty Limited):
Challenger Boutique Holdings Pty Ltd	Australia	Ordinary	100	100
Challenger Managed Investments Limited	Australia	Ordinary	100	100
Challenger Managed Investments (International) Pty Limited	Australia	Ordinary	100	100
Challenger Margin Lending Pty Limited	Australia	Ordinary	100	100
Challenger FM Nominees Pty Limited
(formerly Custom Choice Managed Investments Limited)	Australia	Ordinary	100	100
Directly controlled by Challenger Boutique Holdings Pty Limited:
Challenger Boutique (GFI) Holdings Pty Limited	Australia	Ordinary	100	100
Challenger Boutique Ardea Holdings Pty Limited	Australia	Ordinary	100	–
Challenger Boutique Wavestone Holdings Pty Limited	Australia	Ordinary	100	–
Directly controlled by Challenger Life Nominees Pty Limited
(formerly Challenger Property Nominees Pty Limited):
Sabrand Limited	Cyprus	Ordinary	100	100
Mawbury Pty Limited	Australia	Ordinary	100	100
TLG Services Pty Limited	Australia	Ordinary	100	100
TLGH Pty Limited	Australia	Ordinary	100	100
Talaverra Herring Pty Limited	Australia	Ordinary	100	100
CSPP1 Investment Company 1 Pty Limited(ii)	Australia	Ordinary	100	–
CSPP1 Broadbeach Pty Limited(ii)	Australia	Ordinary	100	–
CSPP1 Mavis Court Pty Limited(ii)	Australia	Ordinary	100	–
CSPP1 Maitland Pty Limited(ii)	Australia	Ordinary	100	–
Directly controlled by TLGH Pty Limited:
The Liberty Group Consortium Pty Limited	Australia	Ordinary	100	100
Directly controlled by Mawbury Pty Limited:
Cescade Pty Limited	Australia	Ordinary	100	100
Directly controlled by Sabrand Limited:
Challenger Hungary International Capital Investment and
Management Limited	Hungary	Ordinary	100	100
Directly controlled by Challenger Hungary International
Capital Investment and Management Limited:
Challenger South Monaco LLC (US)	USA	Ordinary	100	100

(i) These controlled entities have been granted relief from the necessity to prepare fi nancial reports in accordance with Class Order 98/1418 issued by the Australian Securities and investments Commission. For further information see Note 38.

(ii) Due to an internal restructure taking place during the reporting period the ownership of these controlled entities was transferred to another Group entity.

132

(b) Assignment of warrants business

In an agreement dated 30 April 2004, Challenger entered into a Deed of Assignment with Westpac Banking Corporation (WBC) whereby all legal and benefi cial rights, title and interests in respect of the following assets and liabilities were assigned to WBC.

	Consolidated
	2009 2008 $M $M
Shares in listed corporations held in relation to endowment warrants Dividends receivable Warrant liability	44.8 83.3 0.3 0.4 (45.1) (83.7)
	– –

37. Investment in associates

37. Investment in associates
Principal Country of activity incorporation	Consolidated Parent
	2009 2008 2009 2008 % % $M $M
Challenger MBK Fund Funds Management Pte Limited Management Singapore Homeloans Pty Limited Mortgage Australia Origination Ardea Investment Funds Management Pty Limited Management Australia Five Oceans Asset Funds Management Limited Management Australia Greencape Capital Funds Pty Limited Management Australia Kapstream Capital Funds Pty Limited Management Australia Kinetic Investments Funds Partners Limited Management Australia Wavestone Capital Funds Pty Limited Management Australia Less: Provision for diminution in value1	50 – 1.6 – 40 40 46.1 46.1 30 – 2.8 – 25 25 3.4 3.7 25 25 2.0 2.0 25 25 4.6 4.9 20 20 0.2 0.3 28 – 1.9 – (19.4) (22.0)
	43.2 35.0
1This provision for diminution in value relates to Homeloans Pty Limited. Movements in carrying amount of investments in associates Carrying amount at the beginning of the f nancial year Investment in associates acquired in current year Sale of interest in associates Investment in associates – write-downs Share of associates’ net prof t Dividend received	35.0 58.1 6.0 0.1 – (2.4) – (22.0) 3.1 2.1 (0.9) (0.9)
Carrying amount at the end of the f nancial year	43.2 35.0
Share of the associates’ prof t or loss: Prof ts before related income tax Income tax expense	4.4 2.9 (1.3) (0.8)
Prof ts after related income tax expense 3.1 2.1 Retained prof ts attributable to associates at the beginning of the f nancial year 2.4 0.3
Retained prof ts attributable to associates at the end of the f nancial year 5.5 2.4
Share of the associates’ balance sheet: Assets 53.8 47.1 Liabilities (14.6) (18.2)
Net assets 39.2 28.9

There are no material commitments or contingent liabilities relating to the associates.

133

38. Deed of Cross Guarantee

The following wholly owned companies are parties to a Deed of Cross Guarantee under which each company guarantees the debts of the others. By entering in the deed, the wholly owned companies have been relieved from the requirement to prepare a fi nancial report and Directors’ report under Class Order 98/1418 (as amended by Class Order 98/2017 and 00/0321) issued by the Australian Securities and Investments Commission.

• Challenger Group Pty Limited.

• Endowment Warrants Limited.

The above companies represent a ‘Closed Group’ for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by the Company, they also represent the ‘Extended Closed Group’.

Set out below is a consolidated income statement and a summary of movements in consolidated retained profi ts for the year ended 30 June 2009 of the Closed Group.

ended 30 June 2009 of the Closed Group.
	Closed Group
	2009 2008 $M $M
Income statement Other income Other expenses	– – – –
Prof t before income tax Income tax benef t	– – – 0.5
Prof t for the year	– 0.5
Summary of movements in consolidated retained losses Retained (losses) at the beginning of the f nancial year Prof t from ordinary activities after income tax expense	(0.2) (0.7) – 0.5
Retained losses at the end of the f nancial year	(0.2) (0.2)

Set out below is a consolidated balance sheet of the Closed Group as at 30 June 2008.

Set out below is a consolidated balance sheet of the Closed Group as at 30 June 2008.
	Closed Group
	2009 2008 $M $M
Assets Receivables Equity securities	4.0 4.2 45.2 83.3
Total assets Liabilities Payables Interest bearing liabilities	49.2 87.5 23.7 52.0 22.7 31.6
Total liabilities	46.4 83.6
Net assets	2.8 3.9
Equity Contributed equity Retained losses	4.1 4.1 (1.3) (0.2)
Total equity	2.8 3.9

134

39. Subsequent events

The Group announced the sale of its Mortgage Management division on 18 August 2009 to National Australia Bank Limited (NAB). Under the terms of the sale, NAB will acquire the Mortgage Distribution and Multi Brand Lending Businesses, along with approximately $4 billion of residential mortgages held in warehouses for a consideration of $385 million. The transaction is subject to regulatory approvals and is not expected to close before 31 October 2009.

The sale to NAB includes the mortgage aggregation businesses of Plan, Fast and Choice, the multi branded mortgage origination business, approximately $4 billion of residential mortgages held in warehouses and the Group’s 41% stake in the listed mortgage origination company, Homeloans Limited (subject to Homeloans Limited shareholder approval).

The entitlement to the residual income units (RIUs) of the remaining residential mortgage loan special purpose vehicles (SPVs) not sold to NAB (backed by approximately $11 billion of mortgages) were transferred from the Mortgage Management division to Challenger Life Company Limited (CLC) within the Life division on 1 August 2009. The transfer was completed on arm’s length, commercial terms for $375 million. The consideration paid refl ects a value excluding any obligation for future trail commissions and amortisation of prior period acquisition costs pertaining to the loan portfolio. Although no change to the net asset position of the Group has arisen, the transfer was cash settled and so has increased the Group’s fi nancial fl exibility since balance date.

The proceeds from the sale of the Mortgage Management division and from the cash settlement of the RIUs transferred to CLC will be used to retire the Group’s major debt facilities/borrowings consisting of the Medium Term Note, Corporate Net Interest Margin Bond and Corporate bank facility as outlined in Note 19 to the fi nancial statements.

The Group’s controlled entity, Challenger Diversifi ed Property Group (CDI), announced a $130 million capital raising on 6 August 2009 with a 4 for 7 pro-rata entitlement offer to eligible unitholders of CDI. As a major shareholder, CLC has subscribed for its entitlement under the offer and the Group has also agreed to sub-underwrite the offer. The Group owned approximately 44.3% of the CDI units on issue prior to the offer being announced.

Following these transactions, Challenger will be focusing purely on the signifi cant opportunities that exist within the investment management activities of its Life and Funds Management businesses.

As at the date of this report, other than the areas noted above, no other matter or circumstance has arisen that has affected or may signifi cantly affect:

• (i) the Group’s operations in future fi nancial years; or

• (ii) the results of those operations in future fi nancial years; or

• (iii) the Group’s state of affairs in future fi nancial years.

40. Contingent liabilities, contingent assets and credit commitments

Warranties

The Group over the course of its corporate activity has given, as a seller of companies and as a vendor of real estate properties, warranties to purchasers on several agreements which are still outstanding at 30 June 2009. At the date of this report no material claims against these warranties have been received by the Group.

The Victorian State Revenue Offi ce has raised an assessment for stamp duty in respect of certain properties acquired by the Challenger Diversifi ed Property Group as part of the initial public offering of this entity. Challenger is disputing the assessment.

Parent entity guarantees and undertakings

Excluded from the consolidated accounts are the following guarantees and undertakings extended to entities in the Group by Challenger Financial Services Group Limited (the parent):

• (i) Cross guarantee supporting the Medium Term Note and the corporate banking facility.

• (ii) Issue of letters of support in respect of certain subsidiaries in the normal course of business. The letters recognise Challenger Financial Services Group Limited has a responsibility to ensure that those subsidiaries continue to meet their obligations.

• (iii) Australian Financial Services Licence (AFSL) deeds of undertaking as an eligible provider.

Third party guarantees

Bank guarantees have been issued by a third party fi nancial institution on behalf of the Group and its subsidiaries for items in the normal course of business such as rental contracts. The amounts involved are not considered to be material to the Group.

Commitments

Challenger Life Company Limited has capital commitments that it has made to external counterparties for future investment opportunities such as development or investment purchases. At the date of this report there are commitments totalling $152.6 million (2008: $93.8 million) in relation to these opportunities.

Other information

In the normal course of business, the Group enters into various types of business contracts that could give rise to contingent liabilities in relation to performance obligations under those contracts by certain members of the Group.

The information usually required by AASB 137: Provisions, Contingent Liabilities and Contingent Assets , is not disclosed on the grounds that it may seriously prejudice the outcome of the claims. At the date of this report, signifi cant uncertainty exists regarding any potential liability under these claims; however, the Directors are of the opinion that no material loss will be incurred.

135

Directors’ declaration

In accordance with a resolution of the Directors of Challenger Financial Services Group Limited, we declare that:

1. In the opinion of the Directors of Challenger Financial Services Group Limited (‘the Company’):

2. (a) the fi nancial statements and notes of the Company and Group are in accordance with the Corporations Act 2001, including:

   • (i) giving a true and fair view of the fi nancial position of the Company and the Group as at 30 June 2009 and of its performance for the year ended on that date; and

   • (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and

3. (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

4. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the fi nancial period ended 30 June 2009.

5. In the opinion of the Directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identifi ed in Note 38 will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee.

On behalf of the Board

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G A Cubbin Director Sydney 21 August 2009

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D J Stevens Director

Sydney 21 August 2009

136

Independent auditor’s report

Ernst & Young Centre 680 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 www.ey.com/au

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137

Independent auditor’s report

Ernst & Young Centre 680 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 www.ey.com/au

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138

Four-year history

Income statement – cash operating earnings	2009 2008 2007 2006 $M $M $M $M
Income Normalised cash operating earnings Net fee income Other income	250.8 207.9 163.8 132.7 318.8 348.1 331.7 259.7 9.2 10.7 6.8 3.2
Total income Expenses Total operating expenses	578.8 566.7 502.3 395.6 (259.0) (256.2) (246.5) (206.6)
Normalised EBIT Interest and borrowing costs Discontinued operations	319.8 310.5 255.8 189.0 (36.9) (41.3) (33.7) (34.9) – 10.1 8.3 7.0
Normalised prof t before tax Tax Normalised prof t after tax Investment experience after tax Signif cant items after tax	282.9 279.3 230.4 161.1 (64.0) (61.4) (48.4) (43.5) 218.9 217.9 182.0 117.6 (309.6) (192.3) 49.6 35.7 – (69.8) 23.4 (19.0)
Statutory prof t after tax	(90.7) (44.2) 255.0 134.3
Balance sheet Total assets Total liabilities	25,237.8 27,157.3 27,015.2 24,305.3 23,548.4 25,527.3 25,566.6 23,045.0
Net assets	1,689.4 1,630.0 1,448.6 1,260.3
Total average equity attributable to equity holders of the parent	1,381.9 1,612.9 1,339.6 1,181.0
Assets under management and administration – Life – Mortgage Management – Funds Management – Crossholdings	5,767 5,245 3,476 3,6761 93,295 48,068 23,013 20,901 16,041 21,921 22,996 12,8681 (4,769) (5,524) (5,472) (2,801)
	110,334 69,710 44,013 34,644
– Financial Planning	– – 8,796 6,854
Total assets under management and administration	110,334 69,710 52,809 41,498

139

Four-year history

Share information	2009 2008 2007 2006
Basic earnings per share – statutory prof t/(loss) (cents) Diluted earnings per share – statutory prof t/(loss) (cents) Basic earnings per share – normalised prof t (cents) Diluted earnings per share – normalised prof t (cents) Dividends per share (cents) Interim Final	(16.2) (7.5) 46.3 24.9 (15.9) (8.1) 43.2 23.9 39.2 37.1 33.0 21.8 38.4 35.4 30.7 20.8 5.0 5.0 5.0 2.5 7.5 7.5 7.5 5.0
Total	12.5 12.5 12.5 7.5
Dividend payout ratio – statutory prof t/(loss) (%)1 Dividend payout ratio – normalised prof t/(loss) (%)1 Ratios Net gearing (%)2 Gearing (%)3 Return on shareholders’ funds – statutory prof t after tax4 Return on shareholders’ funds – normalised prof t after tax5 Staff numbers6 Share price at 30 June ($) Ordinary share capital (million shares)7 Market capitalisation at 30 June ($ million)8	n/a n/a 27.0% 30.1% 31.9% 33.7% 37.9% 34.4% 11.5% 0.6% 5.6% 5.2% 19.6% 13.3% 16.9% 8.7% (5.4%) (2.7%) 19.0% 11.4% 13.0% 13.6% 13.6% 10.0% 837 911 1,063 958 2.24 1.89 5.83 3.16 569.3 600.4 554.6 544.8 1,275.3 1,134.8 3,233.3 1,721.5

1 Dividends per share/EPS (basic).

2 Calculated as Net Debt/(Net Debt + Equity).

• 3 Calculated as Debt/(Debt + Equity).

4 Calculated as statutory profi t after tax/total average equity attributable to equity holders of the parent.

5 Calculated as normalised profi t after tax/total average equity attributable to equity holders of the parent.

6 2008 staff numbers exclude 189 employees associated with the Financial Planning sale completed on 30 June.

7 Represents issued shares on the ASX.

8 Calculated as share price x number of ordinary shares excluding LTIP vested but not settled.

140

Investor information

(a) Distribution of shares

(a) Distribution of shares
	Number of	Number of	% of issued
Range	shareholders	shares	capital
1 – 1,000	9,856	4,985,803	0.84
1,001 – 5,000	11,171	27,347,748	4.63
5,001 – 10,000	2,473	18,379,276	3.11
10,001 – 100,000	1,621	38,791,393	6.56
100,001 – 9,999,999,999	144	501,648,811	84.86
Total	25,265	591,153,031	100.00
	Minimum
Unmarketable parcels	parcel size	Holders	Units
Minimum $500.00 parcel at $3.24 per unit	155	833	57,006

(b) Substantial shareholders

The number of shares held by substantial shareholders and their associates are set out below:

Range	Number	Percentage*
1. Barclays Group	37,381,787	6.54
2. AMP Limited	29,143,708	5.12

(c) Twenty largest shareholders as at 10 September 2009

(c) Twenty largest shareholders as at 10 September 2009
	Shares held	% of
	at end of	issued
Shareholder	period	capital
1. HSBC Custody Nominees (Australia)	100,971,232	17.08
2. National Nominees Limited	77,914,119	13.18
3. J P Morgan Nominees Australia Limited	50,793,616	8.59
4. ANZ Nominees Limited	33,106,253	5.60
5. CPU Share Plans Pty Limited	26,715,000	4.52
6. Citicorp Nominees Pty Limited	22,659,703	3.83
7. CPU Share Plans Pty Ltd	19,233,319	3.25
8. HSBC Custody Nominees (Australia) Limited – GSCO ECA	14,943,399	2.53
9. Brispot Nominees Pty Ltd	13,361,768	2.26
10. AMP Life Limited	11,570,258	1.96
11. Cogent Nominees Pty Limited	9,116,000	1.54
12. HSBC Custody Nominees (Australia) Limited – A/C 2	9,105,351	1.54
13. UBS Nominees Pty Ltd	8,403,561	1.42
14. Cogent Nominees Pty Limited	8,333,413	1.41
15. Cogent Nominees Pty Limited	6,770,190	1.15
16. ANZ Nominees Limited	6,411,073	1.08
17. Citicorp Nominees Pty Limited	5,315,267	0.90
18. Citicorp Nominees Pty Limited	4,911,324	0.83
19. Credit Suisse Securities (Europe) Ltd	4,220,000	0.71
20. CS Fourth Nominees Pty Ltd	3,968,440	0.67
	437,823,286	74.06

141

Investor information

(d) Shares subject to restrictions

There are no shares subject to restrictions.

(e) Voting rights

On a show of hands, every member present at the meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote.

(f) ASX listing

Challenger Financial Services Group Limited shares are listed on the ASX under code CGF and company information, as well as trading information, can be accessed via the ASX website at www.asx.com.au. Share prices can also be accessed on Challenger’s website at www.challenger.com.au.

(g) Key dates

Shareholders may like to note the following key dates:

Ex-dividend date for the 2009 fi nal dividend 17 September 2009 Record date for the 2009 fi nal dividend 23 September 2009 Dividend payment date 16 October 2009

(h) Shareholder queries

Please contact Computershare Investor Services for information about the Challenger Financial Services Group Limited share registry if you have any questions about your shareholding.

Computershare Investor Services Pty Limited Level 3, 60 Carrington Street, Sydney NSW 2000. Investor queries 1800 780 782 Facsimile +61 2 8234 5050

To assist with all enquiries, please quote your current address and Security Reference Number (SRN) when speaking with Computershare’s associates.

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Award winning annuities

Challenger was named ‘Annuity Provider of the Year 2008’ by independent research house Plan for Life. In addition, Challenger won both the ‘Short Term Annuity Provider of the Year’ category and ‘Long Term Annuity Provider of the Year’ category, reinforcing our strength in the annuities market.

Level 15

255 Pitt Street Sydney NSW 2000 Telephone 02 9994 7000 Facsimile 02 9994 7777

Level 10 101 Collins Street Melbourne VIC 3000 Telephone 03 8616 1000 Facsimile 03 8616 1111

Level 7

320 Adelaide Street Brisbane QLD 4000 Telephone 07 3218 8000 Facsimile 07 3220 3132

Level 1 212 Pirie Street Adelaide SA 5000 Telephone 08 8228 3270 Facsimile 08 8212 1661

Level 2 168 St Georges Tce Perth WA 6000 Telephone 08 9223 7800 Facsimile 08 9221 2499

Caxton Hall Level 6, 21 Palmer Street London SW1H 0AD Telephone +44 20 7976 3300 Facsimile +44 20 7976 3301

www.challenger.com.au

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