Investment bonds review 2013

Investment Bond Review September 2013

Centuria Life Limited

General Manager’s Commentary

Welcome to the Investment Bond Review 2013. This year we look at performance, how we have managed your investments and the changing regulatory framework.

Investment Bonds

What’s to come?

Australian households are facing increasing pressure in saving for life events such as education, housing and retirement. Centuria Investment Bonds offer a simple way to save for your personal and financial goals. As a flexible tax effective investment, Centuria Investment Bonds can also be used to complement superannuation, without the same limitations or constraints.

The Australian economy will face some challenges in the year ahead as growth slows. Interest rates will remain low, and the search for investments that generate income, with capital growth potential, will continue.

Visit our website or contact us to find out more about the benefits of Centuria Investment Bonds.

We will continue to focus on investment opportunities that add value for investors in light of volatile markets and regulatory changes.

The year’s highlights

Regulatory Changes

Growth investments have had a positive year, partly due to lower global interest rates.

On 1 January 2013, the Australian Prudential Regulation Authority’s (APRA) new Capital Standards for our Capital Guaranteed Bonds became operative. The main objective of these standards is to further protect policyholders’ investments.

The RBA reduced the cash rate from 3.50% p.a. at the beginning of the year, to 2.75% p.a. in May 2013. This had a positive impact on our Bonds, through capital growth in the fixed interest portfolios, improving the overall returns.

The ASX All Ordinaries Index ended the year higher, moving from 4,135.50 to 4,775.40 at 30 June 2013, an increase of over 15%. Our Unit-Linked Bonds that invest in Australian equities benefitted from this move. International equities also had a strong year. More details are provided in the Bond commentaries.

Our Investment Committee has worked to capture good investment opportunities in this dynamic environment.

Once again we have ensured that the capital of Capital Guaranteed Bonds remained protected, and we have declared a consistent tax-paid bonus in a low interest rate environment. Our Unit-Linked Bonds have also reaped the rewards of an improvement in equities markets.

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Investment Bond Review 2013

The key requirements for us as a Life company is to: •

maintain required levels of capital within each of our, Funds and for the company as a whole; and

•

determine each Fund’s prescribed capital amount having regard to a range of risk factors that may adversely impact the company’s ability to meet its obligations.

These factors include insurance risk, asset risk, asset concentration risk and operational risk.

These new standards have led to an increase in the reserving required on most investments within our Capital Guaranteed Bonds.

We will continue to manage the investments within our Capital Guaranteed Bonds with the aim of delivering policyholders the best returns possible given the restrictions imposed by the new standards.

Keeping you informed We like to keep you informed about your investments and the impact that financial markets can have on your Bonds.

We will host an Investment Briefing at 10.15am on Friday, 1 November, prior to the Centuria Capital Limited Annual General Meeting (AGM).

If you would like to attend, please call Investor Services to register your RSVP. Presentations will be available on our website at www.centuria.com.au, or you can contact us for a copy.

We sincerely wish you and your families a healthy and successful year.

Terry Reid General Manager Friendly Societies

New Product Disclosure Statements (PDS)

Change of Benefit Fund Rules

On 17 May we re-issued our PDS separating the UnitLinked and Capital Guaranteed Bonds into two PDSs. Copies of each PDS are available on our website at www.centuria.com.au. If you require a hard copy please contact Investor Services.

The Centuria Life Board and Investment Committee have recently reviewed the Rules of several of the Unit-Linked Benefit Funds. They have determined that in the best interests of policyholders, some changes should be made .

Flexibility to switch Bonds

Policyholder Meetings will be held at 9.00am on Friday, 1 November prior to the Centuria Capital Limited AGM.

Did you know?

You can switch at any time between the Unit-Linked and Capital Guaranteed Bonds without impacting your 10 year tax period. If your views or circumstances change you can easily move between Bonds that have a different risk profile, without any tax consequences.

Full details of these meetings, together with all supporting documentation, including the recommended changes and voting details, will be sent to the relevant policyholders in late September.

Additional contributions You can also make regular contributions without impacting the original start date of your Bond. As long as your contributions are not greater than 125% of your contribution in the previous Bond Year, all of your contributions and growth will be free of personal income tax 10 years after the date of your initial investment.

If you want to know more about how Bonds can work for you, please call Investor Services on 1300 50 50 50, or visit our website at www.centuria.com.au.

General insurance Over 50 Insurance offers you competitive rates. We can take care of all of your insurance needs - home, car, boat and travel insurance.

Call 13 31 30 to speak to one of our insurance advisers for a no obligation quote. You can also obtain a quote online at www.centuria.com.au - just click on the Financial Services tab and then Insurance.

Centuria Life

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Investment Market Commentary

The past financial year was positive for growth investments. This was driven by very low global interest rates, the lingering impact of the resources boom and the stability of the Australian economy. Bond and cash returns slowed to less than 5%.

There were some bumps along the way though. In June the US Federal Reserve Board announced that Quantitative Easing (QE) could begin to taper before the end of 2013 and could be complete by mid 2014. This sent global markets into a spin and our market fell 10.6% from 20th May, to its low on 25 June. This was mostly a result of money leaving Australia to capture rising US bond rates and, to a lesser extent, concerns about Australian growth after the end of the mining boom and the outlook for China.

The $A which had been trading at $US1.06 in April finished the year at $US92c. Soothing statements from the US Federal Reserve Board in May and June saw the US market settle and our market stabilised, moving from a low of 4,632 points to over 5,000 points when this report was prepared.

Other issues confronting markets were the continuing problems in Europe, which is in recession, particularly Greece, Italy, Spain, Cyprus and Portugal. Clear evidence emerged that Chinese credit growth is being deliberately slowed to cool the economy and move the bias from construction to internal consumption.

Since the end of QE was foreshadowed, global long term bond rates have risen. US 30 yr Treasuries rose from 2.8% in May 2013 to 3.7% currently. We think this heralds the end of ultra low long term interest rates, although rates will stay at moderate levels for some time. Here in Australia, our benchmark 10 yr bond rate has risen from 3% at the beginning of May to 3.57%. This rise reflects the view that as the US moves away from QE, interest rates in the US will rise impacting long term rates in Australia. It is unlikely we will see the 10yr Commonwealth Bond rate back to the 2.6% it reached in July 2012.

The cash rate, however, is a different story. The Reserve Bank of Australia (RBA) has continued to reduce the cash rate, now at 2.5%, in order to stimulate very sluggish consumer and business demand and further weaken the $A. If long term interest rates in the US rise further we will likely see more money flowing out of Australia, further weakening the $A.

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Investment Bond Review 2013

In last year’s Review we published a chart that showed the decline in the cash rate from 4.75% in June 2011 to 3.75% in June 2012. At 2.5% currently, it has fallen 47% in two years.

We are also seeing rising unemployment. In June 2013 it was up slightly to 5.7% and is expected to rise to 6.5% in 2014. The abolition of the statutory method of calculating FBT on motor vehicles and the bank levy may act against economic activity. It is clear that Australia faces some significant challenges in the forthcoming year, with what are now confirmed to be very optimistic budget deficit projections, a raft of major new expenditure programs that have to be funded against the backdrop of the end of the mining boom, poor consumer confidence, and rising unemployment.

A weaker $A will offset this to some extent and we may see the “two speed� economy in reverse with mining weak and the east coast benefitting from the weaker currency.

Your Bonds performed well last year and the underlying returns of our Capital Guaranteed Bonds were excellent.

Unfortunately the returns we are able to declare have been affected by regulatory changes introduced this year.

Nonetheless the bonus for the Capital Guaranteed Bond for 2012/13 is 2.2%. In addition to these regulatory issues, the Income Accumulation Fund suffered some writedowns in its mortgage portfolio which combine to reduce the distributable bonus to 1.1% for the year. These issues will normalise over 2013/14.

As always, your capital and credited bonuses remain secure.

The Australian share market

Property

A tale of two markets

Generally smooth with some bumps

The Australian market performed well over the year with S&P/ASX 200 share market Index rising 17.3%.

As with the equity market the past year, the listed (AREIT) property market was really a year of two halves. The AREITs continued the recovery that had begun in late 2011. The AREIT Index opened the year strongly and from July 2012 to mid May 2013 had risen nearly 30% as confidence recovered and valuations stabilised, post the GFC. This was assisted by the move towards yield as fixed interest rates continued to decline. Centuria, in its direct property funds business, took advantage of attractive asset prices to purchase of $170 million of property over the year.

The return would have been higher, however following statements from the US Federal Reserve Board in May 2013 concerning the tapering of its QE program, global markets caught a cold and our market fell 565 points, or 10.8% from 14 May 2013 to its low on 25 June. As concerns about the impact of this tapering have eased the market has recovered 399 of those points, or 8.6%.

2012/13 was really a tale of two markets, resources and industrials. The ASX All Resources Index fell 9.3% over the year, while the ASX All Industrials Index rose 26.3%, clear evidence of the end of the mining boom.

In your bond portfolios we had two objectives, to seek a relatively high level of sustainable income augmented with exposure to small to mid size companies in order to provide capital growth. This strategy worked well for us with two of our Bonds in the top quartile for their respective categories over the year.

In May the listed AREIT sector was becoming somewhat overheated as yields had been compressed. It was also affected by the global share market tremors surrounding the QE announcements. The Index had fallen 13.3% off the May high to its low point in late June. The sector has also recovered from its June lows and we are now more comfortable with valuations.

The direct (unlisted) sector did not suffer from the price spike and valuations remain attractive relative to AREITs. Residential demand is benefitting from the historic low interest rates and lack of supply in some areas, notably Sydney. These two factors will not be sufficient to sustain demand if unemployment becomes an issue.

Market performance in 2013/14 will be governed by the extent of the growth slowdown in Australia and the performance of the US economy.

Grow

Centuria Life

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Investment Market Commentary (continued)

The year ahead

We forsee a number of challenges for Australia in the year ahead, mostly a result of a slowing economy, major increases in Federal Government spending, reduced productivity and workplace flexibility.

As we saw in May 2013, global markets and money flows will continue to be driven by events in the US. We expect US long term bond rates to continue to rise to more “normal” levels over the forthcoming year as QE is unwound and this will impact long term interest rates in Australia.

However, the RBA will continue to keep the cash rate low in order to stimulate demand in a sluggish Australian economy.

We said in last year’s Review that we were cautiously optimistic that we would see a better year in investment markets in 2012/13. This has proven to be correct and whilst we think the outlook this year is more clouded we believe our Bonds are well placed to deal with these conditions. We remain focussed on looking after the interest of you, our bond holders.

2013/14 however, finds Australia in a different position than it has been for a number of years, with falling demand from China as the new leadership seeks to move the country from construction to consumption, a slowing economy post the end of the mining boom and the consequent employment issues that come with this. Continued decline in the $A will assist this to some extent and we expect to see growth driven from the east coast rather than the west.

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Investment Bond Review 2013

Bond Performance and Asset Allocations - 30 June 2013

Bonus Credited Bonds Income Accumulation Bond Return Composition (%)

Performance (%) Annual Declared Bonus Rate

2013

2009

2010

2011

2012

2013

Income

0.36

2.00

2.10

2.17

1.10

Expenses

5.30 (2.18) 3.12

Pre-tax profit before abnormal items Less abnormal items

Current Asset Allocation (%) Asset

Allocation

Mortgage write-off

Unrealised property write-down

(4.72) 0.00

Pre-Tax Profit Cash / Fixed Interest

79.12

Mortgages

19.91

Property

0.97

(1.60)

Income Tax benefit / (expense)

0.74

Release from / (increase to) reserving

1.96

Net Bonus

1.10

As shown in the table above, the pre-tax profit of the IAF portfolio was pleasing at 3.12%. Unfortunately the declared bonus has been affected by large writedowns of some of the mortgages in the portfolio and the impact of new reserving requirements from the Australian Prudential Regulation Authority (APRA).

Your capital and credited bonuses remain secure.

Centuria Life

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Bonus Credited Bonds

Capital Guaranteed Bond Performance (%)

Return Composition (%)

Annual Declared Bonus Rate 2009 2.80

2010 2.85

2011 3.10

2013 2012 2.00

2013

Income

2.20

Expenses Pre-Tax Profit

Current Asset Allocation (%) Allocation

Asset Cash / Fixed Interest

100.00

The underlying performance of the Capital Guaranteed Bond was excellent with a gross return of 5.85%. However, APRA’s new reserving requirements have impacted the bonus for this year.

As always your capital and credited bonuses remain secure.

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Investment Bond Review 2013

5.85 (2.15) 3.70

Income Tax expense

(0.90)

Release from / (increase to) reserving

(0.60)

Net Bonus

2.20

Unit-Linked Bonds

Australian Shares Bond

Balanced Bond

Net Performance* (%)

Net Performance* (%)

1 Mth

3 mths

6 mths

1 yr

2 yrs

3 yrs

5 yrs

1 Mth

3 mths

6 mths

1 yr

2 yrs

3 yrs

5 yrs

-1.70

-0.60

4.12

16.54

6.31

6.67

2.67

-1.72

0.46

4.74

12.07

6.44

6.45

2.69

Current Asset Allocation (%) Asset

Current Asset Allocation (%) Allocation

Australian Shares Cash

93.11 6.89

We are very pleased to be able to report that your Bond returned an excellent post tax return of 16.54%.

Over the period the benchmark S&P/ASX 200 Index returned 17.3% and has shown further improvement since the end of the financial year. Over the course of the year we have broadened the Bond’s share exposure with investment in the small and mid cap sectors of the market using funds that specifically target these areas.

We believe your Bond is well placed for the year ahead.

Asset

Allocation

Australian Shares

46.65

Australian Fixed Interest

17.90

International Shares

17.90

Cash

11.12

Property

7.43

International Fixed Interest

0.00

The Balanced Bond produced an excellent after tax return of 12.07% for 2012/13. The Balanced Bond benefited from improved market conditions assisted by active management of the portfolio. The fixed interest and Australian equity exposures performed very well over the year outperforming their benchmarks. International shares and property also assisted overall performance.

The changes that we made to the portfolio structure last year should continue to assist performance in 2013/14.

* Net performance - Actual return based on the movement on unit price.

Centuria Life

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Unit-Linked Bonds

Growth Bond

High Growth Bond

Net Performance* (%)

Net Performance* (%)

1 Mth

3 mths

6 mths

1 yr

2 yrs

3 yrs

5 yrs

1 Mth

3 mths

6 mths

1 yr

2 yrs

3 yrs

5 yrs

0.29

2.38

5.44

10.82

4.86

4.90

1.31

-1.72

3.02

8.27

17.15

7.04

7.09

1.72

Current Asset Allocation (%)

Current Asset Allocation (%) Allocation

Asset

Allocation

Australian Shares

44.22

Australian Shares

57.24

Property

25.36

International Shares

24.06

International Shares

0

Cash

7.02

Alternatives

6.23

Australian Fixed Interest

17.17

International Fixed Interest

The Growth Bond recovered very strongly over the year to post an after tax return of 10.82%. As we foreshadowed in last year’s Investment Bond Review, the Bond’s equity exposure was increased and all sectors performed well.

Over the course of 2013/14 we propose to further enhance the Bond’s investments as market conditions and liquidity permit.

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Asset

Investment Bond Review 2013

0

Cash Property

4.83 13.87

The High Growth Bond produced a stellar 17.15% after tax return for 2012/13, and is ranked first by Morningstar Research in its category. This performance was a result of its greater exposure to local and international shares and excellent performances by the managers in those sectors.

Whilst we do not suggest this performance will be repeated in 2013/14, we are very comfortable with the High Growth Bond’s asset allocation and fund selection.

Closed Funds

Australian Property and Mortgage Bond Net Performance* (%)

Performance (%)

1 Mth

3 mths

6 mths

1 yr

2 yrs

3 yrs

5 yrs

-1.21

-0.24

0.77

3.76

3.47

3.50

2.07

Current Asset Allocation (%) Asset

Deferred Annuity Bond

Annual Declared Bonus Rate 2009

2010

2011

2012

2013

3.40

2.10

2.85

2.45

1.10

Funeral Benefit Fund Allocation

Cash

19.51

Property

29.05

Australian Fixed Interest

51.44

The Australian Property and Mortgage Bond also had an excellent year returning 3.76% after tax, exceeding the prior year’s return.

Over the year we reduced the Bond’s cash exposure and increased its weighting to fixed interest. This combined with the good returns from property, assisted the return.

We expect a fairly stable performance from this Bond in the year ahead.

Performance (%) Annual Declared Bonus Rate 2009

2010

2011

2012

2013

3.25

3.90

5.10

2.30

6.00

Savings Bond No 1 and No 2 and Education Benefit Bond Performance (%) Annual Declared Bonus Rate 2009

2010

2011

2012

2013

Savings Bond 1

4.00

4.10

3.50

3.20

1.60

Savings Bond 2

4.00

3.80

3.40

3.00

5.00

Education Benefit Bond

3.60

3.90

4.75

3.00

1.15

These Bonds are invested in cash and equivalent assets and their returns will move in line with the average official RBA cash rate over the year. The RBA cash rate commenced the year at 3.50% and finished at 2.75%.

We expect the cash rate to full further over the course of 2013.

All of the investments delivered their interest payments and our your capital remains secure.

* Net performance - Actual return based on the movement on unit price.

Centuria Life

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Important This overview is issued by Centuria Life Limited (Centuria) AFSL 230 867, ABN 79 087 649 054. It contains general information only and does not take into consideration any person’s objectives, financial situation or needs. These should be considered before any investment decision is made. To obtain a copy of the Product Disclosure Statement for the Centuria Investment Bonds, please call 1300 50 50 50. The Product Disclosure Statement should be considered before making an investment decision.

Past performance is not indicative of future performance.

Centuria believes that the information contained in this communication is accurate, but makes no representation as to its accuracy or completeness. To the maximum extent permitted by law Centuria excludes liability for any loss or damage arising from use of the information contained in the communication. Unless otherwise stated, performance and asset allocation data in this document is current as at 30 June 2013.

Centuria Life Limited

Level 4 441 St Kilda Road Melbourne VIC 3004

Complaints Process Any complaints received are handled in accordance with our procedures for disputes resolution. If you wish to make a complaint, please contact Investor Services.

Keeping Up To Date Centuria aims to ensure that the information we retain about you is accurate, complete and up to date. If there are any changes to the details you have previously provided to us (such as your address, name or telephone number) please send the new details in writing to: Centuria Life Limited Reply Paid 695 Melbourne VIC 8060 (no stamp required) Alternatively, you can contact Investor Services for a form to complete and return.

Your Privacy A summary of Centuria’s personal information handling practices can be found at www.centuria.com.au.

GPO Box 695 Melbourne VIC 3001

T: 1300 50 50 50 F: 03 9629 3397 E: enquiries@centuria.com.au www.centuria.com.au

ABN 79 087 649 054 AFSL 230867