Challenger says it is making significant adjustments to the pricing of its annuities in response to new investment conditions, notably a sharp decline in credit spreads.

Challenger now forecasts an annual net profit at the bottom end of its previously stated range of $390-440 million, reflecting the credit crunch which it says has not yet been fully reflected in customer pricing.

The first three months of this year unexpectedly marked the worst quarterly loss for the US corporate bond market since the 2008 global financial crisis.

Domestic institutional term annuity sales of $1.02 billion were “very strong” in the first quarter, though Challenger says these were written at lower margins, reflecting “the impact of long sales lead times which reduced the extent to which the sharp decline in credit spreads could be passed through to clients”.

“We are responding to the investment conditions through our annuity pricing to reflect the tighter credit spread environment,” Challenger said in a quarterly update.

Challenger, which operates life insurance and funds management divisions, says group assets under management rose 8% in the March quarter, exceeding $100 billion for the first time to be Australia’s third largest asset manager.

The gains were driven by record quarterly annuity sales of $1.6 billion and CEO Richard Howes said the quarter’s performance “demonstrates our strategy to diversify revenue is working”. Challenger has been investing in its distribution, product and marketing capability and diversifying its product offering and distribution channels.

Total Life sales were $2.42 billion, up 155% on a year earlier.

“Sales of our institutional term annuity and Challenger Index Plus have been very strong, reflecting the investment we are making to build relationships with new institutional clients,” Mr Howes said.

Annuity sales benefited from “stabilisation” in the retail adviser market, Challenger said, with domestic retail term annuity sales jumping almost a third to $366 million.

Total Life net flows for the quarter were $1.38 billion, including annuity net flows of $879 million and Other Life net flows of $498 million.

Domestic fixed term sales recorded significant growth and totalled $1.39 billion and lifetime sales of $107 million were broadly stable.

Life’s book growth for the quarter was a record 9.2%.