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Investment Bond Review September 2011

Centuria Life Limited

Updated November 2011


General Manager’s Commentary

Welcome to the September 2011 edition of our Investment Bond Review. You will notice that we have new branding for this year’s magazine. We hope you find it informative and easy to read. Our name change In March 2011, we changed our name to Centuria Life Limited. This reflects that we provide investors with long-term investments for a range of life events that can be passed from one generation to the next. The new name and brand aim to broaden our appeal, and reflect the diversity and suitability of our product range across all age groups. We also refreshed our corporate goals, the most important of which is an investor first focus. This means that in every aspect of our business — from answering the phones to providing life and investment solutions — we place our policyholders’ interests first. Managing your investments I want to reassure you that at heart, we are the same company at Centuria Life that you have been dealing with over the years; the same management team, the same dedicated investment team and the same friendly investor services team in our call centre. Our investment philosophies have not changed. Our focus across each of our bonds is to actively manage the risks to your investment, particularly in this uncertain environment. In our bonus paying funds our primary goal is to preserve your capital and to invest this capital wisely, where we see reasonable returns for the risks of investment. Our secondary goal is to hold diversified assets to ensure we can achieve returns that exceed inflation. In our unitised funds, we seek to deliver competitive after tax returns, whilst managing the risks to your capital within the parameters of the investment strategy and assets held by each fund. Focused on service At Centuria, we like to keep customer service simple. Our team is here to respond to your needs professionally and efficiently. In a rapidly changing world, in which people are forced to resort to the internet or recorded messages, Centuria takes pride in personally assisting you with your enquiries and following through on your requests.

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“We take real pride in answering the phone — no ‘dial this or that’ menus — and being able to assist people right through to the end of the inquiry. We aim to be prompt and efficient. Investors trust that if we say we will get back to them, we do.” Ash, Centuria Investor Services Team Leader

Investment performance highlights Since the last investment review in 2010, Australia has continued to deliver sound economic performance, largely due to the strength of the resources and energy sectors. Centuria’s conservative investment policies ensured: • The capital of policyholders in our Capital Guaranteed Bond remained protected during the year and did benefit from the higher interest rate environment. • Our unit linked bonds did benefit from exposure to growth assets that performed well over the year and built on the strong returns of the previous year. Importantly, no asset classes recorded negative returns over the year. Looking ahead Volatility in equity markets is continuing. We will continue to invest in quality assets across all asset classes. Our share investments have an increased focus on large companies, as we believe that in the current environment, companies with strong balance sheets and sustainable cash flows will deliver sound returns. We will continue to focus on achieving consistent returns for all policyholders and look forward to developing new products to assist you in achieving your financial goals.


Did you know? Regular savings plans A feature of our bonds is the ability to make regular savings without impacting the 10 year tax-free status of your investment. After the first year of your investment, in each succeeding year you can invest up to a maximum of 125% of the prior year’s total contributions. This can continue for as long as you maintain your investment with us.

Switching between bonds We have seven options within the Centuria Flexible Bonds and you can switch between these bonds at no cost and with no tax penalty.

For more information Why not call us and let us explain how you can make the most of your Centuria Flexible Bonds. Please call our dedicated Investor Services Team on free call 1300 50 50 50.

2011 policyholder briefings We like to offer you opportunities to meet with us and have questions about your investment answered. We will host briefings in Melbourne and Sydney, to discuss the year’s performance and the investment outlook for 2012. The times and dates of the briefings are in the letter you received with this magazine. If you would like to attend the briefings, please call our Investor Services Team and register your RSVP. We will also host another briefing at Centuria Capital’s Melbourne Annual General Meeting in October. You will be able to access the briefing presentations at www.centuria.com.au under Policyholder Information within our Financial Services section. We can also send you a copy of the presentations if you contact us. Finally, I assure you of our strong commitment to all our policyholders. We hope the 2012 financial year is a successful year for you and your families.

General insurance Remember that if you or your family have home, car, travel or boat insurance needs, we offer extremely competitive rates through Over 50 Insurance. Discounts are available whether you are semi-retired, retired or working, and we do not charge any extra to pay by the month.

Terry Reid General Manager Friendly Societies

To receive a no obligation quote and to speak directly to an insurance adviser call 13 31 30. To learn more about Centuria Life and our broader business activities, please vsit our website www.centuria.com.au.

You can call us with queries regarding your investments on free call 1300 50 50 50.

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Investment Market Commentary

While investment markets have been volatile, your bonds have delivered sound returns. Solid performance through persistent volatility Uncertainty has plagued investment markets over the last 12 months. Despite this, our Capital Guaranteed Bond has performed well and our investors’ capital has remained secure. This highlights the value of security and stable returns during periods of economic and political uncertainty.

While predicting currency is notoriously difficult, the direction of the $A will be determined by investor perception of the global growth outlook. As markets have moved to price in a slowdown, the dollar has declined from recent highs of around US$1.10 and we would expect the currency to remain at lower levels while the growth outlook is subdued. Comparison of the Australian Dollar to the US Dollar over 2 years

Our unit linked bonds have also performed according to their investment objectives, despite a range of factors that had a negative impact on financial markets. During the year we focused on diversifying our portfolios to reduce risk.

The Australian share market was particularly volatile over the last year. The first half was buoyant as the local market rose strongly on relief that the Greek debt crisis had been dealt with. A strong US equity market and improving economic growth saw investors increase their exposure to equities. The second half of the year saw the market peak in mid-March and then a decline as the strong Australian dollar ($A), higher interest rates and weak consumer expenditure reduced profit expectations. Increased concerns around the ongoing US government debt negotiations also dampened sentiment toward equities. In this difficult environment, the All Ordinaries Index returned 12.2% over the year. The performance of the larger companies on the Australian Securities Exchange (ASX) reinforced our view that in times of volatility, it makes sense to be invested in larger Australian companies with strong balance sheets and sustainable cash flows. Looking ahead, we believe consumers and companies will continue to remain cautious. Company earnings outside the resources sector are likely to be flat to slightly positive. Movements in the $A exchange rate will also affect returns. The graph opposite shows there has been an upward trend in the $A exchange rate against the US dollar ($US), though it has been volatile.

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1.10

AUS / USD

Australian share market delivers positive return

1.15

1.05 1.00 0.95 0.90 0.85 0.80 Sep 09

Jan 10

May 10

Sep 10

Jan 11

May 11

Source: Yahoo Finance

Our international investments have both a hedged and unhedged component, which reduces the impact of $A movements on portfolio returns. Interest rates in the spotlight In the fixed interest sector, yields have been steady since the RBA’s last interest rate increase in November 2010. We believe that interest rates are likely to remain at current levels in the short term however if markets continue to weaken the RBA will have a bias to cutting rates. This should help support economic growth having a positive impact on Australian shares.

We continue to monitor fixed interest assets closely. Our portfolio is holding well diversified, high quality assets and is well positioned to take advantage of our views on interest rates.


Property recovery continues Property returns have been sound under difficult conditions. The listed sector delivered 5.8% over the year, while direct property returned 8.6% as property values continued to recover from their 2009 lows. We expect both the unlisted and listed sectors to deliver reasonable returns, mostly from their distributions. Any decline in interest rates would be positive for property capital values and contribute to improved returns.

We believe diversification across asset classes will be integral in these conditions. Investing in growth assets such as shares and property allows for greater diversification and potentially higher returns. The Value of Diversification Value of $10,000 invested in each asset class on January 1 2001.

Looking forward The new financial year has kicked off and already we are experiencing a rough ride in the equity markets. In early August we witnessed global equity markets move down sharply as investors took the view that the global economy is moving back into recession. The downgrade of US government debt by Standard and Poor’s further contributed to investor concerns. So what can we expect in the year ahead? The severity of the recent pullback will dampen investor sentiment for the months ahead. We believe that the underlying fundamentals of company profitability will reassert themselves. Volatility will likely remain high over the next month, driven by the release of data relating to economic growth, unemployment and company profits. We would expect that markets will be calmer once they price in the lower growth environment. However investors should expect occasional periods of higher volatility as debt issues arise. The debt crises that we are seeing in Europe and the US, and how respective governments manage these, will continue to have an impact on investor sentiment and hence the performance of equities. The Australian share market will deliver a positive return, underpinned by its 4.5% dividend yield. The resources and energy sectors will most likely continue to be the primary drivers of market upside, as will reasonable profit growth by the banks. For the industrial and property sectors, profit growth is likely to be muted. Important drivers of market returns will be the $A and the interest rate environment. Responding to challenging markets

35K 28K 25K 22K 18K 16K 13K 11K 8K

2001

2003

2005

2007

2009

2011

Year S&P/ASX 200 A-REIT TR - March 15 - 29k

S&P/ASX 200 TR - March Ret - 23.36K

Australia CE Unlisted and Dir - 20.15K

UBS Bank 0 + Yr TR AUD Ma - 18.55K

Source: Morningstar Adviser Workstation Š 2011 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee this data or content to be accurate, complete or timely nor will they have any liability for its use or distribution.

The above chart highlights the benefits of diversification. It shows the returns of four asset classes since January 2001 and the value of growth assets in growing investors’ wealth over time. Since the market lows of March 2009, these asset classes have generally rallied strongly from their lows before moving to lower, more sustainable annual returns. For all asset classes, we continue to focus on quality assets and stable earnings. We believe that most asset classes offer attractive long term value and we are well positioned to take advantage of the recovery in markets that we believe will occur in time.

It is important to remember that though markets will be challenging in the short term, your bonds are long term investments. Further, bonus credited bonds, by their nature, are shielded from volatility. Uncertainty demands a proactive and flexible approach to managing investment portfolios. We will be more strategic in our allocation to various asset classes. We will look to reduce our allocation to those sectors where we forecast a weakening in the outlook for returns, and will invest in cash until the risks in an asset class subside. In addition, we will continue to research managers in each asset class to capture better returns.

Sean Webster Investment Manager

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Latest Bond Performance and Asset Allocations

As at 30 June 2011

Overall the bonds recorded a sound performance over the year to June 2011. Higher overall interest rates assisted the Capital Guaranteed Bond’s performance. The Income Accumulation Bond’s performance was also consistent, supported by higher interest rates and the solid fixed interest portfolio. The unit linked bonds performed well as all asset classes recorded positive returns, building on the strong returns of 2010. Growth assets in particular delivered good returns, as both equities and property benefited from improving economic growth over the first half of the financial year. While the second half of the year was less buoyant, values held up reasonably to deliver positive, full-year returns.

The Centuria Life Investment Committee and its external investment consultants continued to support our philosophy of investing in high-quality assets with sound income streams across diversified portfolios.

For our unit linked bonds, we disclose both gross indicative and net performance. Gross indicative performance represents the net performance of the bond, adjusted to gross up the effect of tax, management fees and other expenses within this “tax-paid” investment structure. This enables you to compare the bond’s performance to other investment structures you may have. It is important to note that this is an indicative figure only. Net performance shows the actual return to investors based on the movement in unit price.

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Our approach was well rewarded this year as portfolios took advantage of the rebound in returns, especially in the case of growth assets.


Bonus Credited Bonds

Income Accumulation Bond Performance (all numbers are in %) Annual Declared Bonus Rate 2007

2008

2009

2010

2011

3.50

1.22

0.36

2.00

2.10

The cash and fixed interest portion of the portfolio recorded sound returns with all expected interest payments received and all capital paid at maturity. All the instruments in this part of the portfolio have ratings of A or above. As such, they are very secure in all economic environments and serve to underpin the Bond’s portfolio.

Current Asset Allocation (all numbers are in %) Target Allocation

Actual Allocation

Cash / Fixed Interest

50.00

78.50

Mortgages

40.00

17.90

Property

10.00

3.50

Asset

The Bond recorded an annual tax paid bonus of 2.10%. A higher bonus level was reduced due to the ongoing impact from some legacy mortgages and a drop in the value of the net tangible assets of one of the unlisted property trusts.

We slightly altered our exposures as the outlook for the Australian economy changed due to higher interest rates, the strong $A and slowing of the non–resources sectors. These changes to the portfolio reduced the risks that may arise as the economy reacts to these impacts.

Return Composition (all numbers are in %)

Pre-Tax Profit before abnormal items

2009

2010

2011

2.80

3.40

3.37

Less abnormal items

Mortgage write-off

(1.05)

(1.18)

(1.70)

Unrealised property write-down

(2.45)

(0.99)

(0.10)

Pre-Tax Profit

(0.70)

1.23

1.57

Income Tax benefit / (expense)

0.21

(0.37)

(0.47)

Release from / (increase to) reserving

0.85

1.14

1.00

Net Bonus credited to Policyholder’s account

0.36

2.00

2.10

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Bonus Credited Bonds

Capital Guaranteed Bond Performance (all numbers are in %)

Return Composition (all numbers are in %)

Annual Declared Bonus Rate 2007 2.90

2008 2.70

2009

2010

2.80

2.85

Cash / Fixed Interest

2011

Pre-Tax Profit

3.39

4.08

4.67

3.10

Income Tax

(1.02)

(1.22)

(1.40)

Release from / (increase to) reserving

0.43

(0.01)

(0.17)

Net Bonus credited to Policyholder’s account

2.80

2.85

3.10

Target Allocation

Actual Allocation

100.00

100.00

The Bond delivered a sound return, driven by the higher interest rate environment. The tax paid bonus was 3.10% which highlights the defensive and high quality nature of the cash and fixed interest investments in the Bond. All the investments are rated A, or above, and paid their expected interest as well as returning capital on maturity. We altered our exposures as the outlook for the Australian economy and interest rates changed and the non-resource sectors slowed down.

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2010

2011

Current Asset Allocation (all numbers are in %) Asset

2009


Unit Linked Bonds

Australian Shares Bond

Balanced Bond

Performance (all numbers are in %) 3 mths 6 mths 1 yr

Performance (all numbers are in %) 2 yrs 3 yrs 5 yrs

Gross Indicative

-0.56

1.42

11.30

11.18

0.71

2.25

Net

-1.05

0.06

7.40

7.33

0.32

1.28

Current Asset Allocation (all numbers are in %) Asset Australian Shares Cash

3 mths 6 mths 1 yr Gross Indicative Net

2 yrs 3 yrs 5 yrs

0.26

2.38

10.16

9.84

1.11

0.97

-0.22

1.05

6.48

6.19

0.27

0.12

Current Asset Allocation (all numbers are in %)

Target Allocation

Actual Allocation

100.00

98.20

0.00

1.80

Target Allocation

Actual Allocation

Australian Shares

35.00

35.60

Australian Fixed Interest

17.00

28.10

International Shares

25.00

20.90

Asset

Cash

The Australian Shares Bond returned 11.3% over the year, slightly ahead of share market returns as the underlying fund manager performed well. Equity markets were driven by a strong resources sector as resources prices continued their upward move; however, a number of other sectors struggled and recorded lower profit growth. Profits in these sectors were held back by weak consumer spending as consumers paid down debt; the strong $A, which drove incremental sales offshore; and increased cost pressures from energy and utility costs. The higher interest rates were also a drag on company performance. The Bond has a significant weighting in the ASX’s top 20 stocks, providing a sound base of exposure to large companies with strong balance sheets and sound cash flows. In addition, the underlying manager has an exposure to select mid-cap companies that have a strong growth profile, to provide some additional performance. The equity market is likely to be volatile in the year ahead as investors worry about offshore debt issues; however, we still expect a reasonable return supported by an overall market yield of approx 4.5% and the related franking credits. Overall market direction is likely to move in line with profit growth, which should be largely driven by the buoyancy of the mining and energy sectors.

Property International Fixed Interest

5.00

8.10

10.00

7.10

8.00

0.00

The Balanced Bond performed very well in 2011, with another year of double-digit returns, returning 10.16%. This performance exceeded the fund’s benchmark, due to the high exposure to domestic and international equities over most of the year. Equities were driven by stronger profits and in Australia, the strength of the mining sector particularly assisted profit growth. This emphasis on equities decreased in the last quarter of the financial year and helped avoid some of the most recent market weakness. The listed property exposure also performed well ahead of its asset class due to a strong performance by the underlying manager. The fixed interest and cash components of the bond performed in line with the benchmarks. Overall, the Bond benefited from its diversified exposures over the year. Cash from the selldown in equity was allocated into government bonds. We will look to deploy this holding into growth assets at an appropriate time.

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Unit Linked Bonds

Growth Bond

High Growth Bond

Performance (all numbers are in %) 3 mths 6 mths 1 yr Gross Indicative Net

Performance (all numbers are in %) 2 yrs 3 yrs 5 yrs

0.47

2.19

8.38

5.94

0.04

1.62

-0.06

0.87

4.98

3.14

-0.98

-0.03

Current Asset Allocation (all numbers are in %) Asset Australian Shares

3 mths 6 mths 1 yr Gross Indicative -1.22

1.52

12.02

10.15

-1.71

1.50

Net

0.30

7.18

6.25

-1.68

-1.55

-1.29

Current Asset Allocation (all numbers are in %)

Target Allocation

Actual Allocation

30.00

29.30

Target Allocation

Actual Allocation

Australian Shares

50.00

49.80

40.00

33.60

0.00

7.70

10.00

8.70

Asset

Property

20.00

20.50

International Shares

International Shares

25.00

20.40

Cash

Cash

Property

10.00

16.00

Alternatives

5.00

8.60

Australian Fixed Interest

5.00

5.20

International Fixed Interest

5.00

0.00

The Growth Bond delivered a strong return of 8.38%. It benefited from an overweight exposure to Australian equities — which recorded a return of 12.2% — and solid exposure to international equities. Australian equities benefited from the stronger mining sector and an improvement in profits by the banking sector. International equities, with currency hedging that protected them from the stronger $A, were also strong as global profits continued to improve from their 2009 lows. In addition, our exposure to global infrastructure assets also turned around last year’s weak performance to deliver a return of 8.7%. Cash and fixed interest holdings delivered in line with their benchmarks while direct property delivered a weak performance. Towards year-end the holding in Australian equity was reduced and this assisted performance by giving the bond a reduced exposure to equity market weakness in the final quarter of the 2011 financial year. This was the major asset allocation change over the year and saw the Bond enter the current year with a higher than benchmark weight to cash, which is the least volatile asset class. The quality of the individual assets remains sound and we will be alert to any opportunities to invest, or reduce exposure to asset classes where medium-term underperformance is expected.

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2 yrs 3 yrs 5 yrs

The High Growth Bond returned 12.02%, well ahead of its benchmark and ahead of last year’s performance. The high weightings to Australian and international equities, in line with the bond’s mandate, were the major drivers of returns. Listed property also contributed a strong above benchmark return. Equities benefited from ongoing profit growth and low interest rates globally, while in Australia, the mining sector was the major profit driver. Listed property benefited from improved rent and property valuations. The domestic equity market is likely to be volatile in the year ahead as investors worry about offshore debt issues; however, we still expect a reasonable return supported by an overall market yield of approx 4.5% and the related franking credits. Global markets will likely experience volatility due to government debt issues but are also likely be supported by low global interest rates. The Bond will continue to have a very high exposure to growth assets and its performance will therefore be in line with the global and Australian shares performance, with a smaller contribution from property exposures.


Closed Funds

Australian Property and Mortgage Bond

Deferred Annuity Bond

Performance (all numbers are in %) 3 mths 6 mths 1 yr

Performance (all numbers are in %) 2 yrs 3 yrs 5 yrs

Annual Declared Bonus Rate

Gross Indicative

2.60

4.04

6.14

7.98

3.17

2.71

2007

2008

2009

2010

2011

Net

1.82

2.62

3.55

4.57

1.15

0.78

4.00

4.75

3.40

2.10

2.85

Funeral Benefit Fund

Current Asset Allocation (all numbers are in %) Asset Cash

Target Allocation

Actual Allocation

50.00

44.40

Annual Declared Bonus Rate 2008

2009

2010

2011

5.10

3.25

3.90

5.10

Performance (all numbers are in %)

Property

25.00

30.00

2007

Australian Fixed Interest

25.00

25.60

5.00

The Australian Property and Mortgage Bond had a sound year, returning 6.14% for the year. This performance was assisted by a strong return from the listed property component of 10.6%, while all underlying managers delivered above benchmark returns. Listed property was boosted by the stronger economy, growth in rents due to a lack of supply, and increased demand for office space as employment continued to rise. Slightly better property valuations also assisted share prices. The fixed interest and cash components of the Bond benefited from the higher average interest rate environment compared to the previous year. We are comfortable with the current fund asset allocations and managers, but will continue to monitor the interest rate environment for any changes that may impact the portfolio.

Savings Bond No 1 and No 2 and Education Benefit Bond Performance (all numbers are in %) Annual Declared Bonus Rate 2007

2008

2009

2010

2011

Savings Bond 1

4.85

4.60

4.00

4.10

3.50

Savings Bond 2

4.30

4.75

4.00

3.80

3.40

Education Benefit Bond

4.85

4.50

3.60

3.90

4.75

These bonds are invested in cash investments, so their return moves in line with the average RBA cash rate over the financial year and the movement of cash out of the bonds due to redemptions. All the investments delivered their interest payments and capital was secure. The outlook for interest rates has been clouded by recent share market volatility. If markets continue to be weak, it is likely that the RBA will cut rates. However, if markets stabilise, it is likely that rate cuts will be delayed for some time.

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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. A Product Disclosure Statement for the Centuria Flexible Bonds is available on request, please free 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. Returns for 1 year, 2 year, 3 year and 5 year periods of the Unit Linked Bonds are annualised compound averages. 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 2011.

Centuria Life Limited

Level 30 367 Collins Street Melbourne VIC 3000

Complaints Process Any complaints received are handled in accordance with our procedures for disputes resolution. If you wish to make a complaint, please contact our Investor Services Team on 1300 50 50 50. 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 our Investor Services Team on 1300 50 50 50 and we will send you 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

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