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Investment Bond Review September 2012

Centuria Life Limited


General Manager’s Commentary

Welcome to the 2012 edition of our Investment Bond Review. This year we will take a close look at how we have been managing your investments in the face of global and domestic events. About your investment Investment bonds continue to be an effective investment used to meet many investor goals. Whether you’re saving for your child or granchild’s education, or for your own retirement, Bonds can play a part in helping you achieve your financial goals. We continue to have a stable management team with a primary focus on ensuring that each Bond performs in line with its investment objective. Our investment approach and strategy is consistent. We actively manage your bonds to strike the right balance between managing risk and investing to generate a reasonable return. For bonus credited Bonds we invest to preserve your capital in light of the continued uncertainty in financial markets. With our unit-linked Bonds, we seek to deliver competitive after tax returns.

The year’s highlights We have witnessed a year of global volatility that has continued to impact financial markets. Most of the uncertainty emanated from concerns about debt defaults in Europe. Markets have been quick to react negatively in an environment of pessimism. Locally, the RBA responded to global conditions by progressively easing interest rates. The cash rate started the year at 4.75% p.a. and was reduced to 3.50% p.a. by June 2012. This had a flow on effect on our Bonds, with falling returns on the fixed interest portfolios in our Bonds. The ASX All Ordinaries Index started the year at 4659 and dropped by more than 11% ending at 4153. It was a volatile period with the Index trading between a high of 4760, and a low of 3927. This has had an impact on the Australian equities component of our unitised funds. More details are provided in the Bond commentaries. These difficult conditions have kept our Investment Committee busy to ensure they minimise the impact of this volatility, and capture opportunities available.

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This year our conservative investment approach ensured that: • We protected policyholders’ capital and still managed to achieve a positive tax-paid bonus in the face of falling interest rates. • Unit-linked bonds returns were protected as much as possible in light of negative equity market returns. The careful selection of underlying mangers shares meant that we did not suffer losses to the extent of the general market.

What’s to come? With volatility expected to continue this year, and consensus that we are in a lower growth phase for the next few years, we continue to actively manage the Bonds. We will focus on investment opportunities that deliver income and look for opportunities to add value and outperform. We will continue to actively manage the bonds and seek tactical opportunities to generate value. We will look for high quality assets that will generate stable growth and income returns.


Did you know? Flexibility to switch bonds

You can switch at any time between the Flexible Investment Bond options without impacting the 10-year tax free period. This means if your views or circumstances change you can easily move between bonds that have a different risk profile.

No restrictions on contributions

You can also make regular contributions to your Bond without impacting its 10-year tax free period. As long as your contributions are not greater than 125% of the value invested in the previous Bond Year, all of your contributions and growth will be personally tax free10 years after the date of your initial investment. If you want to know more about how Bonds can work for you, please call the Investor Services Team on 1300 50 50 50, or visit our website at www.centuria. com.au to learn more about Centuria.

Policyholder Briefing We like to keep you informed about your investments and the impact that financial markets have on your Bonds. We will again host a Policyholder Briefing this year to update you on Bond performance and the investment outlook for the year ahead. The briefing will be held on Friday 2 November, at 9.30am, just before the Centuria Capital Annual General Meeting. If you would like to attend, please call our Investor Services Team to register your RSVP. After the forum you can access the briefing presentations on our website at www.centuria.com.au, or we can send you a copy on request. Finally, we would like to remind you that we have moved our office to Level 4, 441 St Kilda Road Melbourne 3004. Our PO Box address and telephone numbers are the same. We hope 2012 is a successful year for you and your family.

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. You can 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.

Terry Reid General Manager Friendly Societies

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Investment Market Commentary

Double, double toil and trouble... Despite being quoted out of context, this seems to encapsulate the activities and difficulties of central banks, financial markets and investors over the past year. As most of us know, conditions in investment markets have been difficult since the GFC started in late 2007. This year was not only a continuation of this difficult period, it was in some ways worse. Uncertainty and volatility have almost become overused terms since the GFC started - however they remain the most accurate and concise description of conditions that have prevailed. Over the past year we saw conditions deteriorate in the Eurozone, weak economic growth in the US, evidence of slowing in the Chinese economy, and a growth divergence in Australia between the eastern states and the west. In addition we saw the central banks of most major economies either engaging in “Quantitative Easing� or reducing interest rates to zero or close to it, as they strove to encourage economic activity. Whilst this has not been immediately and obviously successful there are signs, particularly in the US, that activity is beginning to pick up. What was worrying for Australia was evidence that the resources boom peaked in early 2011. The Australian dollar ($A) has appreciated significantly against most major currencies since early 2009. This has made exports dearer and exacerbated the problems already being experienced in the manufacturing sector from lower import prices. Retail suffered due to consumers focussing on saving, and the strong $A has made on-line shopping much more attractive than it has ever been. The strength of our banking system during in the GFC meant there was no need for the Reserve Bank to dramatically reduce interest rates. This resulted in money flooding into Australia to take advantage of relatively high cash and fixed interest returns. This in turn kept the $A at high levels when the easing in commodity prices and slowing of the Chinese economy would normally lead to weakness in the currency. At the start of the year investors were achieving relatively high returns from cash and term deposits, however the Reserve Bank progressively reduced the cash rate from 4.75% in July 2011 to 3.75% by June 2012, a fall of 21%.

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This was accompanied by a general drop in yields in fixed interest markets, with the benchmark 10 year Commonwealth Bond rate falling from over 5.27% in July 2011 to 2.9% by the end of June 2012. This doesn’t sound like a lot, however, it is a fall of over 43%. The graph below shows the change in cash rates and the benchmark 10 year Commonwealth Bond rate over the period.

Benchmark 10 year Commonwealth Bond Rate -5.20

4,700 4,650 4,600 4,550 4,500 4,450 4,400 4,350 4,300 4,250 4,200 4,150 4,100 4,050 4,000 3,950 3,900 3,850 3,800 3,750 3,700 3,650 3,600 3,550

-5.00 -4.80 -4.60 -4.40 -4.20 -4.00 -3.80 -3.60 -3.40 -3.20 -3.00 -2.80 Aug 11

RBA Cash Rate (%)

Sep 11

Oct 11

Nov 11

Dec 11

Jan 12

Feb 12

Mar 12

Apr 12

May 12

Jun 12 Jul 12

Effective

Source: IRESS

By running a diversified portfolio within very strict investment rules which support the capital guarantee, we have minimised the impact of these falls in market returns for our Capital Guaranteed Bond holders. Against this background your bonds have performed well with the Capital Guaranteed Bond (CGB) returning a tax paid return of 2%. The Income Accumulation Bond (IAF) bonus rate at 2.17% was higher than 2011, due to its different mix of assets. As always, your capital and credited bonuses remain secure.


The Australian sharemarket - one step forward, two steps... In general, global markets were weak over the course of the year and the Australian sharemarket reversed its prior year performance with a fall of 10.5%. Most of the weakness occurred in the second half of the financial year as the Eurozone debt crisis continued. At the beginning of May the market fell dramatically when it appeared that not only Greece might default on its debts, but others including Spain and Italy, might follow leading to the collapse of the Euro and financial pandemonium. The S&P/ASX 200 Index fell 8.7% in 12 trading days, beginning on the 3rd May and by 12th June it had fallen 450 points (more than 10% in a month). The Index finished the financial year only slightly higher than its low point. The non-mining business sector, particularly retail, struggled with lower demand, increased wage demands, reduced employment flexibility, cheaper imports and poor consumer sentiment. Small business in particular struggled. The resources sector, which had supported market returns from 2008 to 2011, continued its poor performance. BHP fell from its peak of $49.81 in April 2011 to close at $31.45 on 29th June 2012 - a fall of nearly 37%. The mining services sector which had also been performed very well had a major sell off in the second half of the year when news emerged that the Chinese economy was slowing and the Government was seeking to stimulate it.

We believe that non-residential property prices have bottomed and that there is good value to be found in this sector both in the listed and unlisted space. The LPT Index is yielding around 6% and the margin over the 10 year bond rate, at nearly 3%, is historically high. We think there will be continued steady growth in the sector.

Managing risk with diversification In uncertain times, diversification is important when managing your investments. Despite the volatility, growth assets are important for long term returns. Our unitised bonds are diversified across growth assets such as shares, property and defensive assets such as fixed interest and cash. Asset classes will perform differently over time so we reduce the risk of poor performance by diversifying. This means if one asset class is underperforming, your Bond can still achieve good returns from other asset classes that have performed well.

The $A exchange rate was also quite volatile starting the year at $US1.07 and trading as low as $US0.95, before closing at $US1.02. It was trading at $US1.05 at the time of writing. There is evidence that the $A is being treated as a “safe haven� currency with buying by overseas central banks. This may account for its failure to weaken in the face of falling commodity prices, as might otherwise be expected.

Property - a bright spot This sector was a bright spot both for unlisted and listed property, in an otherwise difficult and disappointing year. In the five years prior to May 2007 the Listed Property Sector (LPT) had performed nearly as well as the S&P/ASX 200 Index, rising 79%. Just as occurred in the sharemarket, there was a non-residential property bubble (facilitated by the low cost of debt), characterised by massive increases in prices, which led to low yields. The party ended in May 2007 when interest rates started to rise and the Index then fell 73% to its low in May 2009. Over the next 18 months as the sector recapitalised the Index traded in a narrow range. Over the year the Index returned 4.9%, and from August 2011 recovered strongly.

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Investment Market Commentary (continued)

The year ahead

We are very pleased to report that the new financial year is off to a good start. The S&P/ASX 200 Index was up 201 points at 4,295 at the time of writing, an increase of 4.9%. The LPT Index was up 4.56%, and interest rates look to be, at worst, stable for the near future. The European Central Bank (ECB) has finally indicated that it is prepared to back the debt of member countries. In the US there are some signs of growth in the economy and housing starts were up 6.9% for June 2012 - the highest level since the depths of the GFC in October 2008. Whilst commodity prices have declined since 2011 and China has slowed, Australian GDP growth has normalised. We are cautiously optimistic that we will have a better year in investment markets in 2012/13. We think investors will continue to focus on certainty of earnings and dividends rather than expect high levels of growth. Interest rates will remain low. In late July the benchmark Commonwealth Bond rate fell to its lowest level since at least World War 2 and the Reserve Bank indicated that cash rates were likely to remain at current levels for the time being. In this low interest rate environment investors are likely to be tempted by securities offering higher income returns to compensate for the interest rate falls. However, investments with a secure income stream will continue to be valued. The past four years have been very difficult for investors. Whilst we expect volatility to continue, there are some signs that after nearly five years we may be seeing some early signs of stability, if not recovery, in the global economy. We will continue to carefully navigate our way through this uncertainty with the primary objective of looking after the interests of our bond holders.

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Bond Performance and Asset Allocations - 30 June 2012

Bonus Credited Bonds

Income Accumulation Bond

Performance (%) Annual Declared Bonus Rate 2008

2009

2010

2011

2012

1.22

0.36

2.00

2.10

2.17

Your Bond recorded an annual tax paid bonus of 2.17% for the year ended 30th June 2012. This is a higher return than we achieved for the past year and a pleasing result. As we highlighted previously, fixed interest markets were volatile within a consistent downtrend in yields. By running a diversified portfolio within the very strict investment rules of your bond we have minimised the impact of interest rate falls. As always, your capital and credited bonuses remain secure.

Current Asset Allocation (%) Target Allocation

Actual Allocation

Cash / Fixed Interest

50.00

79.12

Mortgages

40.00

19.91

Property

10.00

0.97

Asset

Return Composition (%)

Pre-Tax Profit before abnormal items

2010

2011

2012

3.40

3.37

2.80

Less abnormal items

Mortgage write-off

(1.18)

(1.70)

-0.62

Unrealised property write-down

(0.99)

(0.10)

-1.63

Pre-Tax Profit

1.23

1.57

0.55

Income Tax benefit / (expense)

(0.37)

(0.47)

0.35

Release from / (increase to) reserving

1.14

1.00

1.27

Net Bonus credited to Policyholder’s account

2.00

2.10

2.17

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Bonus Credited Bonds

Capital Guaranteed Bond Performance (%)

Return Composition (%)

Annual Declared Bonus Rate 2008 2.70

2009 2.80

2012

2010 2.85

2011

2012

Income

5.12

3.10

2.00

Expenses

2.14

Pre-Tax Profit

2.98

Current Asset Allocation (%) Asset Cash / Fixed Interest

Target Allocation

Actual Allocation

100.00

100.00

The Bond delivered a tax paid return for the year of 2%. Returns for this Bond are highly correlated to movements in interest rates. As was the case for most global economies Australia experienced a significant decline in interest rates over the course of the financial year as economic activity slowed and the Reserve Bank sought to stimulate demand. The official cash rate set by the Reserve Bank fell from 4.75% on 1 July 2011 to 3.75% on 30 June 2012 - a fall of 21%. The benchmark 10 year Commonwealth Bond rate also declined from 5.27% at the start of the year, to 2.9% by 30 June 2012 - a fall of 43%. Against this background we believe this is a good return and, as always, both your capital and accrued bonuses are secure.

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Income Tax expense

-0.70

Release from / (increase to) reserving

-0.28

Net Bonus credited to Policyholder’s account

2.00


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

0.60

-3.77

3.49

-3.02

2.05

3.76

-2.74

0.19

-0.65

3.52

1.09

3.75

4.46

-1.38

Current Asset Allocation (%) Asset Australian Shares Cash

Current Asset Allocation (%)

Target Allocation

Actual Allocation

100.00

96.37

0.00

3.63

Target Allocation

Actual Allocation

Australian Shares

35.00

39.11

Australian Fixed Interest

17.00

28.56

International Shares

25.00

12.53

Asset

Cash

The past year was a disappointing and volatile year for the sharemarket. News was dominated by the potential for European defaults and not assisted by low growth in the US, a slowing Chinese economy and here in Australia, cautious consumers and businesses. The benchmark S&P/ASX 200 Index fell 10.5% largely reversing the prior year’s gains. Although hardly exciting news, against this backdrop the Bond performed well. On a more positive note, since the end of June our market has gained 6.5%, reversing most of the past years fall. With signs of constructive action from Europe, we look forward to a better environment for equities in the year ahead.

Property International Fixed Interest

5.00

10.27

10.00

9.53

8.00

0.00

The Balanced Bond produced an after tax return of 1.09% for the 2012 financial year. The diversified structure of the Balanced Bond assisted to insulate the overall portfolio return from the poor year experienced in global sharemarkets. The Bond’s fixed interest and property exposures performed very well over the year. The fixed interest portion of the portfolio returned 13.38% for the year and the listed property exposure performed strongly and comfortably exceeded its benchmark return. The overall return was impacted by the Bond’s negative return from the Australian share sector, which nevertheless outperformed its benchmark, as did the Bond’s international shares. We are comfortable with the Bond’s current exposures and look forward to more robust returns from equities this year.

* Net performance - Actual return based on the movement on unit price. 9


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

-0.08

-1.39

2.51

-0.78

2.06

1.82

-2.10

0.40

-1.92

4.49

-2.21

2.38

3.35

-3.99

Current Asset Allocation (%)

Current Asset Allocation (%)

Target Allocation

Actual Allocation

Australian Shares

30.00

35.36

Property

20.00

16.20

International Shares

25.00

0

Cash

Asset

10.00

23.14

Alternatives

5.00

9.61

Australian Fixed Interest

5.00

15.69

International Fixed Interest

5.00

0

The Growth Bond produced a slightly negative after tax return of -0.78% for the year. It benefitted from an overweight position in cash and fixed interest and its reduced exposure to Australian equities helped insulate the Bond from a weak year in the sector. During the year the Bond’s international share exposure was liquidated as the international picture looked increasingly uncertain. The Bond’s direct property reversed its prior year performance with a strong result, resulting from the successful sale of one of the underlying properties in the Bond’s property investments. Over the course of the forthcoming year we will aim to reduce the Bond’s cash and fixed interest exposures and steadily increase its exposure to growth assets.

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Target Allocation

Actual Allocation

Australian Shares

50.00

46.03

International Shares

40.00

20.69

0.00

12.76

10.00

20.52

Asset

Cash Property

The High Growth Bond produced a negative return of -2.21% for the year. This was due to its high exposure to Australian and international equities, in line with its investment mandate. The Bond’s exposure to listed property assisted to partially offset the negative returns from equities. In our commentary for 2011 we highlighted our view that we expected equity markets to be volatile in 2012 and this proved to be the case. The Bond will continue to have a high exposure to growth assets and its performance will be largely determined by the performance of Australian and global equity markets in 2013.


Closed Funds

Australian Property and Mortgage Bond Net Performance* (%)

Deferred Annuity Bond Performance (%)

1 Mth

3 mths

6 mths

1 yr

2 yrs

3 yrs

5 yrs

-0.18

1.64

2.46

3.18

3.36

4.10

0.14

Annual Declared Bonus Rate 2008

2009

2010

2011

2012

4.75

3.40

2.10

2.85

2.45

Funeral Benefit Fund

Current Asset Allocation (%) Target Allocation

Actual Allocation

Cash

50.00

37.99

Property

25.00

30.79

2008

2009

2010

2011

2012

Australian Fixed Interest

25.00

31.22

5.10

3.25

3.90

5.10

2.30

Asset

The Australian Property and Mortgage Bond had an excellent year and returned 3.18% after tax. This return was a consequence of the Bond holding only cash, fixed interest and listed property all of which performed well over the year. Fixed interest returns were particularly strong as the fund benefitted from falling interest rates over the year, which improved the value of its fixed interest securities. We do not expect these conditions to prevail through 2013 and lower returns from the Bond’s cash and fixed interest holdings are likely to affect returns in the year ahead.

Performance (%) Annual Declared Bonus Rate

Savings Bond No 1 and No 2 and Education Benefit Bond Performance (%) Annual Declared Bonus Rate 2008

2009

2010

2011

2012

Savings Bond 1

4.60

4.00

4.10

3.50

3.20

Savings Bond 2

4.75

4.00

3.80

3.40

3.00

Education Benefit Bond

4.50

3.60

3.90

4.75

3.00

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 4.75% and finished at 3.75%. We expect the cash rate to be steady to lower over the course of 2013. All of the investments delivered their interest payments and our Bondholders’ capital remains secure.

* Net performance - Actual return based on the movement on unit price. 11


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 Flexible 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 2012.

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.

Centuria Life Limited

Level 4 441 St Kilda Road Melbourne VIC 3004

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


Investment Bond Review 2012