Challenger Financial Services Group Ltd chief executive Mike Tilley surprised the market today by resigning less than a year after his contract was extended until 2011, as the group reported an annual loss.

Mr Tilley, who became chief executive in 2004, will get a $1.75 million termination payment and be replaced by deputy managing director Dominic Stevens from September 1.

The departure, which Challenger said was based on a “mutual decision” between Mr Tilley and the board, follows resignations in the past month of Babcock & Brown Ltd and National Australia Bank Ltd heads, Phil Green and John Stewart.

Like Mr Tilley, they led companies hurt by a global liquidity squeeze, which began to shake world credit and equity markets in August last year.

Challenger has been one of Australia’s worst hit stocks, as falling sharemarkets and attractive cash rates reduced income at its funds management division and an aversion to debt spooked investors in its listed satellite funds.

The Packer family-backed investment group reported a net loss for 2007/08 of $44.2 million, lower than its forecast for a $20 million profit and compared with a net profit of $255 million the previous year.

The poor result reflected a fall in the value of Challenger’s investments in its underperforming property and infrastructure funds, which are still trading at considerable discounts to their net tangible asset values, despite selling assets to reduce gearing.

Challenger’s normalised net profit, which stripped out the mark-to-market losses from the funds and other significant items, was $217.9 million, up 19.7 per cent from the previous year and was slightly above market forecasts.

Shares in the Sydney-based group added 16 cents, or 7.1 per cent, to $2.41 but are still down 63 per cent from their 2007 high of $6.58.

Challenger’s board knew Mr Tilley was never going to stay “long, long term” when it hired him, chairman Mr Peter Polson told journalists.

But the group extended Mr Tilley’s contract last October to 2011 to ensure it would be positioned to “get the settings right and provide continuity” during a difficult period.

Asked if anything had changed since Mr Tilley’s contract was renewed in October, Mr Polson said the worst of the credit crisis may have passed and that Mr Tilley had put the business in a strong position.

At June 30, the group had $241 million in available cash and access to an undrawn $350 million debt facility.

Much to the chagrin of journalists, the often elusive Mr Tilley chose not to face the press today.

Mr Tilley said in a statement that he had fulfilled “a key set of objectives” at Challenger and that the company was in “strong shape” with “many exciting opportunities”.

He is also understood to have told analysts that his family was happy that he was standing down.

Mr Stevens said 2008 may be considered as the toughest year for financial services firms in a generation.

“It will always be difficult to pick the bottom, however, probably the majority of this negativity may have been priced-in,” he said.

“We remain confident in our pursuit of generating double-digit earnings per share growth in the long term.”

Profits at the group’s mortgage management division rose 11 per cent as a strong performance from its broker aggregation platform offset tough conditions in securitisation markets.

Mr Stevens said those markets were showing early signs of recovery

Net income at the asset management division rose 23 per cent reflecting strong sales of annuities and higher interest rates, while funds management profits dipped 23 per cent.

Challenger declared a final dividend of 7.5 cents, brining the full-year payment to 12.5 cents, in line with the previous year.

AAP