Source: The Canadian Press

Executives at Sun Life Financial Inc. (TSX:SLF) are cautiously optimistic about the remainder of this year, as they contend with an unpredictable economic recovery that weakened markets and ravaged the insurer’s second-quarter profit.

Chief financial officer Colm Freyne told analysts in the company’s earnings call Thursday that “the economic recovery remains fragile and challenges exist in certain markets segments.”

However, he added that Sun Life is “satisfied with the overall adequacy of our provisions for credit losses.”

“We continue to believe our credit experience for 2010 will be improved over the level experienced in 2009, barring significant changes to the macroeconomic environment,” Freyne said.

The outlook came on the heels of a disheartening second-quarter report late Wednesday from Canada’s third-largest insurance company.

Sun Life said its net profits fell sharply to $213 million for the three months ended June 30, compared with earnings of $591 million for the same period last year, when the company benefited from reserve-related and other gains on its books.

“Weakness in equity markets as well as unfavourable movements in interest rates resulted in the need to strengthen reserves this quarter,” CEO Don Stewart.

“This contrasts with the strong equity market recovery and rising interest rate environment a year ago.”

The Toronto financial services giant plans to continue investing in key areas of its business, including distribution, branding, technology and risk management, but at the same time Freyne said it aims to improve operational efficiencies.

“We expect direct expenses to be flat to down,” he said.

Barclays analyst John Aiken said in a note that while Sun Life’s earnings weren’t as strong as he hoped, he believes they are far from a disaster.

“We cannot deny that some of the negatives in the quarter could weigh on Sun Life’s valuation in the near term, however, we believe that most of this should have reasonably been anticipated,” he wrote.

“Sustainable improved market conditions would go a long way in improving Sun’s, and the industry’s, earnings outlook. That said, we continue to believe it will be some time before Sun and the industry will benefit from continuing experience gains,” he added.

Sun Life employs about 16,000 people, including about 7,000 in Canada, and has insurance, wealth management and mutual fund operations around the world.