Sun Life hopes October markets will help rebound to profit in Q4

Connor said he’s launched a review of Sun Life’s businesses to focus on growth and reducing volatility. Part of that revamp will result in a loss of between $550 million to $650 million in the upcoming quarter.

His comments came a day after the Toronto-based insurer reported a third-quarter loss of $621 million or $1.07 per share, in the third-quarter due to falling stocks and interest rates. That compared with a year-ago profit of $416 million, or 73 cents per share.

Sun Life reports $621 million Q3 loss

So far this quarter, bond yields are up about 10 basis points in the U.S. and four basis points in Canada, while U.S. equity markets have risen nine per cent and five per cent in Canada, he noted.

“If the quarter ended today, this would be good, but the quarter doesn’t end for a number of weeks yet,” he said.

Stock and interest rate drops affect insurers because they tend to invest much of the money they make from policyholders into equity and bond markets.

In a quest to offset some of the market turmoil, Sun Life (TSX:SLF) will overhaul the accounting method used to reflect its hedging policies — those put in place to safeguard against volatility — by creating a reserve fund in the fourth quarter.

It will book an associated non-cash charge of $550 million to $650 million, higher than the $500 million it had earlier expected — depending on how the markets perform.

The fund would provide for the estimated costs of hedging against future liabilities in its variable annuity and segregated fund insurance businesses, which would reduce the amount of regulatory capital required to cover those products.

“What we’re doing is recognizing the cost on a pay-as you go basis and anticipating it up front,” Connor explained.

“By doing so, we’re effectively trading equity returns for returns that are based on swap spreads and interest rate levels.”

The plan will have a side benefit of reducing required capital levels, but the net effect after the fourth quarter will largely be neutral, he added.

The plan is part of Sun Life’s strategy since the financial crisis struck to de-risk and reduce its market sensitivities.

Connor plans to focus growth in businesses with more attractive risk-return profiles.

He cited the company’s recent move to buy all of money manager McLean Budden, the launch of its mutual fund business in Canada and the recently acquired 50% stake in Filipino insurer Grepa Life.

The company reported its first quarterly loss in two years late Wednesday, mostly as a result of U.S. operations which took a more than half-billion-dollar hit due to stock market chaos.

Shares in the insurer fell 4.6% or $1.11 per share to $22.89 each in Thursday afternoon trading.

Elsewhere Thursday, Manulife Financial Corp. (TSX:MFC) posted a loss of $1.28 billion for its third quarter as the country’s largest insurance firm joined its peers in feeling the pinch of volatile markets and low interest rates.

Manulife posts $1.28 billion Q3 loss on volatile markets

Toronto-based Manulife said its loss attributable to common shareholders amounted to 73 cents per share and compared with a loss of $2.25 billion or $1.28 per share in the same period a year earlier. Its share added seven cents to $12.62.

As for Sun Life, at least one analyst downgraded his outlook for the company’s fourth-quarter earnings Thursday after the huge third quarter loss.

Peter Rozenberg, an analyst at UBS Investments reduced Sun Life’s earnings outlook by four per cent to $332 million in adjusted earnings, citing “significantly” higher sensitivities.

“Lower rates, lower U.S. results, and much higher earnings sensitivity have reduced our outlook and valuation,” he wrote in a research note.

The world’s financial markets were battered by worries in August and September that the European debt crisis could produce a full-blown recession in Europe that could spill over into North America, Asia and elsewhere.

North American markets fell between 12 and 14% in the quarter. Falling interest rates also affected Sun Life’s bond and other fixed-rate investments.

The insurer had already warned of the loss last month, citing “substantial declines” in equity markets, lower interest rates and the impact of an annual refinement of the company’s methods and assumptions.

The third-quarter loss was driven by the company’s need to increase its reserve to $684 million related to steep declines in both equity markets and interest rate levels.

The unfavourable conditions were most felt in the company’s individual life and variable annuity businesses in its U.S. operations, where the company booked a $569 million hit for the quarter. During the quarter last year, the U.S. division earned $18 million.

Updates to its actuarial methods and assumptions, which generally occur in the third quarter of each year, further reduced net income by $203 million.

Return on equity was negative 17.4% during the volatile quarter, compared with a 12% gain a year ago.

Profits also plummeted in its Canadian operations, where it posted profits of just $11 million compared with $246 million a year ago.

In Asia, the company earned $26 million during the quarter, compared to $36 million in the same quarter of 2010.

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