Sun Life reports $621 million Q3 loss

Analysts, on average, had expected a narrower loss of $1 per share, according to Thomson Reuters.

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.

“Our financial results reflect the severe volatility experienced during the third quarter, including interest rate levels that reached historic lows and a significant decline in equity markets,” Sun Life CEO Donald Stewart said in a statement.

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

North American markets fell between 12 and 14% in the quarter. Besides the drop in stock prices, falling interest rates also affected Sun Life’s bond and other fixed-rate investments.

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.

“Global economic uncertainty and U.S. monetary policy actions have increased demand for fixed income securities, putting downward pressure on bond yields, which have a direct impact on the financial performance of Canadian life insurers and defined benefit pension plans,” Stewart said.

The company also warned that plans to set up a reserve fund could reduce its fourth-quarter income by $550 million to $650 million, higher than the $500 million it had earlier expected.

Its estimates are based on conditions at the end of September.

“The impact of this change on our net income in the fourth quarter will depend on the level of interest rates and other market conditions,” it said.

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.

During the third quarter, revenue from insurance premiums and other products was $7.5 billion, down from $7.7 billion in the same period last year, largely due to the impact of the strong Canadian dollar.

It reported a $572 million operating loss, compared with an operating net income of $403 million in the third quarter of 2010.

The 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 impact of the unfavourable conditions was 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.

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

During the quarter last year, the U.S. division earned $18 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.

Stewart is retiring as CEO at the end of this month and will be replaced by chief operating officer Dean Connor.

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

Shares in the company, which reported its results after markets closed, added five cents to $24 Wednesday on the Toronto Stock Exchange.