Source: The Canadian Press

Sun Life Financial Inc. isn’t basking in the glow of big third-quarter profits helped by a rebound in stock markets, instead it’s hedging against potential risks to its business from interest rates, high unemployment and a persistently volatile economy.

“Growth in 2011 and 2012 will quite be dependent on economic conditions both as to interest rates and generally as to consumers willingness to (invest in) additional financial security,” Sun Life CEO Donald Stewart told a conference call with analysts Thursday to discuss a major rebound in the company’s finances.

After markets closed Thursday, Canada’s third-biggest life insurer reported it earned a net profit of $453 million in the third quarter, reversing a big loss the previous year.

“On both sides of the North American border high levels of unemployment are constraining both consumer spending, but also in our group (corporate) business, the number of people at work and taking on additional benefits and making additional savings,” he said.

A recent improvement in stock markets pushed Sun Life far out of the red to a huge gain in the third quarter. The rebound in equity markets boosted the value of the Toronto company’s investments and contributed $156 million to its bottom line.

Sun Life (TSX:SLF) said it also benefited from positive assumption changes, which boosted profit by $49 million.

Canada’s third-largest insurance company said it reviews its outlook on ongoing basis and usually makes yearly adjustments in the third quarter.

Under Canadian accounting rules, insurers are required to provide assumptions on how changes in things like interest rates, equity returns and mortality rates affect their ability to meet policyholder obligations.

This year, those assumption adjustments benefited the company’s bottom line. For example, Sun Life said an adjustment in mortality rates amounted to a gain of $216 million during the quarter.

The company said it recently updated its economic scenario generator, which projects future interest rate and equity returns, to include the extremely volatile markets of 2008 and a longer period of low interest rates in calculating its liabilities.

Sun Life said with $1.1 billion in adjusted earnings so far this year it is close to achieving its target of $1.4 billion to $1.7 billion, but said a number of challenges it faced in 2010 such as lower interest rates and volatile equity and bond markets could continue into 2011.

Insurers are heavily invested in stock and bond markets and any swing in those markets is reflected in their quarterly balance sheets.

Sun Life earned $453 million, or 79 cents per share, in the three months ended Sept. 30. That compared with a loss of $140 million, or 25 cents per share, in the same period last year.

Analysts surveyed by Thompson Reuters had expected earnings of 61 cents per share by the Toronto-based company.

However, a persistently low long-term interest rate environment continued to eat away at its bottom line. But Sun Life said credit markets improved from last year and the impact from lower interest rates was largely offset by more favourable movements in interest rate swaps that is uses for asset-liability management.

Peter Rozenberg a financial analyst at UBS Securities said low interest rates continues to be a drag on all life insurance companies and Sun Life’s interest rate sensitivity increased by $100 million during the quarter. He warned that this low rate environment will continue to hurt insurers.

Sun Life also warned in its outlook that equity markets remain volatile and weak economic conditions persist. A decision announced Wednesday by the U.S. Federal Reserve to repurchase US$600 billion in treasury bonds could also affect the company because it will further lower yields and interest rates.

Sun Life’s U.S. division returned to profitability during the quarter even as the company set $57 million more aside on the mortgage front in anticipation of continued problems in the U.S. commercial mortgage market. That amounted to a $40-million hit on its earnings.

As of Sept. 30, Sun Life had $455 billion in assets under management, a 10% increase over last year.

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.

Manulife reports Q3 loss

Meanwhile, Canada’s largest life insurance provider, Manulife Financial Corp. (TSX:MFC) reported Thursday that it posted a $947-million loss in the third quarter as the company recorded a number of charges that more than offset improvements in operational earnings.

One of the big negatives was a $1.04 billion charge to goodwill that reflects the impaired value of Manulife’s U.S. insurance business, due to the weak economic outlook and a repositioning of that business.

Unlike Sun Life, whose bottom line benefited from its yearly actuarial review, Manulife reported $2.03 billion in charges resulting from an annual review of all actuarial methods and assumptions, which the company uses to estimate its future liabilities.

Still, Manulife beat analyst expectations that it would report a
much bigger loss and the financial services sector on the Toronto
Stock Exchange rose 1.5% on the insurers
better-than-expected results.

Shares in Sun Life were up 72 cents or 2.5% to $29.51 in midday trading Thursday and Manulife shares rose $1.13, or 8.7% to $14.03.