TORONTO (Reuters) - Shares of Canadian insurers sank on Monday after Sun Life Financial (SLF.TO) warned it will post a loss in its third quarter due to falling bond yields and stock markets.
Sun Life, Canada's No. 3 insurer, was down more than 9 percent just after midday, after it said it expects to report a loss of C$621 million ($615 million) in the quarter. On an operating basis, the company said the loss would be C$572 million.
The forecast - which also weighed on shares of rivals Manulife Financial (MFC.TO) and Great-West Lifeco (GWO.TO) - contrasted with analysts' expectations of a net loss of C$49 million and an operating profit of C$259 million, according to Thomson Reuters I/B/E/S.
"September was a gruesome month," Caldwell Securities portfolio manager John Kinsey said of the 9 percent drop in Canadian stocks, which hit Sun Life's bottom line.
"We weren't expecting too much (from Sun Life)."
Life insurers hold stocks and bonds to guarantee they'll be able to pay future investment and insurance policy obligations. When the value of their portfolios fall on a quarterly basis, they use profits to bulk up reserves.
"Losses from equity market and interest rate movements were at the high end of the ranges previously disclosed," Sun Life said in a statement.
The Toronto Stock Exchange's benchmark S&P/TSX composite index .GSPTSE fell 12.6 percent in the third quarter, while bond yields retreated due to economic uncertainty in Europe and the United States.
Volatile markets have played havoc with insurers' results over the past few years, and the difficulty of projecting the impact of the market gyrations has led to surprises during earnings disclosure periods.
For instance, Sun Life surprised the market in the second quarter by recording a gain from its bond portfolio, despite declining yields.
But a company official said last month that the decline in yields during the third quarter had a bigger impact because it was tilted toward the longer-term debt that insurers hold.
The Toronto-based insurer said it remained well capitalized despite the loss. The company plans to release third-quarter results on November 2.
Manulife, meanwhile, is expected to post a net loss of just over C$1 billion, according to Thomson Reuters I/B/E/S, with an operating profit of C$543 million.
Manulife took more than C$3 billion in losses during the second and third quarters of 2010 due to weak markets, but has since hedged much of its equity and bond exposure to reduce its earnings volatility.
BMO Capital Markets analyst Tom MacKinnon said in a note he does not expect a similar negative warning from Manulife, due its more detailed disclosure of market impacts.
Great-West Life has considerably less market exposure than either Sun Life or Manulife.
Sun Life stock was down 9.2 percent at C$24.02, while Manulife sank 5.4 percent to C$12.24, and Great-West slid 2.6 percent to C$21.47.
Reporting by Cameron French, additional reporting by Euan Rocha; editing by Rob Wilson