TORONTO (Reuters) - Sun Life Financial (SLF.TO) shares jumped on Monday after the Canadian insurer said it would stop marketing variable annuities and individual life insurance in the United States, and signaled support for its lofty dividend unless financial markets wither.
Canada’s No. 3 insurer billed its decision to pull out of two capital-intensive businesses that had become a drag on earnings as the start of a “new chapter.” The move comes just two weeks after Dean Connor took over as chief executive from longtime head Donald Stewart.
Connor said the insurer was hardly pulling back from the United States, but instead shifting its focus to become a leader in U.S. group insurance and voluntary benefits. It will also push ahead with its U.S. MFS Investment Management business and strengthen its growing position in Asia, he said during a conference call.
Connor suggested the company - which recently recorded its first quarterly loss in two years due to weak markets - would maintain its lofty dividend unless financial markets deteriorate.
“We see the dividend as being supported by both the run rate earnings and the strong capital position we’re at today,” Connor said.
Sun Life last raised its dividend in early 2008. The quarterly payout sits at 36 Canadian cents a share and yields about 8 percent due to the decline in its shares over the past four years.
The high yield combined with the company’s sagging earnings prompted some analysts to predict Sun Life would follow the lead of its larger rival Manulife Financial (MFC.TO), which cut its payout in 2009 and watched its shares plunge as a result.
Sun Life, which was down 39 percent year-to-date at the start of Monday’s session, rose 8.4 percent to C$19.86.
“I think it was the supportive comments they made about the dividend that drove the shares higher today,” said Robert Sedran, an analyst at CIBC World Markets.
Ending sales of variable annuities - insurance contracts that guarantee the holder a minimum payment - will allow Sun Life to begin to clear its balance sheet of products that had used up a lot of capital while burdening it with losses during periods when markets have weakened.
The outlook for prolonged low long-term interest rates - due in large part to the U.S. Federal Reserve’s “Operation Twist” bond-buying program - force Canadian insurers to take losses on the gap between what they owe on policies and what they can expect to earn on the bonds they hold to offset them.
Under strict Canadian accounting rules, they must take these losses upfront on investments and obligations that won’t come due for years, whereas Sun Life’s U.S.-based competitors are able to smooth the impact out over several years.
“I think it’s fair to say that we based our (new) strategy ... on today’s economic climate,” Connor told Reuters.
“We are not basing our strategy on hope that interest rates will increase, so it’s fair to say that we assumed that today’s low interest rates would continue and we built a strategy around that.”
Dominion Bond Rating Service said it viewed the moves “favorably”.
“The decision to stop selling these long-tailed capital-intensive products will reduce the company’s risk exposures and earnings volatility over time while providing a better platform for higher return on invested capital,” it said in a statement.
Sun Life had already been slowing its U.S. individual life insurance sales, but decided to completely stop sales as the products were sold by the same distributors that sold the variable annuities.
The moves will result in the reduction of about 800 jobs, but will have no impact on existing customers and their policies, and should not have a meaningful impact on 2012 operating earnings, the company said.
One-time transition costs should range from C$75 million ($73 million) to C$100 million, and the company has about C$100 million in goodwill associated with its U.S. variable annuity business that it may write down.
While both Sun Life and Manulife have struggled with their variable annuity businesses, Canaccord Genuity analyst Mario Mendonca said he does not expect Manulife to follow Sun Life’s lead.
“Manulife’s scale in both individual life and U.S. variable annuities is significantly greater than Sun Life‘s. This suggests to us that Manulife’s lower unit costs help to justify continued sales,” he said in a note.
He also said that Manulife’s approach to distribution would likely mean that shutting down one product line would have an impact on other more profitable lines, such as its retirement and mutual fund businesses.
Editing by Frank McGurty