* Fourth-quarter EPS 23 Canadian cents
* Operating loss C$1.25 per share
* Hit by about C$1.2 billion in charges
* Shares drop as much as 8.5 percent (Recasts, new throughout)
By Susan Taylor
OTTAWA, Feb 12 (Reuters) - Sun Life Financial Inc (SLF.TO) reported a 77 percent drop in quarterly profit on Thursday as the insurer took a bigger than expected hit from deteriorating capital markets and suggested that conditions are unlikely to improve before 2010.
Shares of Canada's third-biggest insurance company fell as much as 8.5 percent after it announced charges of about C$1.2 billion related to ailing equity and credit markets.
"I think everyone probably expected a pretty messy quarter, not only out of Sun Life, but all the insurers," said Craig Fehr, financial services equity analyst Edward Jones, in an interview.
"Just think about the three months that Q4 spanned -- they were three pretty bad months in the market in general and ... insurance companies, particularly the Canadian lifecos, are going to trade almost as derivatives of the equity markets."
The market downturn has hit insurers hard, in part because their large portfolios of segregated funds are tied to equity market returns, often with guaranteed minimum payments, Fehr said. When markets decline, companies must put cash into a reserve funds to meet their liabilities.
Sun Life said its results included C$682 million in charges related to equity markets, C$365 million from asset impairments, credit-related writedowns and spread widening, and C$164 million in anticipation of higher future credit related-losses.
"It wasn't necessarily operating phenomenon. It was this issue of having to basically take money out of the till and put it into this reserve fund," Fehr explained. Analysts' forecast of a C$500 million impact was swamped by C$682 million in such charges, he said.
Despite "very disappointing" financial returns, Sun Life said its sturdy balance sheet that will help it grow in the year ahead as it faces a "significant headwind" from poor credit conditions.
"As we progress through 2009, it appears likely that the turbulence of 2008 will continue and may extend well into 2010," Chief Executive Don Stewart said in a conference call with analysts.
"In light of 2009's economic uncertainties, we have undertaken initiatives to further strengthen the organization and will undertake others."
The insurer has cut 4 percent of its workforce and is reviewing its entire product line to determine which areas it will focus on, he said.
Sun Life said quarterly earnings fell to C$129 million, or 23 Canadian cents a share, from C$555 million, or 97 Canadian cents a share, last year.
The results include a gain of C$825 million from the sale of its 37 percent stake in CI Financial Income Fund (CIX.TO).
Excluding the gain, it posted an operating loss of C$696 million, or C$1.25 a share. In the same period last year it reported operating income of C$560 million, or 98 Canadian cents a share.
Return on equity, a key measure of profitability, was 3.3 percent, down sharply from 14.2 percent, a year earlier.
The company said fourth-quarter revenue fell 13 percent to C$4.7 billion from C$5.4 billion.
Sun Life Canada contributed C$2.05 billion, down from C$2.61 billion in the year-before period, while the U.S. arm contributed C$587 million, down from C$1.63 billion.
Assets under management were C$381.1 billion at quarter's end, down 10.4 percent from C$425.3 billion.
Sun Life shares were off nearly 3.8 percent at C$22.13 on the Toronto Stock Exchange and down 4.9 percent at $17.76 in New York at mid-session on Thursday.
$1=$1.25 Canadian Reporting by Susan Taylor; Additional reporting by Supantha Mukherjee in Bangalore; Editing by Frank McGurty