July 31, 2008 / 5:24 PM / in 9 years

UPDATE 2-Sun Life profit drops, shares fall 6 pct

(Adds CEO comments from conference call, closing share price, details)

By Lynne Olver

TORONTO, July 31 (Reuters) - Profit at Sun Life Financial (SLF.TO) fell 12 percent in the second quarter after a slew of unfavorable factors, from stock market performance to credit-related losses, hurt results in the United States, particularly the U.S. annuities business.

The results were worse than analysts had expected, and hammered Sun Life’s shares, which fell 6.1 percent on the Toronto Stock Exchange to close at C$39.80 on Thursday.

“Notwithstanding volatile markets, these are disappointing results,” Chief Executive Don Stewart said on a conference call.

Sun Life’s board felt it was “prudent” to keep the dividend where it was, in light of current economic uncertainty, Stewart added.

“In our view, it’s very possible that economic difficulties will intensify over the remainder of 2008 and extend into 2009,” Stewart said.

Other executives also remained cautious on the earnings outlook.

“We do not anticipate that macroeconomic conditions will improve in the near term, and credit could be a drag on U.S. earnings for the remainder of 2008,” Chief Financial Officer Rick McKenney said on the call.

Earlier in the day, Sun Life said that net income in the three months ended June 30 fell to C$519 million ($507 million), or 91 Canadian cents a share. That was down from C$590 million, or C$1.02 a share, in the 2007 period.

The strong Canadian dollar versus foreign currencies trimmed operating earnings by C$17 million or 3 Canadian cents a share, the company said.

Analysts had expected Canada’s third-largest life insurance company to report earnings of 99 Canadian cents a share before items, according to Reuters Estimates.

Return on equity, a key measure of profitability, fell to 12.9 percent in the quarter, from 14.5 percent a year earlier.

Sun Life cited several factors for the drop in earnings: a decline in U.S. equity markets, the unfavorable impact of interest rate movements and associated hedges, wider credit spreads and credit-related allowances on reserving requirements, and credit-related losses on asset sales in Sun Life Financial’s U.S. insurance business.

SLF U.S. profit fell 47 percent in the quarter to C$83 million. In U.S.-dollar terms, earnings dropped 42 percent to $82 million.

Profit in the U.S. annuities operations tumbled in particular, and executives said they are considering changes to hedging regimes to improve this business, and possibly mergers, acquisitions or divestitures.

“We’re in the deal stream,” Stewart said. “But I can’t obviously comment on specific transactions.”

The corporate focus is on fixing and improving the U.S. annuities business and continuing to grow the insurance business, “but we keep all of our businesses under strategic review,” Stewart said.

Earnings at MFS Investment Management, Sun Life’s U.S. asset-management unit, fell 18 percent in the quarter to C$56 million, primarily due to declining stock markets. MFS assets under management fell to US$183 billion, from US$202 billion a year earlier.

SLF Canada was a bright spot. Earnings rose 6 percent to C$296 million, mainly due to higher interest rates and equity markets, the company said. Profits rose in the Canadian group wealth and group benefits areas.

On a May conference call, executives had warned that the economic slowdown, uncertain capital markets and strong Canadian dollar could limit earnings growth in the short term.

Sun Life shares are now down more than 28 percent this year, the worst 2008 performance among Canadian publicly traded life insurance companies.

$1=$1.02 Canadian Reporting by Lynne Olver; editing by Rob Wilson

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