Sun Life Financial Inc. has given investors a clearer sense of the battering insurance companies are taking from low interest rates and slumping stock markets, posting its first quarterly loss in two years.
After warning two weeks ago that it was on the verge of spilling red ink for the first time since 2009, Sun Life reported a loss of $621-million in the third quarter. The drop came as low interest rates and falling stock markets depress profits across the sector.
The results were in line with Sun Life's warning in mid-October, but provide greater detail about the bleak state of global markets and their impact on the insurance sector.
"Our financial results reflect the severe volatility experienced during the third quarter, including interest rate levels that reached historic lows and a significant decline in equity markets," Sun Life chief executive officer Don Stewart said in a statement.
"Despite the relative resilience of the Canadian economy, the financial turmoil in the global economy has been far reaching."
The loss at Sun Life, one of Canada's largest life insurers, was equal to $1.07 a share. That compares with a profit of $416-million, or 73 cents a share during the same quarter a year ago. Revenue was $7.5-billion in the quarter, down from $7.7-billion last year.
The announcement does not bode well for the rest of the industry as Canada's major insurance companies report earnings this week for the quarter spanning July to September. Manulife Financial will be watched particularly close when it reports Thursday, since its operations currently have a much larger exposure to fluctuating rates.
Insurance companies are sensitive to market swings since they invest most of the premiums they receive from policy holders in the bond markets. Low rates, such the ones that have prevailed as governments around the world adopt policies designed to encourage consumer and corporate spending, mean depressed returns for the insurers.
"Global economic uncertainty and U.S. monetary policy actions have increased demand for fixed-income securities, putting downward pressure on bond yields, which have a direct impact on the financial performance of Canadian life insurers and defined benefit pension plans," Mr. Stewart said.
The losses come after North American equity markets fell more than 12 per cent during the quarter. The loss was also due to $684-million increase in net reserves at Sun Life, which is money they set aside as protection to ensure the company will be able to pay customers down the road.
"We continue to take action to improve our product mix, increase prices and de-risk products. Our business is strong despite economic uncertainties and we remain a well-capitalized financial institution," Mr. Stewart said.
Updates to Sun Life's actuarial methods and assumptions also reduced net income by another $203-million. The company also announced it was keeping its quarterly dividend at 36 cents per common share.
Before Sun Life warned of a loss in October, analysts were expecting an adjusted profit of about $260-million.
In particular, a move by the U.S. Federal Exchange to keep interest rates low for the next few years has hurt profits in the sector. Trying to spur the U.S. economy, the Fed has introduced a program dubbed Operation Twist to lower long-term interest rates to encourage businesses to borrow and invest.
Operation Twist seeks to push longer-term interest rates down, while avoiding a plunge in shorter-term rates. That strategy poses problems for insurers like Sun Life which are not only exposed to absolute changes in rates, but also the degree to which long-term rates and short-term rates move in tandem.
Slumping returns are causing insurance companies to increase premiums. Manulife recently announced it was hiking rates on universal life insurance for the second time in less than a year and other insurers may follow.