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(Christinne Muschi/christinne muschi)
(Christinne Muschi/christinne muschi)

The insurance model is broken in these markets Add to ...

Sun Life Financial warned Monday that investors should expect a big loss thanks to market moves in the third-quarter, driving home just how broken the business model is for investors when equity markets are hugely volatile and interest rates are depressed.

Sun Life is going to miss estimates by so much that it shows clearly that investors have little hope of getting any clear grasp on the earnings path for insurers. Sun said it will report a $621-million loss, when the consensus according to Thomson Reuters was for a profit.

The problem, Sun Life said, was substantial declines in equity markets and interest rates which hurt its life insurance businesses in the U.S.

Insurance earnings have long been a bit of a black art because of the long time horizons. Adjust an assumption here, fiddle with a sensitivity, tweak a model there, and the needle moves. A lot.

Add in the mark to market rules under Canadian accounting regulations in an equity market with huge volatility and the earnings are all over the map. There's basically no chance of consistently getting a handle on what the insurers' income statement is going to look like in any given quarter.

When investors don't know what earnings are going to be like, multiples get crushed.

Sure, the insurers could get a big chunk of third-quarter declines in earnings back should equity markets rebound. But at that point, the gains will be discounted by investors who are rightly concerned that they could be disappear once more.

Even for investors with the fortitude to look through the period of rough equity markets, there's still the problem of low interest rates. World economies are slowing and policy makers are focused on keeping rates low for a very long time.

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