Sun Life Financial Inc. (SLF) reported second quarter operating earnings of 10 cents per share, plummeting from 73 cents earned in the year-ago quarter. Operating earnings of $58.4 (or C$59) million in the reported quarter declined from $439 (or C$425) million recorded in the second quarter of 2011.
Including a one-time expense of restructuring costs, hedging-related adjustments for hedging accounting in SLF Canada and other fair value adjustments, the company reported a net income of $50.5 (or C$51) million, compared with $421.4 (or C$408) million in the prior-year quarter.
Earnings per share were 90 cents compared with 68 cents in the prior-year quarter. The overall results of Sun Life were negatively affected by the deteriorating interest rate environment and weakening equity markets.
The company’s financials included a negative impact of the equity markets up to $129.7 (or C$131) million and an adverse effect of interest rate environment worth $194.1 (or C$196) million. These were partially offset by a net gain from increase in fair value of real estate of $6.9 (or C$7) million.
Operational Update
During the quarter under review, total revenue of Sun Life grossed $5.99 (or C$6.05) billion, increasing 17.3% from $5.33 (or C$5.16) billion in the year-ago quarter on the back of higher profits earned in fair value through profit and loss and AFS asset sale.
During the quarter total premiums and deposits of Sun Life grossed $25.0 (or C$25.2) billion, climbing 20.8% from $21.6 (or C$20.9) billion in the year-ago quarter. This surge was primarily attributable to an escalation in Mutual Fund sales that almost doubled year on year.
Sun Life’s asset under management (“AUM”) increased 4.8% in the reported quarter over the prior-year quarter to $491.4 (or C$496.3) million primarily due to accretion in general fund assets, segregated fund assets, other mutual and managed funds coupled with a declining Canadian dollar against other currencies, partially offset by hostile market movements.
Segment Details
The company reports its financials through five operational segments: Sun Life Financial Canada (“SLF Canada”), Sun Life Financial U.S. (“SLF US”), MFS Investment Management (“MFS”) Sun Life Financial Asia (“SLF Asia”) and Corporate.
The SLF Canada segment reported a net income of $179.2 (or C$181) million increasing 20.3% over the prior-year quarter. Its return on equity (“ROE”) also deteriorated 250 basis points year on year to 10.9% during the second quarter.
Sun Life is making significant changes in order to tackle the low interest rate environment in the third quarter that would derisk its Individual Insurance & Investment products further. The changes include increase in prices and a decrease in guarantee.
The SLF US segment incurred a net loss of $185 million versus a net income of $114 million reported in the prior-year quarter. The results in the second quarter were negatively impacted by the declining interest rates, poor conditions of the equity markets specifically in the Annuities and Individual Insurances along with certain revisions in Employee Benefits Group.
However, the results were partially neutralized by a positive effect of “credit spread and swap spread movement” in Annuities and Individual Insurance, and a profit made by selling AFS assets.
The ROE for the quarter under review was a negative 13.6% compared to 8.3% during the second quarter ended 2011.
MFS reported net sales of $4.2 billion, improving 44.8% over the prior-year quarter.
The net income for this segment amounted to $66 million surging 43.5% over the prior-year quarter. Its pretax operating margin ratio also deteriorated 200 basis points year on year to 32% during the second quarter.
The SLF Asia segment reported a net income of $14.9 (or C$15) million decreasing 50% over the prior-year quarter. Its ROE also deteriorated 400 basis points year on year to 3.2% during the second quarter.
The net income for the reported quarter was adversely impacted by the decline in interest rates in the Hong Kong market coupled with a strained business environment in China, neutralized by bolstered earnings in Philippines and a positive impact of AFS assets sale.
The company’s Corporate segment included the results of its operations in UK and other Corporate Support. This segment reported net loss of $22.8 (or C$23) million, augmenting from the loss of $3.1 (or C$3) million incurred in the prior-year quarter.
The poor result of this segment was primarily due to increased expenditure and decreased income from foreign exchanges.
Financial Position
Sun Life exited the second quarter with cash and cash equivalents of $7.95 (or C$8.15) billion against $9.26 (or C$9.04) billion reported in the year-ago quarter. As on June 30 2012, the company’s debt obligations amounted to $61.5 (or C$63) billion at par with 2011-end.
Total shareholder’s equity including preferred share capital in the company’s books amounted to $15.77 (or C$16.16) billion as on June 30, decreasing from $15.4 (or C$15.7) million as on December 31, 2011.
Dividend
The Board of Sun Life declared a cash dividend of 36 cents per share, which will be paid on September 28, 2012 to shareholders of record as on August 29, 2012.
Peer Take
The company competes closely with Manulife Financial Corporation (MFC), which reported its second-quarter 2012 operating loss of $293 (or C$300) million or (C$18) cents per share, compared with the income of $1179 (or C$1206) million or (C$66) cents per share in the prior-year quarter. The disappointing results came on the back of a volatile equity market and a weak interest rate environment.
The net income excluding notable items was $538 (or C$551) million compared with $462 (or C$473) million in the second quarter of 2011
Zacks Rank
Sun Life carries a Zacks #3 Rank, implying a short-term Hold rating and its peer, Manulife, retains a quantitative Zacks #2 Rank that translates into a short-term Buy rating.
MANULIFE FINL (MFC): Free Stock Analysis Report
SUN LIFE FINL (SLF): Free Stock Analysis Report
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