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Sun Life, Great-West results top expectations

Sun Life Financial CEO Donald Stewart

Adrian Wyld/The Canadian Press

Sun Life Financial Inc. and Great-West Lifeco kicked off life insurance earnings season on a high note Wednesday, topping expectations in what could have been a messy quarter.

Sun Life was the first out of the gate, reporting second-quarter profits of $408-million, up from $72-million a year ago. The results amounted to 71 cents per share, well above analysts' expected earnings of 54 cents per share.

Investment gains and a turnaround in the company's U.S. operations helped the results. But Sun Life also threw the market a curveball by reporting that it had actually benefited from the current interest rate environment.

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Interest rates have become one of the key factors that analysts and investors watch to help predict life insurers' performance – especially in Canada, where accounting rules result in insurers' taking more of a haircut from low rates. As a result, analysts who cover the life insurers were prepared for a weaker-than-normal quarter. U.S. 10-year Treasuries fell 31 basis points during the second quarter, which ended June 30, to 3.16 per cent, UBS analyst Peter Rozenberg recently noted. And they've fallen further since.

In addition, stock markets fell during the quarter, creating another headache for the insurers, which have large investment portfolios. The S&P/TSX composite index fell 5.8 per cent during the period and the S&P/500 declined 0.4 per cent, RBC Capital Markets analyst Andre-Philippe Hardy pointed out in a note to clients.

But Sun Life surprised analysts by reporting a $23-million after-tax gain on interest rates and barely a dent from the drop in stock markets.

"Our interest rate sensitivities assume a parallel shift across the yield curve," the company said. "During the second quarter interest rate movements varied by duration and asset class, resulting in actual results that were different than those indicated by our previously disclosed sensitivities."

Winnipeg-based Great-West reported profits attributable to common shareholders of $526-million, up from $455-million a year earlier. The latest results amounted to 55 cents per common share, above the Street's consensus estimate of about 49 cents a share.

The company benefited, among other things, from new strength at the formerly beleaguered U.S. money manager Putnam Investments, which Great-West bought in 2007. Putnam's net sales for the first six months of the year were $3.4-billion. The money manager's sales in the same period a year earlier had actually been negative, as it bled customers.

Great-West, which is Canada's second-largest life insurer, also noted Wednesday that it has no direct exposure to Greece, and that its aggregate exposure to Portugal, Ireland, Italy and Spain is $926-million. It reduced the exposure by $131-million during the second quarter, but said that the downgrade of Irish government debt after the end of the quarter will have a "minimal impact" on its third-quarter results.

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Both Sun Life and Great-West will be holding conference calls for analysts on Thursday morning to shed more light on their results. Rival Manulife Financial Corp. reports its results on Aug. 11.

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