Sun Life CEO says 2015 targets still ambitious in low interest rate environment

Sun Life Financial chief executive Dean Connor says the company’s financial targets remain “suitably ambitious” even as the insurer reported sharply improved third-quarter results compared with a year ago.

The low interest rate environment remains a significant head wind for the Sun Life and despite the progress the company has made, Connor remains cautious.

“We expect that impact to show up in terms of a head wind of circa $150 million a year for each of the next three years,” he said of low interest rates.

“We saw that in the third quarter… and that certainly factors into our thinking about our 2015 plan.”

Shares in Sun Life closed up 94 cents or about four per cent at $25.31 on the Toronto Stock Exchange following the company’s earnings report.

The company reported a profit of $383 million or 64 cents per share for its latest quarter compared with a loss of $621 million or $1.07 per share a year ago.

Return on equity was 11.1 per cent for the quarter, up from negative 17.4 per cent a year ago.

On an operating basis, Sun Life said it earned $401 million or 68 cents per share and return on equity of 11.6 per cent.

At the company’s investor day in March, Sun Life set a target for 2015 of $2 billion in operating profits and operating return on equity of 12 per cent to 13 per cent.

Low interest rates hit insurance companies in an number of ways, including lower yields on bonds and increased costs of hedging equity exposure that could affect variable annuities.

Connor noted that since the 2015 targets were set just eight months ago, interest rates have slipped but stock markets have done better than expected.

“So there’s some headwinds and there are some tailwinds,” he said, adding that much can happen between now and 2015.

Connor said the company is looking to grow the parts of its business that are less affected by interest rates, including its group and voluntary benefits business in the U.S. and its MFS Investment Management mutual fund operations.

Last year, the company stopped selling variable annuities in the U.S.

“We continue to work very hard to reposition to succeed in a low interest rate environment,” he said.

“You’ve seen us reprice out products, replace products and introduce new products and manage our expenses very tightly and improve our productivity.”

RBC Capital Markets analyst Andre-Philippe Hardy raised his price target on the stock to $24 from $22, but maintained a “sector perform” rating.

“The stock has rallied significantly from its 52-week low of $17.92 as concerns over capital and dividend sustainability have declined, but we view the next leg of upside as more difficult,” Hardy wrote in a report.

Scotiabank analyst Joanne Smith noted Sun Life made improvements in a number of key areas including its U.S. group business as well as strong results at its MFS segment and in Canada.

“Core results were strong, and actions to mitigate low interest rates continue to have a positive impact on earnings,” Smith wrote in a note to clients.

“If SLF can string together a few consistent quarters of clean results, such as these, we expect investors to gain confidence in the achievement of the longer term earnings and return objective.”

Sun Life employs about 16,000 people, including 7,000 in Canada, and has insurance, wealth management and mutual fund operations around the world.