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Annuities a cloud over Sun Life

The Canadian insurance giant Sun Life Financial Inc. is giving up on new sales of US annuity products, which have cost it hundreds of millions of dollars this year, and plans to cut about 800 jobs at its American subsidiary, based in Wellesley.

The job cuts will hit about 30 percent of the workforce at the insurance company’s US business. Sun Life says about half of the cuts will take place in New England.

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Most of those positions are in Wellesley and the unit’s Boston sales office. Sun Life also operates support offices serving the US business from Canada, Ireland, and India.

Five of Sun Life’s 12 highest-ranking US unit executives based in Wellesley will see their jobs eliminated. It isn’t clear how many more positions will be lost in Wellesley.

Many employees will continue working there to serve customers who have already purchased annuities and life insurance policies, a spokeswoman said. Others work with insurance products that Sun Life will continue to sell.

Another Sun Life business based in Massachusetts, mutual fund manager MFS Investment Management, is not affected by any of the layoffs or business shifts.

Sun Life’s exit from the individual annuity and life insurance market is a blow to a company that launched a big marketing campaign to increase its name recognition less than two years ago.

Sun Life made headlines by acquiring the naming rights to the stadium where the Miami Dolphins of the NFL play football. Estimated terms of the deal signed at the start of 2010: about $37.5 million for five years.

But the variable annuity business has been an insurance disaster, due mostly to volatile stock markets and very low interest rates. Comparatively strict capital and accounting requirements for Canadian insurers magnified the problems.

Sun Life ended up in an “inherently weak competitive position,’’ according to the Canadian credit rating agency DBRS.

Actually, those factors did a lot more damage than that. Sun Life’s US subsidiary lost about $560 million in the third quarter of this year, just before stock markets rallied in October. Sun Life’s exit will cost the company at least $73 million this quarter, with additional write-downs on the horizon.

Variable annuities have been a big problem for insurance companies because they offer market-based appreciation in good times but also guarantee a minimum gain. The harder insurance companies choose to market variable annuities, the more they boost the minimum return.

Sun Life suffered a similar problem - to a lesser degree - on life insurance policies that weren’t built for volatile fixed-income markets and historically low interest rates.

As Sun Life’s US business struggled, the company was required to dedicate more capital to support it. The most obvious consequence: Sun Life stock had slumped 40 percent for the year, through the end of last week.

Enter Dean Connor, who was promoted to chief executive at Sun Life on Dec. 1. Less than two weeks later, the company made the decision to move away from the risk and volatility of its US annuity business.

That will allow Sun Life to “deploy capital to businesses that can generate superior [returns] with less volatility,’’ Connor told investors on a conference call yesterday.

Stockholders liked the sound of that. Sun Life shares jumped $1.26 to $19.30 yesterday.

One thing you can say about Sun Life’s grim recent experience in the US annuity market: The company wasn’t alone.

Manulife Inc., an even bigger Canadian insurer with a large US presence headquartered in Massachusetts, took its own annuity hit this year.

The parent firm of John Hancock Financial Services cited market volatility when it reported a loss of about $1.3 billion for the third quarter. Investment hedges protecting the insurer from market risks proved expensive.

Annuities sold in America were not Manulife’s only problem. But the company said last month that it decided to reduce the distribution of those products. Manulife shares are down 37 percent so far this year.

Insurance companies don’t have public profiles like banks and brokerages, and most of them like it that way. But many are struggling with volatile markets and stubbornly low interest rates, just like other financial service giants.

In this case, Canadians ran into more trouble than they bargained for over the border.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
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