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We are initiating coverage on the shares of Sun Life Financial Inc. (SLF - Analyst Report) with a Neutral recommendation.

Sun Life is a leading Canadian life insurance company, with an active presence in the U.S. Over the long term we believe the company will be able to generate superior returns for its investors given a proactive approach to managing and mitigating fundamental issues.

Sun Life is seeking to grow internationally. It is specifically focusing on the emerging economies of Asia, which is expected to provide higher return and growth compared to the North American markets.

The company is also making business mix changes in its U.S. segment to reduce the equity market exposure and limit its interest rate exposure.

At the same time, Sun Life is aggressively seeking to grow its Global Asset Management Business, which has been witnessing growing asset base for the past many quarters. This business provides higher ROE, lower capital, and lower volatility. It has the potential to provide earnings upside.

Along with doing away with high equity/interest rate risk products, Sun Life has implemented hedging to reduce earnings and capital sensitivity to interest rates and equity markets. The company stands better than its peers in terms of managing hedging these risks.

Nevertheless the historically low interest rate environment will continue to have a significant negative impact on the company’s operations.  The company’s leverage ratio has also increased due to requirement of additional regulatory capital.

Sun Life is expected to release fourth quarter and full year 2012 results on February 4, 2013. The Zacks Consensus Estimates fourth quarter earnings of 55 cents, compared  to an operating loss of 38 cents per share  in the year ago quarter. For the full year 2012 earning of $2.47 is expected, compared to an operating earning of 18 cents for full year 2011.

Sun Life retains a Zacks Rank #3 (Hold).  Peers carrying a Neutral recommendation are Metlife Inc. (MET - Analyst Report), Manulife Financial Corp. (MFC - Analyst Report).

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