Aug. 6 (Bloomberg) -- Canadian insurers plunged after Manulife Financial Corp. cut its quarterly dividend for the first time and Sun Life Financial Inc. said third-quarter profit may be reduced by as much as C$550 million ($511.5 million).

Manulife, the country’s largest insurer, lowered its quarterly dividend to 13 cents a share from 26 cents, the first reduction since the Toronto-based insurer went public in 1999. The move will save about C$800 million a year, Chief Executive Officer Donald Guloien said in a statement today.

“It makes me angry, but it also throws up a lot of question marks,” said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc., which manages about C$3 billion, including Manulife and Sun Life. “This is definitely out of left field.”

The Manulife dividend cut and profit forecast from Sun Life indicate Canada’s biggest insurers may be girding for more declines in equities, after a second-quarter stock rally led to profits that beat analysts’ estimates

Guloien, who took over the top job in May, has said Manulife needs to build its capital base to “withstand the most odious circumstances” caused by stock declines, and to satisfy global regulators.

“We want to provide the highest degree of comfort that is reasonable for negative developments that could occur,” Guloien said in a telephone interview. Over time, “we would expect we would be able to deploy that capital very effectively in funding organic and strategic growth.”

The cut to Manulife’s dividend “is a reversal of its prior stance and is likely to be a source of concern for investors,” Morgan Stanley analyst Nigel Dally wrote in a note.

Stocks Lower

Sun Life, the No. 3 insurer, said third-quarter earnings will be reduced by C$450 million to C$550 million to reflect updated equity market and interest-rate assumptions used to value annuities, segregated funds and other products.

The dividend cut sent most financial services stocks lower. Manulife fell C$3.89, or 15 percent, to C$22.36 at 4:15 p.m. trading on the Toronto Stock Exchange, the biggest drop in about eight months. Sun Life fell C$4.62, or 12 percent, to C$33, the largest drop in more than nine months.

Canadian lenders aren’t likely to follow Manulife and cut their payouts, said John Aiken, a bank analyst at Dundee Securities Corp. in Toronto.

“It is our strong conviction that none of the banks will cut their dividends in the near term,” Aiken wrote in a note today after the Manulife announcement. “Payout ratios remain sustainable.”

Beat Estimates

Both Canadian insurers reported second-quarter profits that topped analysts’ estimates. Manulife said net income climbed 76 percent to C$1.77 billion, or C$1.09 a share. Sun Life said profit rose 14 percent to C$591 million, or C$1.05 a share.

The companies said equity markets boosted earnings at their mutual fund operations, outweighing increased reserves set aside for declines in segregated funds and other products.

“It’s pretty hard to look forward and be confident that equity markets are necessarily going to continue at the pace they have in recent times,” Sun Life Chief Executive Officer Donald Stewart said in a telephone interview. “The company’s well-positioned for whatever the economy may throw at us.”

Stewart declined to say whether the Toronto-based insurer may follow Manulife in cutting its 36-cent-a-share quarterly dividend.

“The dividend is decided quarter by quarter by the board of directors,” Stewart said. “But this quarter, we’re very clear that we’re continuing the dividend at 36 cents.”

U.S. Insurance

Sun Life’s profit from U.S. insurance rose more than fivefold to C$422 million on higher sales of annuities and individual insurance products. Profit from Canada fell 27 percent to C$217 million.

Manulife recorded a loss at its U.S. insurance unit of C$631 million on investment-related losses, compared with year- earlier profit of C$223 million. U.S. asset management earnings, which include results from Boston-based John Hancock Financial, surged more than fivefold to C$1.55 billion. Profit from Canada increased 11 percent to C$336 million.

Great-West Lifeco Inc., the country’s second-largest insurer, said second-quarter profit fell 27 percent to C$413 million, or 44 cents a share. The dividend was unchanged. Great- West fell C$2.45, or 9.1 percent, to C$24.45, the biggest drop in about five months.

To contact the reporter on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net.

Last Updated: August 6, 2009 16:41 EDT