A Jan. 24 article in the Globe and Mail recently caught my eye, its contents akin to waving a red cape in front of a bull. I could imagine contrarian investors wringing their hands in glee, as Canada’s insurance companies apparently are reviled by investors around the globe.

According to Data Explorers, a survey of 66 global life insurers found that 9% of Sun Life Financial‘s (NYSE:SLF) stock was sold short — tied for first in the group, and far higher than the 2% group average. Apparently, hedge funds have been juicing their returns by going long on banks and short on insurance companies.

And if you’re considering an investment in Sun Life, this is good news. Because while things look bad right now, there’s plenty of reason to believe in a rebound that could send the shorts running.

What’s Wrong With Sun Life?

Most of the problem lies south of the (Canadian) border. Sun Life’s U.S. business suffered a $511 million operating loss in the fourth quarter and an operating loss of $768 million for all of 2011. That’s a decline of $1.1 billion compared to 2010.

The first cause for the loss was a steep decline in variable annuity sales due to challenging economic conditions. In addition, Sun Life took a $522 million one-time charge to net income for a change to the valuation of its variable annuity insurance contract liabilities. As a result of the 31% drop in variable annuity sales in the fourth quarter, Sun Life announced it is exiting the U.S. variable annuity and individual life business. It will continue marketing its group insurance and voluntary benefits products and services, which are profitable. In Canada, those one-time charges amounted to $103 million.

In addition, the decline in equity markets and interest rates in 2011 cut Sun Life’s net income by an additional $356 million. All told, we’re looking at about $2 billion in bad news. While negative, it isn’t fatal. For whatever reason, Canadian insurance companies don’t seem to have much success south of the border.

What’s Right?

The rest of Sun Life’s business is in good shape. Moving forward, it’s focusing on four areas: Canadian insurance, U.S. group insurance and voluntary benefits, asset management on both sides of the border, and its Asian operations. The four segments generated $1.2 billion in operating net income in 2011, with Sun Life’s Canadian insurance unit bringing home $650 million — or slightly more than half the net operating income of its profitable businesses.

Next in line is MFS International, Sun Life’s global asset management business. Managing $253 billion in assets, it produced $271 in net operating income in 2011, an increase of 23%.

The biggest increase of the four divisions was its Asian operations, which increased net operating income by 57% to $144 million on a 9% decrease in revenue. Just imagine how it would do with an increase. Although India is Sun Life’s biggest market in Asia with $290 million in individual insurance sales in 2011, China delivered a 72% increase in sales to $160 million. In a few more years (assuming all goes well), Sun Life’s Asian operations should deliver greater profits than its MFS division.

Finally, its Employee Benefits Group, the surviving insurance-related unit in the U.S., managed to generate $86 million in net opening income in 2011 on $446 million in sales. It’s an impressive result considering revenues dropped 27% compared to 2010. Choosing to hold the line on prices rather than give its product away, Sun Life will continue to see lower sales with reasonable profits for the foreseeable future.

Outlook 2012

Sun Life’s main financial objective is to achieve an operating return on equity of 12% to 14% over a three-to-five-year period. In 2011, it was just 0.8%, compared to 10.7% in 2010. Forgetting its U.S. division, which had an operating ROE of -14.3% in 2011, the other two insurance businesses (Canada and Asia) delivered solid returns for shareholders. With some of the issues discussed earlier in the rearview mirror, I see it getting back to double-digit returns in 2012.

Shorts face an incredibly expensive lesson should interest starts to rise, as Sun Life and its 6.7% dividend yield will look increasingly attractive. Plus, a look at Sun Life’s chart since 2000 shows SLF rarely trades this low. In the short term, continue to expect volatility in its stock price. But in the long-term, Sun Life eventually will return to solid profitability, and its stock will challenge its five-year high above $57.

In the meantime, why not enjoy Sun Life’s delightful dividend yield? There’s nothing better than being paid to wait.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.