* Noisy quarter expected, assumption changes promised
* No dividend cuts expected after Manulife cut in Q2
* Stronger stock market offset by credit deterioration
TORONTO, Nov 3 (Reuters) - There will be a lot of complex provisions and one-time items when Canada's big life insurers report quarterly earnings this week but the bottom line is they will stay profitable and their dividends appear safe.
Analysts and investors have been keenly awaiting third-quarter earnings season since North America's largest life insurer, Manulife Financial Corp (MFC.TO), surprised everybody in August by halving its dividend -- the only dividend cut taken by a big Canadian financial services company since the global economic crisis rocked lenders and insurers.
Manulife and No. 3 lifeco, Sun Life Financial Inc (SLF.TO), warned at the end of the second quarter that they would update the actuarial assumptions on which they base investment returns and costs, a move that will add a lot of complexity to the third-quarter results.
While the outlook for the lifecos is better than it was when stock markets were falling -- and insurance investments were plunging alongside -- analysts said the dust has not yet settled from the calamitous year that has passed.
"This quarter for investors is going to be about trying to sift through a lot of noise. I think when you do that, it will be fairly positive," said Edward Jones analyst Craig Fehr.
"Certainly headwinds exist for insurance companies in the near term, but at the core, many of these companies are performing quite well and ... when the dust starts to settle in the financial markets, some of that core earnings power will start to shine through a little better. I just think it's going to take more time."
With reserve adjustments once again expected, analysts said the goal will be to try to see through all the accounting fog to what lies beneath -- the business of selling insurance and investing premiums in global markets.
"I think there's going to be much more focus on what the underlying earnings are, rather than what the actual reported numbers are," said Scotiabank insurance analyst Tom MacKinnon.
Earnings season will be kicked off by the smallest of the big four lifecos, Industrial Alliance Insurance and Financial Services (IAG.TO) on Wednesday, followed by Manulife, Great West Lifeco Inc (GWO.TO) and Sun Life on Thursday.
At first glance, the quarter should be a good one for the insurers, with a sharp rise in global stock markets and tightening credit spreads boosting earnings.
But advance warning by Manulife and Sun Life on their need to build reserves make the quarter tough to read.
"Corporate bond yields declined in the quarter, while credit-related losses likely trended above normal, and these two negatives were likely only partially offset by stronger equity markets," TD Newcrest analyst Doug Young wrote in a earnings preview.
The market turmoil that rocked global economies in the last year has made life hard for insurers, which make their money not so much by selling insurance as by investing the money from premiums in stock and bond markets worldwide.
Market volatility is forcing some of the big lifecos to update the assumptions they use to value their annuities and funds, which are often based on interest rates.
Insurers are huge investors in the fixed income market and make long-term assumptions of their liabilities based on where interest rates are. Because the recession has pushed short-term rates to historic lows, the insurers must reassess what the returns on their investments will be.
Sun Life said in August that third-quarter income will be reduced by C$450 million to C$550 million when it updates the actuarial assumptions used to value its variable annuities.
Still, the life insurers were well capitalized at the end of the second quarter and capital levels -- measured by the minimum continuing capital and surplus ratios (MCCSR) -- are expected to remain adequate in the third quarter.
That means dividends should be unchanged this time around, despite the surprise cut by Manulife in August.
"The outlook for dividends is a little better than in past quarter ... capital is in a far better position than a year ago," Fehr said.
Some analysts also believe the lifecos are a good investment compared with their banking peers, whose share prices have climbed since stock markets began rebounding in March and April.
"When you've got the insurers sitting here in the area of 9 times (price to earnings) and the banks at 12ish, they certainly are attractive versus their financial peers," MacKinnon said.
"But the insurers are supposed to be known for good stability in earnings and we haven't seen it, so the discount is warranted, to some extent. But therein lies the opportunities as well." (Reporting by Andrea Hopkins; editing by Peter Galloway)