* Sun Life, Manulife report losses; Great-West profit
* Losses driven by changes to actuarial assumptions
* Shares of all three, plus Industrial Alliance, drop (Adds Manulife comments from interview)
TORONTO, Nov 5 (Reuters) - Two of Canada's big life insurers unveiled surprise losses on Thursday, while a third reported a smaller-than-expected profit as the fallout from volatile financial markets persisted.
Manulife Financial Corp (MFC.TO), North America's largest lifeco, and Sun Life Financial Inc (SLF.TO), Canada's No. 3 insurer, reported quarterly net losses on Thursday as they changed the assumptions used to value their assets and liabilities and took hits from credit downgrades.
Great West Lifeco (GWO.TO), the country's second-largest lifeco, said its profit edged higher in the three months ended Sept. 30, but the result came in slightly below expectations.
While the value of the Manulife's and Sun Life's huge stock market investments climbed in the third quarter, the boost was not enough to offset the big adjustments the companies make annually to value their assets and liabilities.
A drop in global interest rates and equity prices over the last year forced both companies to update the actuarial assumptions on their books, a change that reduced income by C$513 million at Sun Life and by C$783 million at Manulife.
Lower interest rates hurt returns on fixed-income investments, forcing the insurers to rebuild capital to cover promises made to customers who bought a guaranteed class of insurance products.
"This year, because of the volatility we've seen in financial markets, the assumption changes are quite large, and quite material -- clearly a show-stealer," Edward Jones analyst Craig Fehr said.
"We can't ignore the changes, because it is part of the core operations of an insurance company. At the same time, you can't expect this to occur every single quarter so you have to try to look through it determine what the core performance of these insurance companies was -- and I think it was OK."
Sun Life's net loss shrank to C$140 million ($132 million), or 25 Canadian cents a share, for the third quarter. That compares with a net loss of C$396 million, or 71 Canadian cents, a year earlier, when asset impairments, credit-related losses and a huge decline in equity markets took a toll.
Analysts on average had expected earnings of 19 Canadian cents a share, according to Thomson Reuters I/B/E/S.
Sun Life also offered a much-sought-after view of what it considers normalized income once the global economic crisis abates. It said it believes 2010 earnings could come in much as 33 percent lower than before the financial crunch.
Chief Executive Donald Stewart said the company had solid sales increases and stood to benefit in the years ahead from an aging population and an increase in private pension planning as government and employers step out of the business.
Even so, Stewart acknowledged the economic uncertainty and slow recovery in the United States, where Sun Life has a lot of business, may mean the worst is not yet over.
"It is clear that it is going to take some considerable time to get improvements in the fundamentals and there is more pain going to emerge in the United States as we go through this," Stewart said in an interview.
News at Manulife was little better. Canada's largest life insurer's net loss came in at C$172 million, or 12 Canadian cents a share, compared with earnings of C$510 million, or 33 Canadian cents, a year earlier.
Analysts on average had expected earnings of 27 Canadian cents a share, according to Thomson Reuters I/B/E/S.
The Toronto-based company said the third quarter's adjusted earnings from operations were C$803 million, based on a forward-looking estimate of normalized earnings the company released in August.
Chief Executive Donald Guloien said he thought the economy was improving, spurred by government spending worldwide.
"With the amount of stimulation that has taken place globally, we're seeing positive signs," Guloien said in an interview. "If the economy starts to improve and equity markets go up and interest rates go up, that will be incredibly positive for Manulife."
Rival Great West Lifeco capped off the reporting with the only profit of the day. Net income rose slightly to C$445 million, or 47.1 Canadian cents a share, in the quarter. That compares with C$436 million, or 48.7 Canadian cents a share, a year earlier.
Great West issued C$1 billion of common shares in the fourth quarter of 2008, which diluted earnings per share in the most recent quarter compared with the year before.
Analysts, on average, had expected earnings of 48 Canadian cents a share, according to Thomson Reuters I/B/E/S.
All three companies boasted high capital levels, which should put them in a strong position to make acquisitions as the global insurance industry consolidates.
"We think the environment will remain 'target rich' for perhaps the next year to two years as various divestitures get forced into the marketplace," Stewart said. "There are plenty of deals out there."
Shares of Sun Life ended the day down 6.5 percent, while Manulife shares were 3.6 percent lower, and Great West stock fell 1.4 percent.
Shares of No. 4 Industrial Alliance, which reported better-than-expected profit on Wednesday, dipped 0.7 percent in the selloff. ($1=$1.06 Canadian) (Reporting by Andrea Hopkins; Editing by Frank McGurty and Peter Galloway)