* Profits seen up in Q4 for major lifecos
* Rise in stocks, economy to boost earnings
* A gradual return to normal seen despite volatility
TORONTO, Feb 9 (Reuters) - After a volatile year, Canada's big life insurance companies are expected to report higher fourth-quarter profits this week, boosted by stock market gains and a brighter economic outlook.
The big insurers -- Manulife Financial Corp (MFC.TO), Great West Lifeco (GWO.TO), and Sun Life Financial (SLF.TO) -- are emerging from the financial crisis with an eye once again on growth, though analysts warn they will continue to tweak accounting details to reflect 2009's market volatility.
"We're certainly going to see better earnings than we did a year ago," said Edward Jones analyst Craig Fehr.
"We're seeing an investor base coming back into the market ... a consumer that feels a little bit better and is willing to spend again on things like insurance premiums," Fehr said.
The return of customers who want to buy insurance and wealth-management products is part of the good news for lifecos in the fourth quarter. While sales generate higher fee income, they also give insurers more money to invest -- and stock market gains are set to boost the bottom lines.
Equity markets continued to recover in the quarter, with a 5.5 percent increase in the S&P 500 and a 3.1 percent rise in Toronto's S&P/TSX composite index.
Those gains were not as large as they were in the third quarter, but the rise in the value of the lifecos' huge stock holdings compared with the fourth quarter of 2008 will ensure everyone records a profit after disappointing results in the second and third quarters of 2009.
Still, some analysts said the longer-term outlook remains murky, dependent on the overall state of the economic recovery and the appetite of consumers to buy wealth-management products.
"If the markets and the economy follow a double-dip profile, there is no assurance that equity market volatility will not return in the future," Desjardins Securities analyst Michael Goldberg wrote in his earnings preview.
The big three lifecos report earnings on Thursday, while No. 4 Industrial Alliance Insurance and Financial Services (IAG.TO) will report on Friday.
RETURN TO GROWTH
The insurers' huge investments in stock and credit markets plunged in 2008 and much of 2009. As well, their core earnings have been clouded by changes to the actuarial assumptions they use to value their long-term assets, making it difficult for investors to gauge the underlying strength of the businesses.
Manulife, North America's largest lifeco, and Sun Life, Canada's No. 3, both took big hits adjusting their assumptions in the third quarter, and smaller changes also could be in store in the fourth quarter. Analysts expect all of the companies to book year-end revisions.
"Management could be forced to build reserves yet again following year-end assumption reviews, which presents some downside risk to our estimates," National Bank Financial analyst Robert Sedran wrote. Nevertheless, Sedran, too, expects better results compared with both the third quarter and the year-before quarter.
Insurers are forced to build reserves when the falling value of investments threatens their ability to pay long-term obligations such as insurance settlements and annuities. The cash used to build the reserves comes directly out of earnings.
Gains on equity investments could allow the insurers to release some of reserves built in leaner times, boosting earnings, but the typically prudent companies will likely use the cash to shore up other reserves rather than release any to shareholders this time around.
Analysts expect the insurers to leave dividend levels where they are after a surprise cut by Manulife in the second quarter earned it the ire of shareholders.
The determination of all of the insurers to guard high levels of capital has largely been praised by analysts.
Overall, Edward Jones' Fehr said the return of economic growth in Canada, combined with the growth of the lifecos into underserved markets overseas, bodes well for long-term growth.
"For many many quarters now the core growth of these companies -- which is selling insurance policies and wealth products and services -- has been overshadowed by some of the accounting treatment and the impact that comes from the financial markets," he said.
"As we move forward we're going to see more of a focus on core growth, and the Canadian insurance companies shake out quite well," Fehr said. (Reporting by Andrea Hopkins; editing by Peter Galloway)