* Results seen stronger than a year ago
* Stock markets rose during quarter, bond spreads narrowed
* Insurer stocks are stronger, but investors wary
* Debt crises in Europe and U.S. could hit markets
* Canadian insurers still rise and fall on markets
TORONTO, Nov 4 (Reuters) - Even if Canadian life insurers live up to expectations by posting strong third-quarter results this week, investors ought to think twice before piling into their shares given the uncertain outlook for financial markets.
With debt crises in Europe and the United States pressuring stocks and threatening another severe market downturn, analysts say one or more of the insurers could cut profit targets when they start reporting results on Wednesday.
The cautious tone comes even though the group has posted year-to-date stock gains that are mostly in the double digits.
The industry's No. 3 player, Sun Life Financial Inc, leads the insurers with a 34 percent gain, while the top dog, Manulife Financial Corp, which owns U.S. insurer John Hancock, is up 16 percent, though shares of both are still at less than half of their pre-crisis values.
But that was then and this is now, analysts say. Even with the market-beating gains this year, many think the stocks are a risky play.
"It's a real contrarian bet to stick your neck out to be long insurance companies," said Barry Schwartz, a portfolio manager at Baskin Financial, which sold its stake in Canadian life insurers earlier this year.
Indeed, according to Thomson Reuters I/B/E/S, the most common rating for each of the four main players in Canada's life insurance industry is "hold," even though analysts agree the stocks are extremely cheap by historical standards.
"We remain reasonably cautious and believe that additional volatility in their shares is likely before we see any sustained increase," Barclays Capital analyst John Aiken said in a note, referring to Manulife and Sun Life.
Aiken is more sanguine about No. 2 Great-West Lifeco Inc, which has less market exposure than its peers and has not suffered to the same degree. However, he has a "neutral" rating on the sector.
Indeed, the group's volatile results and stock performance since the 2008 market crash would suggest caution is warranted.
This is due largely to the impact financial markets have had on their earnings. Under Canadian accounting rules, the insurers must add to their reserves when markets fall to ensure their investments can meet future policy obligations.
While insurers have been busily hedging their exposure and repositioning their more market-sensitive business lines such as annuities, market movements still dictate to a large degree whether the group has a strong or weak quarter.
During quarters when stocks and bond yields fall sharply, like the third quarter of 2011 for instance, the earnings impact can be severe. Manulife Financial took a loss of C$1.3 billion ($1.30 billion) a year ago, while Sun Life lost C$621 million.
Schwartz said these factors, combined with the challenge of getting a handle on the insurers' labyrinthine business lines and international operations, drove Baskin to sell its stakes in the insurers earlier this year even though the insurers could be poised for huge profit gains if markets shoot higher.
"Rightly or wrongly we've decided that we can get that type of exposure by going long U.S. banking stocks," he said.
This quarter should be substantially better than a year ago, as the S&P/TSX composite index rose 6.2 percent during the quarter, while government bond yields crept higher from recent record lows.
However, spreads between government and corporate bond yields narrowed, and Manulife looks set to report another loss after warning it August it could take a charge of C$1 billion as part of an annual review of actuarial assumptions.
Manulife is expected to report a net loss of 31 Canadian cents a share for the July-September period, compared with a loss of 73 Canadian cents a year earlier. Sun Life is seen with a profit of 39 Canadian cents a share, versus a loss of C$1.07 a year ago.
Analysts see Great-West posting a profit of 50 Canadian cents a share, up slightly from 48 Canadian cents.
Industrial Alliance Insurance and Financial Services Inc , the No. 4 Canadian insurer, will be the first of the group to report, on Wednesday. Industrial Alliance's profit is expected to rise to 71 Canadian cents a share from 52 Canadian cents.
In addition to Manulife's expected charge, Sun Life could take a smaller hit - perhaps C$100 million - to revise its own actuarial assumptions, said National Bank of Canada analyst Peter Routledge.
But even a breakout quarter by the sector may be ignored by investors, who tend to take their cues from the financial markets, analysts say.
As well, this quarter could see one of more of the companies abandon profit targets they set a year or more ago when they held out hopes for a faster markets rebound.
Manulife signaled in August that it would revisit its 2015 profit goal of C$4 billion and some wonder if Sun Life may at some point have to alter its objective of C$2 billion on operating income, which it also expects in 2015.
Regardless of whether the insurers' results beat estimates, Routledge said he expects a somber tone to company commentary, reflecting the uncertain outlook.
"I suspect there won't be a lot of ra-ra," he said.