Nov. 5 (Bloomberg) -- Manulife Financial Corp. and Sun Life Financial Inc., two of Canada’s three biggest insurers, posted third-quarter losses after they increased reserves to protect against equity-market declines. The shares had their biggest drop in three months after earnings missed analysts’ estimates.

Manulife, North America’s largest insurer by market value, said the loss was C$172 million ($161.9 million), or 12 cents a share, compared with a profit of C$510 million, or 33 cents, a year earlier. Sun Life’s loss narrowed to C$140 million, or 25 cents a share. Great-West Lifeco Inc., the second-largest insurer in Canada, said profit climbed 2.1 percent to C$445 million, or 47 cents a share.

The insurers set aside more money to cover potential stock declines, and recorded charges to reflect falling interest rates. Manulife, owner of Boston-based John Hancock Financial Services, reported non-cash charges of C$1.2 billion this quarter, while Sun Life said earnings were eroded by a C$513 million charge to reflect updated assumptions on stock prices and interest rates.

After “a year that was so bad, you inevitably get a more pessimistic outlook for assumptions, and that means an increase in reserves,” Sun Life Chief Executive Officer Donald Stewart said today in a telephone interview.

Manulife fell 91 cents, or 4.4 percent, to C$29.68 at 12:57 p.m. in trading on the Toronto Stock Exchange. Great-West, based in Winnipeg, Manitoba, fell 41 cents, or 1.7 percent, to C$23.70. Sun Life dropped $1.87, or 6.2 percent, to C$28.24.

Dividend Cut

Manulife CEO Donald Guloien, who took over in May, cut the company’s dividend in half last quarter and has said he wants to build up enough capital to “withstand the most odious circumstances.”

“Given the new CEO, with cutting a dividend, you kind of know what his mindset is,” said Bruce Campbell, president of Campbell & Lee Investment Management Inc. in Oakville, Ontario.

Before one-time items, Toronto-based Manulife earned C$803 million, within the company’s forecast of C$750 million to C$850 million. Manulife was expected to earn 29 cents a share before one-time items, the median estimate of 13 analysts surveyed by Bloomberg News.

Sun Life’s loss also lagged behind the 2-cent-a-share median loss-estimate of nine analysts surveyed by Bloomberg News.

U.S. Operations

Manulife reported a C$1.2 billion gain as the U.S. benchmark S&P 500 Index increased 15 percent in the quarter. About 60 percent of Manulife’s revenue came from U.S. operations last year.

Manulife’s U.S. insurance arm had a loss of C$601 million, compared with year-earlier profit of C$311 million because of investment-related losses. U.S. asset management, which includes John Hancock results, had profit of C$593 million, compared with a year-earlier loss of C$27 million.

Profit from Canada was unchanged at C$113 million, while profit from the company’s so-called Asia and Japan division almost doubled to C$417 million because of stock markets.

At Toronto-based Sun Life, profit from Canada surged 39 percent to C$219 million, as gains on the benchmark Standard & Poor’s 500 and S&P/TSX Composite indexes lifted asset-management fees.

“The equity market rebounds have obviously had a major effect on them,” said Gavin Graham, director of investments at Bank of Montreal Asset Management in Toronto, which oversees about C$45 billion. “Sun Life is the most exposed to equity markets of the big three” insurers, he said.

Canadian Dollar

Sun Life’s U.S. insurance unit had a loss of C$413 million, narrowing from a year-earlier loss of C$533 million. The rising Canadian dollar lowered U.S.-denominated earnings by C$22 million.

The dollar also lowered profit at Sun Life’s MFS Investment Management arm, as earnings fell 12 percent to C$43 million. Sun Life had profit of C$13 million from Asia, compared with a year- earlier loss of C$8 million.

“The vast majority of the shortfall was in the company’s U.S. operations,” Morgan Stanley analyst Nigel Dally wrote in a note to investors today.

Sun Life’s profit forecast of C$1.4 billion to C$1.7 billion for 2010 reflects continued “macroeconomic challenges and market volatility,” the company said in a statement. Sun Life had average operating earnings of C$2.1 billion between 2005 and 2007.

Acquisitions

Sun Life is looking for acquisitions in all of the countries it operates in, Stewart said. He declined to name specific targets.

“There’s still a fair gap still between what sellers would like to get, and what buyers are prepared to pay,” Stewart said.

Great-West, the owner of Boston-based Putnam Investments, said U.S. earnings climbed 58 percent to C$68 million. Canadian profit fell 16 percent to C$212 million, while European earnings rose 19 percent to C$167 million.

(Manulife will hold a conference call at 2 p.m. Toronto time. To listen, dial +1-416-340-2216 or 1+866-898-9626 at least 10 minutes before the start time.)

(Great-West will hold a conference call at 3:30 p.m. to discuss results. To listen, dial +1-416-340-2220.)

To contact the reporter on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net.

Last Updated: November 5, 2009 13:12 EST