* Q4 EPS C$1.00 vs EST C$1.08
* Profit driven by rise in stock markets and bond yields
* Shares fall 5 pct as earnings miss
* Great-West Lifeco beats earnings estimate (Adds analyst, CEO comment)
By Cameron French
TORONTO, Feb 10 (Reuters) - Manulife Financial Corp's (MFC.TO) fourth-quarter profit more than doubled from a year earlier and rebounded from a steep third-quarter loss, lifted by strong stock markets and bond yields.
However, the insurer's shares dove more than 5 percent after the results were reported on Thursday, giving back some of their recent torrid gains as the profit fell short of analyst estimates.
Manulife, North America's largest life insurer, earned a record C$1.8 billion ($1.8 billion), or C$1.00 a share, in the three months ended Dec. 31, topping its year-before profit of C$868 million, or 51 Canadian cents a share.
The results marked a sharp rebound from combined losses of C$3.3 billion in the second and third quarters, as strong stock markets and rising bond prices in the fourth quarter increased the projected returns from the insurer's massive equity and bond portfolios.
However, the per-share profit of C$1.00, missed analyst estimates of C$1.08, triggering a selloff among shares that have risen 32 percent since the end of November.
"There was a significant run-up in anticipation of these earnings," said Craig Fehr, an analyst at Edward Jones in St. Louis, Missouri.
Excluding the markets impact, as well as other items, adjusted profit was C$692 million, missing the company's own forecast range of C$700 million to C$800 million.
For the full year, the insurer lost C$391 million.
The result came as Manulife rival Great-West Lifeco (GWO.TO), Canada's No. 2 insurer, said its fourth-quarter profit rose 14.7 percent on stronger sales of insurance policies and mutual funds.
The Winnipeg-based company earned C$508 million, or 54 Canadian cents a share, up from C$443 million, or 47 Canadian cents a share, and topping analysts' forecasts for 51 Canadian cents a share.
Toronto-based Manulife has embarked on a hedging program to reduce its sensitivity to markets, shorting C$5 billion of equity futures in the fourth quarter.
The company said about 50 percent of its underlying earnings sensitivity to stock markets was offset by hedges as of Dec. 31, up from about 24 percent at the end of September, and ahead of the pace to achieve the company's goal of hedging about 60 percent of its exposure by the end of 2012.
However, the reduced exposure to markets means Manulife's profit will not benefit from the expected markets recovery to the same degree that it suffered from the 2008-09 decline.
"Investors that desire a more stable earnings base from Manulife should continue to receive it, but with smaller incremental earnings growth when the markets move in its favor," Barclays Capital John Aiken said in a note.
However, the company's more conservative approach has boosted its capital levels, which have been under scrutiny in the wake of the financial crisis.
Manulife's minimum continuing capital and surplus requirements, a key measure of balance sheet strength, was 249 percent at the end of the quarter, up from 234 percent on Sept. 30, and at what Aiken called "fortress levels".
The company said it was on track to achieve its 2015 net income objective of C$4 billion, outlined in November.
In an interview, Chief Executive Don Guloien said the prospects of hitting that target have improved due to the recent strength in markets.
"It looks a lot more positive today than it did three or four months ago," he said.
However, regarding a possible hike to the dividend, which Manulife halved in 2008, Guloien said he needed to see more growth and sustainability of earnings, as well as clarity around possible regulatory changes involving capital rules for insurers.
$1=$1.00 Canadian Reporting by Cameron French; editing by Rob Wilson