* Industrial Alliance misses estimates, shares drop
* Sun Life losses match earlier warning
* Weak stocks, falling bond yields weigh
* Manulife Financial to report Thursday
By Cameron French
TORONTO, Nov 2 (Reuters) - Canadian life insurers' earnings season got off to a rocky start on Wednesday as the No. 3 and No. 4 insurers reported gloomy results due largely to weak financial markets during the quarter.
While Sun Life Financial (SLF.TO) had warned it would report a steep loss for the period, smaller rival Industrial Alliance (IAG.TO) surprised investors with a much smaller than expected profit, sending its shares down nearly 11 percent on the day.
"The equity market impact was certainly worse than we were forecasting," said CIBC World Markets analyst Robert Sedran.
Quebec City-based Industrial Alliance earned a net C$45.7 million, ($45 million), or 53 Canadian cents a share, in the third quarter.
That compared with a year-earlier profit of C$63.5 million, or 75 Canadian cents a share, and was short of analysts' expectations of a profit of 74 Canadian cents a share as compiled by Thomson Reuters I/B/E/S.
"The environment in the quarter was certainly one of the most difficult that we have experienced since 2008 and 2009, and resulted in one of our most disappointing quarters," Chief Executive Yvon Charest said on a conference call.
Weak equity markets - the Toronto Stock Exchange's benchmark S&P/TSX composite index .GSPTSE fell 12.6 percent during the quarter - stripped 19 Canadian cents a share from the company's bottom line, Industrial Alliance said.
Life insurers hold stocks and bonds to guarantee they'll be able to pay future investment and insurance policy obligations. When the value of their portfolios falls on a quarterly basis, they use profits to bulk up reserves.
But it was higher life insurance mortality rates and disability claims that surprised analysts.
Charest said the higher mortality rates were simply an aberration in a longer-term decreasing trend. He said the higher disability claims were disappointing, but not abnormal.
"Actions are currently being taken to improve this overall situation," he said.
Sun Life's loss of C$621 million, or C$1.07 a share, compared with a year-before profit of C$416 million, or 73 Canadian cents a share.
The company warned two weeks ago that it would take the loss, sending its shares down 9 percent at the time.
Sun Life said it increased its reserves by C$684 million during the quarter due to the market declines. It took additional charges of C$203 million to update actuarial assumptions, which it typically does in the third quarter.
While the loss itself had been forewarned, Barclays Capital analyst John Aiken said the company's disclosure about its sensitivities to bond yield moves was a concern.
"Quarter over quarter, their sensitivity to a 100 basis point decrease in interest rates actually doubled. That's pretty bad," he said.
As well, the insurer said its sensitivity to bonds should increase substantially in the fourth quarter due to a planned change in how it values variable annuity and segregated fund insurance contract liabilities.
Manulife Financial (MFC.TO), Canada's largest life insurer, will report on Thursday
$1=$1.01 Canadian Reporting by Cameron French; editing by Rob Wilson