UPDATE 1-Weak markets hurt Sun Life Financial 2nd quarter profit
* EPS C$0.09 vs I/B/E/S view of C$0.18
* Weak stocks, falling bond yields hit results
* Could take charges through 2015 if rates stay low
TORONTO, Aug 8 (Reuters) - Sun Life Financial Inc said on Wednesday its profit fell 87.5 percent in the second quarter, hurt by weak stock markets and sinking bond yields, and the company warned profits could suffer in coming quarters if markets do not recover.
Sun Life, Canada's No. 3 insurer, earned C$51 million ($51.26 million), or 9 Canadian cents a share, compared with a year-before profit of C$408 million, or 68 Canadian cents a share.
The result fell short of analysts' estimates of a profit of 18 Canadian cents per share, according to Thomson Reuters I/B/E/S.
However, with Canadian life insurance earnings difficult to forecast due in part to the unpredictable impact of market movements, the result was unlikely to spook shareholders, suggested National Bank Financial analyst Peter Routledge.
"It's pretty much an in-line quarter," he said.
Retreating stock markets and falling interest rates during the quarter stripped C$320 million from Sun Life's profit, the company said.
Under Canadian accounting rules, insurers must use profits to bulk up reserves to ensure expected returns from their stock and bond portfolios match policy obligations. Weak markets also hurt Sun Life's U.S. annuities business, which sells long-dated investment products with a fixed return.
Market movements have led to volatile earnings from the Canadian insurers over the past three years, pulling profits sharply lower during quarters when markets fall and leading to outsized profit gains when they rebound.
Sun Life has moved to reduce its market exposure under Chief Executive Dean Connor, who took over late last year.
But the company said that, if current rates persist, it could take charges of C$50 million in each of the third and fourth quarters, and further charges totaling C$500 million in the 2013 to 2015 period.
Sun Life has a target of C$2 billion in annual operating income by 2015 and did not say whether the charges would affect that goal.
The company's erratic performance in recent quarters has prompted worries it could cut its dividend, but Sun Life held its payout at 36 Canadian cents per share in the quarter.
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