* Sun Life op EPS C$1.22 vs est C$0.75
* Stronger markets add C$348 mln to bottom line
* Industrial Alliance Adj EPS C$0.71 vs est C$0.74
* Sun Life rises 1.9 pct, Industrial falls 5.6 pct
By Cameron French
TORONTO, May 10 (Reuters) - Strong markets pushed Sun Life Financial Inc profit up 56 percent in the first quarter, topping analysts' estimates and driving Sun Life shares higher, while smaller rival Industrial Alliance sold off after disappointing results.
Sun Life, Canada's No. 3 insurer, earned C$1.22 per share on a operating basis, well ahead of analysts' expectations of a profit of 75 Canadian cents.
Stripping out a C$348 million gain from higher stock markets and bond yields, core results were in line with expectations.
The results were welcome news for investors, after disappointing results last week from Manulife Financial and Great-West Lifeco prompted a selloff in the sector.
"The core numbers, which would remove market-related gains or losses, were pretty much in line, a little better than we had," said Peter Routledge, an analyst at National Bank of Canada.
The stock rose 1.9 percent to C$22.55, the strongest Canadian financial performer of the day.
Sun Life reported consecutive losses during the third and fourth quarters of 2011 as markets weakened, forcing it and its Canadian rivals to bulk up reserves to ensure expected returns from their stock and bond portfolios match policy obligations.
The S&P/TSX composite index rose 3.7 percent in the f irst q uarter, while U.S. 10-year treasuries, which are used as a benchmark by the industry, rose more than 30 basis points.
Total premiums and deposits rose to C$25.3 billion from C$20.0 billion.
On a net basis, Sun Life earned C$686 million, or C$1.15 a share, compared with a year-earlier profit of C$438 million, or 73 Canadian cents.
Volatile stock and bond markets have led to wild swings in Canadian life insurers' results over the past three years, while core results have been much less erratic.
"You've had the worst possible environment for live insurance companies over the last 18 months, where you've had both falling long term interest rates and equity markets," said Gavin Graham, president at Graham Investment Strategy.
"You want the scenario from hell? There you are."
Sun Life has moved to reduce its market exposure under new Chief Executive Dean Connor, who took over late last year.
Connor unveiled a plan in March that included a focus on Asian growth and wealth management, while pulling out of certain money-losing businesses in the United States.
He said the company was targeting C$2 billion in annual operating income by 2015.
Speaking after the company's annual meeting, Connor told reporters Sun Life was in the market for acquisitions and would be prepared to issue equity if a big deal that fit the company's growth plans became available.
"We have not had to raise equity capital throughout the financial crisis, so I'm comfortable we're in a place we need to be as we think about the acquisition side of our plan," he said.
The company's erratic performance in recent quarters has prompted worries that it could cuts its dividend, but Sun Life has steadfastly held its payout at 36 Canadian cents a share.
While Sun Life shares led the pack, Industrial Alliance's brought up the rear among Canadian financials, falling 5.6 percent after the insurer reported a 2.4 percent drop in earnings and a weaker ratio of income to debt.
Profits dropped to C$70.4 million, or 67 Canadian cents a share in the quarter to March 31, down from a profit of C$72.1 million, or 76 Canadian cents a share, in the year-before period.
Core profit was 71 Canadian cents a share, short of analysts' expectations of 74 Canadian cents a share.
The insurer's solvency ratio - a measure of debt to income - was 186 percent, lower than Routledge's estimate of 192 percent, and well below the 200 percent level some see as an acceptable floor given the uncertain capital environment.
Premiums and deposits fell 6 percent to C$ 1.86 billion, while higher claims, particularly for long-term disability benefits, resulted in a loss of C$11.1 million.
$1 = $1.0044 Canadian)