* Q2 EPS C$1.05 vs C$0.91, beats forecasts
* Q2 profit boosted by C$432 reserve release
* Says Q3 income will be reduced by C$450-C$550 mln
By Andrea Hopkins
TORONTO, Aug 6 (Reuters) - Canadian insurer Sun Life Financial Inc (SLF.TO) reported a larger-than-expected quarterly profit on Thursday as it released reserves built by the recent stock market surge.
Canada's No. 3 life insurer said it had net income of C$591 million, or C$1.05 a share, in the second quarter ended June 30, up from C$519 million, or 91 Canadian cents a share, in the same quarter a year earlier.
Analysts had expected earnings of 93 Canadian cents a share, according to Reuters Estimates.
"Equity markets showed substantial improvement in the second quarter, resulting in strong earnings gains," Chief Executive Donald Stewart said in a statement.
Profit was boosted by a reserve release of C$432 million as a result of rising equity markets, C$104 million from increased interest rates, and C$117 million from the favorable impact of narrowing credit spreads.
Some of the reserve release was mopped up by a C$217 million reserve increase for downgrades on Sun Life's investment portfolio, and a C$97 million reserve increase related to changes in asset default assumptions in anticipation of future credit-related losses, the company said.
It also took C$121 million in net credit impairments in the quarter.
Return on equity was 14.9 percent for the quarter, up from 12.9 percent in the same quarter last year.
Sun Life warned third-quarter income will be hit when it updates the equity and interest rate related assumptions used to value its variable annuity, segregated fund and certain fixed annuities.
It said the negative impact would be in the range of C$450 million to C$550 million after-tax, and said the change will reduce its regulatory capital ratios. ($1=$1.07 Canadian) (Reporting by Andrea Hopkins; editing by John Wallace)