* Loss of C$621 million follows profit warning
* Reserve boosted by C$684 million due to markets (Adds details)
TORONTO, Nov 2 (Reuters) - Sun Life Financial (SLF.TO) fell to a steep loss in the third quarter due to falling bond yields and stock prices, Canada's No. 3 insurer said on Wednesday.
The company lost C$621 million ($615 million), or C$1.07 a share, in the quarter ended Sept. 30. That compared with a year-before profit of C$416 million, or 73 Canadian cents a share.
On an operating basis, the insurer lost C$572 million, or 99 Canadian cents a share.
Sun Life warned two weeks ago that it would take the loss - which caught analysts and investors alike by surprise, as forecasts had called for a modest profit.
The stock dropped 9 percent after the warning.
"Our financial results reflect the severe volatility experienced during the third quarter," Chief Executive Don Stewart said in a statement.
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.
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.
The Toronto Stock Exchange's benchmark S&P/TSX composite index .GSPTSE fell 12.6 percent in the third quarter, while bond yields retreated due to economic uncertainty in Europe and the U.S. Federal Reserve's purchases of long-term bonds..
The Toronto-based insurer has extensive operations in Canada, the United States and Asia. As a seller of both insurance and wealth management products, it competes with Manulife Financial (MFC.TO) and Great-West Lifeco (GWO.TO).
Revenue was C$7.5 billion, down from C$7.7 billion in the same period a year ago.
Return on equity was negative 17.4 percent, compared with 12 percent in the third quarter of 2010.
Sun Life also said it expects to take a one-time net income hit of about C$500 million in the fourth quarter, due to changes in how it expenses hedging costs for its variable annuities and segregated funds businesses.
During the quarter, Sun Life said it would buy out the minority stake in its McLean Budden investment management unit for about C$144 million to boost its mutual fund business.
$1=$1.01 Canadian Reporting by Cameron French; editing by Rob Wilson