Sun Life Financial Inc. (TSX:SLF) expects to lose $621 million in the latest quarter from volatile markets and other factors and could book another $500 million in losses in the current period if weak markets persist.

Canada’s third-biggest insurer said early Monday it will lose $621 million in the quarter ended Sept. 30 — about $572 million of that from operations alone.

The company cited “substantial declines” in equity markets, lower interest rates and the impact of an annual refinement of the company’s methods and assumptions for the red ink.

Sun Life also announced Monday that it plans to set up a reserve fund, starting with the fourth-quarter report, to cover estimated losses from its hedging activities.

The change in hedging accounting would reduce fourth-quarter profit by $500 million, if current market conditions are still in effect at the end of this year, the Toronto -based company said.

Sun Life noted that equity markets were exceptionally volatile during the three months ended in September, with North American markets dropping 12 to 14%.

“Results for the third quarter include losses related to substantial declines in both equity markets and interest rate levels, which particularly impacted the individual life and variable annuity businesses in SLF U.S.,” the company said in a release before markets opened.

The world’s financial markets were battered by worries in August and September that the European debt crisis would produce a full-blown recession in Europe that would spill over into North America, Asia and elsewhere.

Canada would be hurt by a global recession because our export-oriented economy is a major supplier of oil, minerals, coal and other raw materials to global customers.

At the same time as markets turned lower, a weak U.S. economy prompted a drop in long-term interest rates as the U.S. central bank tried to keep borrowing costs low to boost growth.

Besides the drop in stock prices, falling interest rates also affected Sun Life’s bond and other fixed-rate investments, particularly affecting individual life and variable annuity businesses in the United States.

“It’s a combination of the U.S. Treasury rates reaching historic lows combined with the size of our variable annuity book of business in the U.S.,” Sun Life spokesman Frank Switzer said in an interview.

Sun Life said $200 million of its third-quarter loss was related to an annual update of its actuarial methods and estimates — used to calculate the company’s obligations under various products sold — but didn’t specify how much of the hit would be from equities and how much from interest rates.

More detail will likely be provided when Sun Life makes its full third-quarter financial report on Nov. 2, Switzer said.

The company will also elaborate on a new reserve to cover future cost of hedging — a method of buffering the company from market swings by purchasing futures contracts or derivatives.

“If the amount of the reserve matches that quarter’s hedging costs, then there’s no impact. But if the reserve is not enough, there would be a bit of an impact,” Switzer said.

Under Sun Life’s current approach, those hedging costs are recorded in the quarter when they are incurred.

The volatile markets are also expected to hit most of Canada’s insurers hard since so much of their investments are in equities and bonds.

Sun Life shares were down 8.7% or $2.29, trading at $24.16 just before noon on the Toronto Stock Exchange.

Manulife Financial (TSX:MFC) was down 68 cents or 5.3% at $12.26, , Industrial Alliance (TSX:IAG) dropped 14 cents or less than one per cent to $32.12 and Great West Life (TSX:GWO) was down 53 cents or 2.4% at $21.52 at the Toronto Stock Exchange just before noon..

In the second quarter ended June 30, Sun Life earned a profit of $408 million, or 71 cents per share, That compared with earnings of $72 million, or 13 cents per share a year ago, when profits fell sharply as volatile stock markets and a big loss in its U.S. operations squeezed the company’s business.

Analysts polled by Thomson Reuters on average had predicted adjusted earnings per share of 54 cents.

In the most recent quarter, the company’s U.S. division reversed a year-earlier net loss, partially by making shifts in its product mix.

Sun Life employs about 16,000 people, including 7,000 in Canada, and has insurance, wealth management and mutual fund operations around the world.