Desjardins Group reported a drop in surplus earnings for the third quarter, as a writedown on its asset-backed commercial paper (ABCP) holdings combined with weaker results at is general insurance unit.

The largest co-operative financial group in Canada announced a combined surplus earnings before member dividends of $149 million for the quarter ended Sept. 30, down $99 million or 39.9% from the corresponding quarter last year.

Return on equity was 6.2%, compared to 11.0% in 2007.

“These results reflect the sharp deterioration in capital markets during the third quarter, causing stock market gyrations and unprecedented volatility,” Desjardins Group said in a release.

The caisse network, the backbone of Desjardins Group, recorded growth in surplus earnings, which were up 10% on a year-over-year basis to $212 million for the third quarter of 2008, mainly due to a $38 million increase in income from securitization activities and firm cost control.

However, a $94 million writedown for ABCP holdings reduced surplus earnings before member dividends in the third quarter. Most of this writedown was recorded in the Personal and Commercial segment, which was also affected by an other-than-temporary decline in value of $78 million before income taxes of certain Caisse centrale Desjardins financial asset-backed securities as a result of the deterioration of capital markets, Desjardins Group said.

In addition, Desjardins Group’s third quarter profitability was adversely affected by the weaker results of the general insurance subsidiary, stemming from higher loss experience in home insurance because of poor weather conditions and lower investment income due to, among other things, the stock market decline.

Results at the group’s life & health and securities subsidiaries were also down from the third quarter of 2007 as the market downturn reduced investment income.

“This quarter’s results were achieved in the midst of a financial crisis that rocked capital markets around the world. This put pressure on activities with greater exposure to these markets, and our overall performance since the beginning of the year was therefore affected,” said Desjardins Group president and CEO Monique Leroux, in a release.

“Desjardins is still doing well, especially in terms of capitalization and loan portfolio quality. Our caisse network continues to expand, its main indicators remain solid, and costs are well controlled,” Leroux said.

As for income, net interest income rose to $890 million, up $63 million or 7.6% from the same quarter last year, chiefly due to higher business volume.

Net premiums grew by $166 million or 17.6% as a result of brisk growth in insurance premiums, particularly life and health insurance premiums, which advanced $62 million or 10.3%, together with a $113 million or 315% jump in annuity premiums.

Other income was severely affected by the drop in the insurance subsidiaries’ investment income, with an equivalent amount also affecting expenses related to claims, benefits, annuities and changes in the life and health insurance subsidiary’s insurance provisions, by the ABCP portfolio write-down and the other-than-temporary decline in value of certain Caisse centrale Desjardins financial asset-backed securities.

Also affected by deteriorating market conditions, income from brokerage, investment fund and trust services fell by $30 million or 17.9%.

Overall, Desjardins Group’s total income rose to $1,997 million for the third quarter of 2008, down $377 million or 15.9% on a year-over-year basis.

Provisions for credit losses charged to income in the third quarter amounted to $65 million, up $18 million or 38.3% from the same period in 2007.

Expenses related to claims, benefits, annuities and changes in insurance provisions totalled $579 million in the third quarter, down $196 million or 25.3% from last year. A large part of this decrease was due to an equivalent drop in the life and health insurance subsidiary’s investment income, as previously mentioned.

IE