There are signs that things are starting to turn around for Canadian financial services companies. Perhaps none reveal this upswing as much as the industry’s total net income of $8.9 billion in the second quarter, up from $1.4 billion in the previous quarter and $7.5 billion for Q2 a year earlier.

Eighteen of 51 companies in the survey saw earnings increases over Q2 2008. In addition, Anthony Clark International Insurance Brokers Ltd. posted a profit, vs a loss in Q2 a year earlier; and Desjardins Group reported no change in net income. In Q1 2009, only eight companies had higher net income than they did a year earlier. That said, we’re not out of the woods yet, as 21 companies had declines in net income and 10 were in a loss position in Q2.

(The 51 companies exclude three firms in the table whose results are consolidated with others surveyed. These are Great-West Lifeco Inc. and IGM Financial Inc., which are majority owned by Power Financial Corp.; and DundeeWealth Inc. , majority-owned by Dundee Corp. )

The banking, life insurance, and property and casualty insurance sectors all had higher earnings as a group, but mutual fund and investment companies, distributors and suppliers, and holding companies collectively had lower net income. Life and P&C insurer E-L Financial Corp. s earnings were up, but stock exchange TMX Group Inc.’ s were down.

Four of the mutual fund and investment companies and two of the distributors and suppliers were in the red. The other four firms with losses were Pacific & Western Credit Corp., Xceed Mortgage Corp., Kingsway Financial Services Inc. and Jovian Capital Corp. Pacific & Western and Jovian are struggling to establish their businesses, whereas Kingsway has been in trouble for a couple of years due to problems that emerged as a result of an acquisition in the U.S.

As is typical in a recovery, both the dollar amounts and the percentage increases for earnings are very large for some companies, as they move back toward historical levels from very low levels or losses. This was the case for Canadian Imperial Bank of Commerce, Manulife Financial Corp., E-L, Dundee, DundeeWealth and Oppenheimer Holdings Inc. in Q2.

This earnings rebound can also distort the overall picture. For example, excluding Manulife, the three other companies among the life insurers reported an average decline of 8.8%. And if you exclude CIBC from the banks, that reduces the average gain for the other 15 companies to 6.5%.

The other company with a very big gain is Fairfax Financial Holdings Ltd. This doesn’t indicate recovery in its operating business; rather, it shows a good quarter from an investment point of view. Fairfax’s expertise lies in investing its assets, including derivatives. It had made a killing in the past couple of years through the purchase of credit swaps before the global credit crisis hit. In Q2 2009, it had net gains on investments of US$330 million vs a loss of US$47.4 million for Q2 2008.

Flush with cash, Fairfax is buying the shares of U.S.-based reinsurer Odyssey Re Holdings Corp. it didn’t already own. In January, Fairfax bought a Polish reinsurer, and the shares of Northbridge Financial Corp. (previously in our survey) that it didn’t already own. In July, Fairfax bought the shares of Britain-based Advent Capital (Holdings) PLC that it didn’t already own.

Another firm in acquisition mode in Q2 was GrowthWorks Ltd., which bought out Mavrix Fund Management Inc. on June 30. Mavrix hadn’t reached profitability when the bear market hit and has lost more than half its assets under management in the past two years.

Most of the companies in the survey maintained their dividends, but Manulife cut its in half and Kingsway eliminated its dividend of 2¢ a share in Q1. Manulife had explained that retaining most of its earnings is the most effective way to strengthen the company and allow it to seek opportunities to grow.

Meanwhile, Home Capital Group Inc. has increased its quarterly dividend to 15¢ from 14¢, DundeeWealth has increased its dividend to 3.5¢ from 2¢, and Cash Store Financial Services Inc. has declared a special cash dividend of 7.5¢ a share.

Here’s a closer look:

> Banks. The deposit-taking institutions had an average increase in net income of 15.2% from a year earlier despite the doubling of loan-loss provisions for the group to $3 billion from $1.5 billion. Only Bank of Montreal, Laurentian Bank of Canada and Pacific & Western had lower loan-loss provisions than in the prior year, although Equitable Group Inc., Home Capital Group Inc., HSBC Bank Canada, Royal Bank of Canada and Toronto-Dominion Bank all managed to lower their loan-loss provisions from the previous quarter.

@page_break@Notably, eight of the 16 companies had higher earnings vs the same quarter two years prior, prior to the onslaught of the global credit crisis. These were Canadian Western Bank, Equitable, Firm Capital Mortgage Investment Trust, First National Financial Income Fund, Home Capital, Laurentian, National Bank of Canada and Royal Bank.

Most of the Big Six banks reported strong results in Canadian personal and commercial banking, as well as in wholesale banking. Wealth-management continues to struggle in the face of investor reluctance to buy equities while capital markets, although improving, are still seeing historically low levels of activity.

> Life Insurers. Manulife and Sun Life Financial Inc. both had earnings gains vs Q2 2008.

Manulife’s earnings were 62% higher than in Q2 2007, while Sun Life’s earnings were virtually identical to Q2 2007. Conversely, Great-West’s earnings were still 23% lower than those of Q2 2007, while Industrial Alliance Insurance & Financial Services Inc.’ s earnings were 46% lower.

Nevertheless, all the life insurers are finding the economic environment challenging; this is not surprising, given their exposure to equities markets through their segregated fund products. All but IA have large U.S. wealth-management businesses and, in each case, AUM is well down from Q2 2008, although up somewhat from Q1 2009.

> Property And Casualty Insurers. This group had an average gain in earnings of 75.5%, but only EGI Financial Holdings Inc. and Fairfax had increases. Co-operators General Insurance Co. and Intact Financial Corp. (the new name for ING Canada Inc.) both had substantial declines, while Kingsway continues to post losses.

This sector continues to experience soft markets, in which the companies keep their premium rates low to chase volumes. Combined with increased claims costs, this is making it difficult to make money. EGI, Fairfax and Intact did, however, make underwriting profits as indicated by combined ratios (operating expenses and losses as a percentage of net earned premiums) of less than 100.

On the positive side, Intact reports that there are signs of firming in the commercial market in Ontario, and it expects this will happen in other provinces as well.

> Mutual Fund And Investment Companies. Only Brookfield Asset Management Inc. and DundeeWealth had earnings’ gains among this group.

Brookfield’s specialty is long-term infrastructure projects in which it invests directly. As a result, it has been less affected by the global downturn than its peers.

DundeeWealth was up only because of a gain related to the asset-backed commercial paper it holds; without this item, its net income was down by 15.9%.

DundeeWealth had the smallest decline in AUM in the group, at 5.2%. But it’s important to note that its assets under administration, at $23.3 billion, were down by a much larger 26.5%.

IGM’s AUM was not down much more, at 8.4%; this was considerably better than CI Financial Corp.’ s 14% decline in AUM and significantly better than AGF Management Ltd.’ s 27.7% drop. Both AGF and IGM were still in net redemptions through August, while CI has had net sales — thanks to its large seg fund business, for which redemptions tend to be low because investors want to keep their guarantees.

> Distributors And Suppliers. Besides Anthony Clark, only Coventree Inc., which is winding up its business, and Oppenheimer saw improvements in their results. Five of the other seven companies in the sector had declines, and two were in a loss position. IE