The fourth quarter of 2008 was a sea of red ink for financial services companies, as 25 of 49 firms included in Investment Executive’s quarterly profit survey posted losses. Another 16 reported lower net income — many of them, substantially lower.

Only nine companies reported better results in the quarter than in the same quarter a year earlier: seven were banks or other deposit-taking institutions; the other two were TMX Group Inc. and Grey Horse Corp., the latter of which provides transfer agent, corporate trust and foreign-exchange services.

Combined, the 49 companies posted a loss of $419.9 million, vs net income of $6.2 billion a year earlier. These figures exclude three companies whose results are consolidated with those of their parents: Great-West Lifeco Inc. and IGM Financial Inc. , whose majority owner is Power Financial Corp.; and Northbridge Financial Corp. , whose majority owner is Fairfax Financial Holdings Ltd.

The four life insurers, which had to increase reserves for guaranteed products and/or take charges related to the plunging value of their equities portfolios, suffered the biggest losses. These losses will be reversed once markets recover — unless the recession is prolonged.

On the positive side, all of the life insurers except Sun Life Financial Inc. increased operating cash flow in the quarter, indicating that their core businesses continue to do well. None of the four decreased their dividends.

What’s irritating for the insurers and their shareholders is that crumbling equities portfolios have required the insurers to raise capital, which, when common shares are involved — as was the case for both Great-West and Manulife Financial Corp. — dilutes the value of existing shares. However, once markets recover, the insurers can and probably will buy back shares.

Prospects for the banks are somewhat less rosy. It is expected that increased regulation in the wake of the credit crisis will constrain banks’ ability to grow their earnings. Nevertheless, the Canadian banks remain very strong; none have cut their quarterly dividends. But all raised capital, which, with the exceptions of Bank of Nova Scotia and National Bank of Canada, included common share offerings.

The mutual fund and investment-management companies group generated combined net income of $288 million, with five of the 11 reporting losses. Recovery of the equities markets is key to their future earnings growth.

High claims, soft pricing and shrinking equities portfolios led to losses for all the property and casualty insurers except Fairfax. Only ING Canada managed a small underwriting profit; witness its 98.9% combined ratio (losses and operating expenses as a percentage of net earned premiums).

Although Fairfax’s profit was in positive territory, its fourth-quarter earnings were less than for the same period the previous year, when it made substantial sums from credit-default swaps, resulting in record earnings in 2008. Fairfax bumped its annual dividend to $5 a share from $2.75.

EGI Financial Holdings Inc. also increased its quarterly dividend to 7¢ a share from 6¢, while Kingsway Financial Services Inc. dropped its dividend to 2¢ from 7.5¢.

Only two firms in the distributors and suppliers group reported net income in the quarter and all three holding companies reported losses. That said, Power Financial has maintained its dividend.

CI Financial Corp. , which converted to a corporation from an income trust on Jan. 1, has set its dividend at 12¢ a share and added a 4¢-a-share extra dividend, payable on April 15 to shareholders of record on March 31. Because corporations pay taxes that income trusts don’t, dividends tend to be lower than distributions, and that is certainly the case at CI. Its monthly distributions in 2008 were the equivalent of a 47¢-a-share quarterly dividend.

GMP Capital Trust is in the process of reverting into a corporation and will hold a special unitholders’ meeting in May to vote on the conversion. It suspended its 5¢-a-unit monthly distribution in March and plans to set a 5¢ quarterly dividend following its conversion.

In this difficult economic climate, there will be acquisition opportunities. AGF Management Ltd., Canaccord Capital Inc. and ING have indicated an interest in making purchases, and there are no doubt others that will look seriously at anything that will enhance shareholder value. Industrial Alliance Insurance and Financial Services Inc. and Western Financial Group Inc. have both made recent acquisitions. Jovian Capital Corp. is acquiring 50% of Hahn Investment Stewards & Co. Inc. Scotiabank acquired Sun Life’s stake in CI during the quarter and picked up selected assets and employees from UBS Energy after the quarter ended.

@page_break@Here’s a look at the various sectors in more detail:

> Banks. The increases in net income in the quarter are deceptive because the comparative quarter in 2008 was particularly weak. Canadian Imperial Bank of Commerce, for example, the most exposed of the banks to the U.S. subprime mortgage mess, reported a $1.4-billion loss in the quarter ended Jan. 31, 2008, vs a gain of $147 million in the most recent quarter. And the group’s combined earnings of $3.4 billion in the recent quarter were less than the $3.8 billion and $4.4 billion earned in the previous two quarters.

All Big Six banks took charges related to lower equities prices; loan-loss provisions were also up sharply in the quarter, to a combined total of $2.4 billion from $1.1 billion a year ago.

CIBC and Scotiabank were the only two of the Big Six to increase net income year-over-year; Scotiabank, by just 0.8%. Performance was weakest at CIBC, Bank of Montreal and National Bank in the quarter ended Jan. 31, with respective net incomes of $147 million, $225 million and $69 million.

If you take the fiscal year ended Oct, 31, 2006, as a “normal” year, comparable average quarterly earnings were $662 million, $666 million and $218 million, respectively.

In contrast, Scotiabank’s $842 million in net income in the quarter is not much less than its 2006 average quarterly earnings of $895 million. Royal Bank of Canada’s net income of $1.1 billion is down by 10.9% from its 2006 average quarterly earnings of $1.2 billion. Toronto-Dominion Bank’s net income of $779 million is 33% less than its average quarterly earnings of $1.2 billion. Acquisitions have played a role in maintaining the earnings of all three, but their performances are still markedly better than BMO’s, CIBC’s and National Bank’s.

Laurentian Bank of Canada’s reported a 31.1% increase in net income, mainly the result of an unusually low quarter a year earlier during which it had an unfavourable tax adjustment.

Home Capital Group Inc. continues to post strong earnings increases. Cash Store Financial Service Inc. saw a 69.6% jump in net income as it continues to expand its network. And Firm Capital Mortgage Investment Trust had a 18.3% increase in earnings. Xceed Mortgage Corp. boasted a 120.1% increase in net income but that was the result of a one-time gain related to the restructuring of asset-backed commercial paper.

Canadian Western Bank and HSBC Bank Canada were down marginally; Equitable Group Inc. and First National Financial Income Fund were both down by more than 20%. Pacific & Western Credit Corp. posted a loss.

> Life Insurers. Great-West took a $1.4-billion impairment charge for the goodwill and intangible assets on its balance sheet related to the 2007 acquisition of Boston-based Putnam Investments LLC. Putnam continues to struggle with assets under management, at US$105.7 billion as of Dec. 31, 2008, vs US$178.5 billion a year earlier. Net redemptions were US$17.2 billion in 2008.

Great-West issued $1 billion in common shares in the quarter.

IA strengthened provisions for future policy benefits by $138.2 million in the quarter. This was not required, but IA wanted to guard against a further drop in stock markets. It also issued preferred shares. (For more on IA’s acquisitions, see page 16.)

Manulife took a $2.4-billion charge to cover shortfalls related to segregated fund guarantee liabilities. The insurer’s quarterly financial statements note: “Our core businesses continue to maintain or increase market share and generated record levels of life insurance sales and new business embedded value in 2008.”

Manulife’s U.S. asset-management business reported AUM of US$133.9 billion as of Dec. 31, down from US$178.1 billion a year earlier. The decline at the Canadian wealth-management business was less dramatic, with AUM at $82.3 billion vs $86.2 billion.

Manulife issued $2.3 billion in common shares in December.

Sun Life didn’t raise any capital in the quarter, as it sold its stake in CI to Scotiabank for $2.3 billion, resulting in a net gain of $696 million. AUM at Boston-based MFS, Sun Life’s U.S. wealth-management division, was US$134 billion vs US$200 billion a year earlier.

> Property And Casualty Insurers. None of the firms are doing well in their underwriting, but this should be temporary for most.

Kingsway, however, remains in trouble because of its U.S. subsidiary, Lincoln General Insurance Co. The company is in discussions with the Pennsylvania Insurance Department about Lincoln’s future and will report to shareholders at the annual meeting on April 23.

In February, ING became an independent Canadian company following a $2.2-billion private placement and secondary offering in which institutional and retail investors acquired Netherlands-based ING Groep’s ownership interest. Operating subsidiary ING Insurance Co. of Canada is being renamed Intact Insurance Co.

Also in February, Fairfax bought all the shares of Northbridge that it didn’t already own.

> Mutual Fund And Investment-Management Companies. AGF was the only big firm with a loss. It took a $46.3-million writedown in goodwill and customer contracts, but maintained its dividend.

CI’s AUM continues to be buoyed by seg funds sales.

IGM’s results were hurt by Great-West’s writedown of Putnam’s goodwill and intangible assets. Without that, its earnings would have been down by 40.2% instead of by 65.9%.

In addition to AGF, Guardian Capital Group Ltd., Mavrix Fund Management Inc., Seamark Asset Management Ltd. and Stone Investment Group Ltd. all reported losses. Mavrix has been struggling since its inception and AUM is down to $257 million. Seamark has also struggled since it lost the contract to manage the Clarington funds. Stone is a fairly new firm and has $622 million in AUM.

> Distributors And Suppliers. Grey Horse was the only company in this group with improved earnings, but its increase was only 1.6%. Accord Financial Corp. had a 77.6% drop in net income, and every other firm in the category was in the red.

Among the investment dealers, Oppenheimer Holdings Inc. has maintained its dividend, but Canaccord has suspended its. GMP is changing to a corporation and Northern Financial Corp. doesn’t pay a dividend.

GMP was the only one of the group to raise capital — $40 million through a private placement in December of preferred shares, $25 million of which Fairfax purchased.

> Exchanges. TMX Group saw a substantial rise in earnings of 61.1%, part of which was a result of its merging of TSX Group Inc. and Montreal Exchange Inc.

> Holding Companies. Desjardins Group was affected by dropping equities prices and its exposure to ABCP. Jovian’s loss is mitigated by strong growth at BetaPro Management Inc., in which it has a 60% stake. Power Financial’s loss reflects Great-West’s loss. IE