Profit survey: Good news in Q3 results

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The average increase in net income for the 39 firms was 13.8%, but this figure was pushed up by large increases at Manulife (net income of $946 million vs a loss of $319 million in Q3 2012) and Brookfield Asset Management Inc. (net income of US$1.5 billion vs US$875 million in Q3 2012). These figures were only somewhat offset by Fairfax Financial Holdings Ltd.‘s massive drop (a loss of US$569.1 million vs net income of US$35.7 million in Q3 2012).

Q3 2013 saw the impact of increases in long-term interest rates, which reduced the value of bond holdings held at fair market value and dragged down earnings. This particularly affected life insurance companies (lifecos), which hold a significant amount of bonds to offset their product liabilities. But higher interest rates will have a positive effect on the life insurers’ earnings in the longer term, as they are reflected in lower product liabilities. (Lifecos must calculate their liabilities assuming that interest rates remain at current levels.)

There were several major ac quisitions and disposals executed or announced in Q3 or shortly thereafter. These include:

– GWL acquired Ireland-based Irish Life Group Ltd. on July 18, which contributed $41 million to GWL’s net income in Q3.

– Industrial Alliance Insurance and Financial Services Inc. (IA) completed its acquisition of Jovian Capital Corp. on Oct. 1.

– Sun Life Financial Inc. sold its U.S. annuities business on Aug. 1.

– E-L Financial Corp. announced the sale of P&C insurer Dominion of Canada General Insurance Co. to U.S.-based Travelers Cos. Inc. in a deal that was expected to close by the end of 2013. E-L will continue to manage 80%-owned lifeco subsidiary, Empire Life Insurance Co.

– Matrix Asset Management Inc. sold the operating, institutional and high net-worth assets of subsidiary Seamark Asset Management Ltd. on July 12 to a newly formed firm indirectly owned by Robert McKim, formerly chief investment officer of Seamark before it became part of Matrix. Matrix will be delisted from the Toronto Stock Exchange.

Q3 also featured 2:1 stock splits by National Bank of Canada and Toronto-Dominion Bank (TD). Both banks also increased their quarterly dividends – to 92¢ from 87¢ and to 86¢ from 85¢, respectively. Other firms that increased their quarterly dividends include: Bank of Montreal (BMO), to 76¢ from 74¢; Canadian Western Bank, to 19¢ from 18¢; Equitable Group Inc., to 16¢ from 15¢; Brookfield, to 20¢ from 15¢; Gluskin Sheff + Associates Inc., to 20¢ from 17.5¢; and Guardian Capital Group Ltd., to 5.5¢ from 5¢.

Here’s a closer look at the various industries in the sector:

– banks. Among the 12 deposit-taking institutions, both BMO and National Bank had a decline in earnings. National Bank’s was due to the gain on restructured notes in Q3 2012.

The big development in the industry is TD becoming the issuer for Aeroplan Visa credit cards, replacing Canadian Imperial Bank of Commerce (CIBC) as of Jan. 1. CIBC will continue to serve the Aeroplan cardholders who also are its banking customers, about half of the cardholders. This will immediately increase TD’s earnings and decrease CIBC’s.

– life insurers. Operational results from the four (including GWL) publicly traded life insurance companies were generally good, producing increases at GWL and IA while Manulife saw a significant increase in net income vs a loss a year earlier. This was despite losses in the value of these companies’ bond holdings.

Only Sun Life had a decline in earnings. A major contributor to this decline was the $170 million in losses at the firm’s discontinued U.S. annuities business, although Sun Life also had lower operating earnings in both Canada and Asia.

– p&c insurers. A major thunderstorm in Toronto in early July produced underwriting losses at Co-operators General Insurance Co. and Intact Financial Corp. The storm didn’t affect EGI Financial Holdings Inc., which is primarily a non-standard auto insurer, Fairfax or Kingsway Financial Services Inc., the latter two of which operate primarily in the U.S.

Still, only Intact had positive net income – and it was down by 55.8% vs a year earlier because of losses on its bond holdings and its underwriting loss.

Both EGI and Fairfax had underwriting profits, as is evident in the declines in their combined ratios. But EGI had a loss on its discontinued U.S. operations, which it announced on Aug. 8 that it’s selling off. Fairfax had particularly large losses on its investments.

Kingsway continues to have large underwriting losses as it struggles to establish a viable business in the U.S.

– mutual fund and investment-management firms. Six of the nine companies (including IGM) had better earnings than a year earlier and AGF reported positive net income vs a loss in Q3 2012. Fiera Capital Corp. had lower earnings, not surprising as it’s in transition toward becoming a much larger firm. Only Matrix had a loss in Q3 2103.

AGF’s return to profitability is positive, but its assets under management (AUM) were down by 11.7% vs Q3 2102 and its mutual funds are still experiencing significant net redemptions. IGM also had net redemptions but smaller, at $317 million vs $458 million, and its AUM was up by 5.6%. Both firms are losing AUM in their subadvisory/institutional accounts, although the bleeding is greater at AGF.

In contrast, CI Financial Corp. had $900 million in net sales in Q3 and its AUM was up by 15.8%.

Besides Matrix and AGF, the only firm with lower AUM in Q3 2013 year-over-year is Sprott Inc. – not surprising, given Sprott’s specialty in gold investments, which are out of fashion. The company is “dissatisfied” with its investment performance, according to its quarterly report, and will manage portfolios on a “team basis and with enhanced risk management” in the future.

– distributors and suppliers. Canaccord Genuity Group Inc. had a 74% increase in earnings, GMP Capital Inc. had a loss vs profits a year earlier and Oppenheimer Holdings Inc.’s net income was up by 82%.

None of these brokerages are back to pre-global financial crisis earnings levels – and they expect financial market conditions to remain challenging in 2014.

– exchanges. Q3 2013 is the first quarter in which TMX Group Ltd. has provided year-earlier figures since the new version of the firm was formed on July 31, 2012. (These numbers weren’t fully comparable because the year-earlier figures were for only the two months ended Sept. 30, 2012.)

– holding companies. Dundee Corp. saw lower values for most of its investments and a much bigger loss at Dundee Securities Ltd. All of Desjardins Group’s divisions had higher operating net income but the parent firm’s bond holdings lost value. At Power, much lower earnings at a subsidiary, Paragesa Holdings SA, more than offset the gains at GWL and IGM.

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