Most financial services companies did well in the final quarter of calendar 2005, although some mutual fund companies, distributors and suppliers are struggling and insurer Fairfax Financial Holdings Ltd. reported a huge loss.

For the 47 companies surveyed in Investment Executive’s quarterly profit report, the average increase in net income from a year earlier was 8.7%. When Fairfax is excluded, the gain becomes 13.9%. (These numbers exclude Northbridge Financial Corp., Lindsey Morden Group Inc. and BluMont Capital Inc., whose results are consolidated with their parent companies. See footnotes for details.)

Here’s a closer look at the earning picture in the main financial services sectors:

n banks. Twelve of the 15 deposit-taking institutions had increases in net income in the quarter. Of the remaining three, Pacific & Western Credit Corp. had a decline in earnings; mortgage originator Cervus Financial Group, which is in start-up mode, remained in the red; and FMF Capital Group Ltd. spiralled downward.

FMF, a U.S. mortgage-origination business that became a Canadian income trust, is in deep trouble. It lost $14.5 million in the quarter, a figure that more than exceeds its $10 million in revenue. The company also had to write off $87.4 million in impaired intangible assets.

The Big Five banks continue to expand, both domestically and offshore. Bank of Nova Scotia is acquiring the mortgage business of Maple Financial Group Inc., including Maple Trust Co. The deal is expected to close shortly. Scotiabank is also aggressively opening branches, planning 20 new ones in Canada and 50 in Mexico in the fiscal year ending Oct. 31, 2006. It is also in the process of buying National Bank of Greece (Canada), which has 10 branches. In addition, it continues to build upon its South American presence with the acquisition of two Peruvian banks, which will be merged (see page 16).

TD Bank Financial Group’s acquisition strategy recently has centred on the U.S. The merger of TD Waterhouse’s U.S. discount operations with Ameritrade, resulting in TD Ameritrade — of which TD owns 32.5% — and the acquisition of Hudson United Bank by 51%-owned TD Banknorth were completed in the quarter. After the quarter’s end, TD purchased domestic auto insurer VFC Inc.

Royal Bank of Canada, meanwhile, has merged its institutional and investor services with those of Dexia Banque Internationale à Luxembourg to form RBC Dexia Investor Services, in which Royal has a 50% interest.

Some analysts think rising interest rates and increased competition in the alternative mortgage market could dampen Home Capital Group’s run of huge growth. It could moderate to around 20% a year from almost 30%. There are concerns that this could cause a decline in its trading multiple and, consequently, a drop in its stock price.

> Life insurance. The four life insurers all had solid gains, including Toronto-based Manulife Financial Corp. , whose integration of Boston-based John Hancock Financial Services Inc. has gone well.

Sun Life Financial Inc. ’s Boston-based money-management subsidiary, MFS Investment Management, continues to recover from the mutual fund scandals in which it was involved. MFS’s assets under management as of Dec. 31, 2005, were US$162 billion, up from US$146 billion a year earlier — but still well below the US$200 billion-plus AUM that it had in the early years of this century.

Industrial Alliance Insurance and Financial Services Inc. ’s strategy of increasing its market share in wealth management also appears to be going very well. AUM is up 76.9% as of Dec. 31 from a year earlier, thanks to its acquisition of mutual fund manager Clarington Corp. It also continues to add on the distribution side (see page 22). But at $13.8 billion in AUM, it is still a small player compared with the big banks and large independents such as IGM Financial Inc and CI Financial Inc.

> Property and casualty insurance. As a result of 2005’s hurricanes in the southern U.S., Toronto-based Fairfax reported a whopping US$318.1 million net loss in the fourth quarter, which is in addition to the US$220 million it lost in the third quarter. That brought its loss for the year to US$497.9 million, vs a loss of US$19.8 million in 2004, a year also affected by hurricanes but to a lesser extent. Retained earnings were halved to US$531.4 million as of Dec. 31 from US$1.1 billion the year before. Book value per share was down 27.7%.

@page_break@Northbridge, whose results are consolidated with parent Fairfax, was also affected by the U.S. hurricanes. One of its Canadian-based subsidiaries insures oil rigs in the Gulf of Mexico. Nevertheless, it still made an underwriting profit.

The other five P&C companies all had increased earnings, although Co-operators General Insurance Co. ’s gain was just 0.7%, to $39.1 million, due to lower underwriting profit. Optimum General Inc. ’s huge 355.6% increase to $1.7 million was from a low base, but it does reflects a respectable turnaround in underwriting results.

> Mutual fund companies and investment-management firms. Fund company Sceptre Investment Counsel Ltd. and investment-management firm Seamark Asset Management Ltd. of Halifax continue to struggle. Sceptre has seen its business shrink significantly, with AUM at $6.8 billion as of Dec. 31, less than a third of eight years earlier, while its net income of $3.7 million for the fiscal year ended Nov. 30, 2005, was less than a quarter of that eight years ago. The company’s continued decline is a result of poor investment performance, compounded by its association with Putnam Investments Inc. — one of the companies caught in the U.S. mutual fund scandals of 2003.

As for Seamark, it continues to face problems. After many years of strong investment performance, the company’s track record turned sour in 2004, resulting in problems retaining existing institutional assets and attracting new clients. The dismissal of its president last May and the announcement after quarter’s end that Clarington was moving $2.9 billion in assets away from Seamark have added to its woes.

But Seamark has a new president and CEO, Stuart Raftus (see page 22), who aims to rejuvenate the firm.

Another struggling company, Mavrix Fund Management Inc. , remains in the red, but it is still in building mode.

AGF Management Ltd. , which has been through tough times, reported net income of $12.4 million for the quarter ended Nov. 30 (the sale of Unisen was treated as an unusual item), an improvement over the same quarter a year ago.

CI is a major candidate as an acquisitor. Frustrated by its recent unsuccessful attempts to buy Britain-based Amvescap PLC and Clarington, it is likely to remain on the lookout for other purchases, regardless of whether it continues to be an independent or becomes a subsidiary of Sun Life, whose agreement to keep its interest in CI to a maximum of 34% ends in June. CI has also indicated it will become an income trust.

> Distributors and suppliers. This is a mixed bag. Only three companies — Canaccord Capital Inc. , insurance brokerage consolidator Hub International Ltd. and Fairfax’s claims service subsidiary, Lindsey Morden Group Inc. — had increases in net income.

Distributors Jovian Capital Corp., Oppenheimer Holdings Inc. and Western Financial Group and supplier Accord Financial Corp. , a provider of asset-based financial services, all had small earnings declines, while Anthony Clark International Insurance Brokers Ltd., Loring Ward International Ltd. and Northern Financial Corp. remained in losing territory.

The only disturbing result is that of Calgary-based Anthony Clark. It has been in the red since the fourth quarter of 2003, which has reduced shareholders’ equity to $787,000 from $6.4 million. It settled a long-standing lawsuit in December, which should lower expenses and give management more time to focus on operations and strategy. IE