Banks, life insurers make gains

For most of the P&C insurers, the decline in net income reflects unusually high profits the year before — and they are still enjoying higher than normal earnings. However, both Co-operators General Insurance Co. and Kingsway Financial Services Inc. have problems requiring action.

The weak results at DundeeWealth Inc., Mavrix Fund Management Inc. and Stone Investment Group Ltd. reflect investment in future growth. Guardian Capital Group Ltd. was affected by the changes in the taxation of income trusts, an area in which it specializes. Integrated Asset Management Corp. didn’t earn any performance fees this quarter and Seamark Asset Management Ltd. is still suffering from the loss of the Clarington mutual funds’ mandates.

Distributors and suppliers are a mixed bag. Investment dealers Canaccord Capital Inc. and GMP Capital Trust are coming off record quarters a year earlier. On the other hand, Accord Financial Corp. and Coventree Inc. are experiencing sluggish demand, while Loyalist Insurance Group Ltd. had substantial costs related to a lawsuit filed by a former shareholder of a subsidiary sold in 2004.

The average earnings gain for the 48 companies with comparable year-ago figures — and whose results are not consolidated with those of other companies in the survey (see footnotes 5, 7 and 9) — was 10.7%. Those excluded are Stone, which is newly public; Great-West Lifeco Inc. and IGM Financial Inc., which are owned by Power Financial Corp.; Northbridge Financial Corp. and Cunningham Lindsey Group Inc., owned by Fairfax Financial Holdings Ltd. ; and DundeeWealth, owned by Dundee Corp.

Consolidation continues. AGF Management Ltd. bought 80% of private-client firm Highstreet Partners Ltd. and CI Financial Income Fund completed its takeover of Rockwater Capital Corp. in the quarter. IAM finally acquired all the shares of subsidiary BluMont Capital Inc. it didn’t already own and has taken BluMont private. Sceptre Investment Counsel Ltd. purchased the private-client business of Legg Mason Canada in December. Great-West is buying Boston-based Putnam Investments Trust.

On the other side of the transaction ledger, Hub International Ltd. is being taken over by Maple Tree Acquisition Corp.

There was also a bankruptcy; FMF Capital Group Ltd. , a subprime mortgage lender active in the U.S., was badly hit by the deteriorating U.S. housing market.

Here’s a look at the sectors:

> Banks. The big news was Bank of Montreal‘s commodity trading losses. Earnings for the first quarter ended Jan. 31 were revised downward in late May to $436 million from the $673 million initially reported. That excludes $88 million in related after-tax restructuring charges. This quarter (its second), another $90 million in losses were taken, but BMO’s other divisions did so well in the quarter that net income was still up 3.1% from the same period a year earlier.

BMO has since reduced the risk in its commodities portfolio by about a third and has put in place a new management team.

Of the remaining financial institutions, only three had declines in net income: Laurentian Bank of Canada, Pacific & Western Credit Corp. and RentCash Inc.

The relative drop at Montreal-based Laurentian is the result of favourable tax adjustments a year ago, which inflated results for that quarter. Nevertheless, the bank continues to struggle. This is illustrated by the fact that Edmonton-based Canadian Western Bank and Toronto-based Home Capital Group Inc. , with considerably less in assets and revenue, are posting similar earnings. Efficiency is an issue. Laurentian’s efficiency ratio (non-interest expenses as a percentage of revenue) was 74.8%, vs 53.4%-63.7% for the big banks, 45.1% for Canadian Western and 26.7% for Home Capital.

At Pacific & Western, the compression of margins and its decision not to chase yield into riskier markets is to blame for a 65.5% drop in net income.

Earnings at Edmonton-based RentCash, whose main business is payroll advances, were pulled down by its money-losing rental division, which makes loans to buy furniture, appliances, electronics and computers. The company plans to spin off that part of its business to shareholders.

@page_break@Royal Bank of Canada is continuing its expansion into the U.S., suggesting that it is having some success. Exactly how much isn’t clear, however, because the bank doesn’t break out its U.S. results in its quarterly reports.

TD Bank Financial Group’s U.S. personal and commercial banking unit, TD BankNorth, continues to struggle in a very competitive environment in the U.S. northeast. Net income in this division was up a little from a year ago but down somewhat from the intervening three quarters. TD put in new management at the unit last year.

Bank of Nova Scotia, CIBC and National Bank of Canada had good results across most business lines.

> Life Insurers. Great-West has been adding acquisitions and assets. Its acquisition of Putnam will add US$192 billion to assets under management as of Dec. 31, 2006. And its U.S. subsidiary has an agreement to buy 80% of Benefit Management Corp., adding almost 90,000 more medical members to its health-care division.

At Manulife Financial Corp. , the realignment in assets required by a change in accounting rules (see page 4) reduced net income by $69 million. In addition, earnings for its U.S. insurance, Canadian operations and reinsurance were down, while U.S. wealth management and Asia/Japan operations were up.

Sun Life Financial Inc. ‘s U.S. operations also had a decline in net income, but earnings at its Canadian and Asian operations, as well as at Boston-based MFS Investment Management, were up. Sun Life’s efforts to sell MFS have been unsuccessful.

> P&C. Only EGI Financial Hold-ings Inc. and Optimum General Inc. increased earnings in the category, but both were down compared with each of their three previous quarters. This reflects the increased competitiveness in the North American P&C market.

EGI, ING Canada Inc. , Fairfax and its subsidiary Northbridge continue to post good underwriting results, as indicated by their combined ratios (operating expenses and losses as a percentage of net earned premiums) in the 93.5%-96% range.

Among the other three, Optimum General’s combined ratio is slightly more than 100, down from a year earlier, but both Co-operators’ and Kingsway’s have shot up.

Co-operators earnings are at their lowest level since the first quarter of 2003 as a result of increased expenses, including rising claim costs. The company is taking steps to modify underwriting and risk selection procedures and implement “appropriate” rate increases.

Kingsway’s problem is confined to U.S. subsidiary Lincoln General. Kingsway has significantly increased its estimate of unpaid claims for Lincoln in each of the past three quarters. Kingsway thinks this and other steps position Lincoln to “improve its results going forward.”

> Mutual Fund And Investment- Management Companies. Results for AGF, CI and Sceptre were boosted by acquisitions. Highstreet, in which AGF has taken a 80% interest, adds $4.8 billion to AGF’s AUM; CI’s purchase of Rockwater in April adds $3.7 billion to CI’s AUM and $9.8 billion to $84.4 billion in assets under administration; Legg Mason added $600 million to Sceptre’s AUM.

AGF has a buyer for Investmaster Group Ltd., its British subsidiary that supplies software and services to Britain’s private wealth-management market.

Of the big mutual fund companies, only DundeeWealth had lower net sales in the quarter, at $775 million vs $819 million. But the main reason for its big 41% drop in net income is the expenses related to the start-up of both Dundee Bank of Canada and the formation of a New York-based structured credit asset management group under DFG Investment Advisers Inc.

> Distributors And Suppliers. Cunningham Lindsey reported a profit vs a loss the year earlier due to increased efficiency and lower costs in Canada and higher claims volumes in Britain.

Canaccord and GMP continue to build their businesses, while Oppenheimer Holdings Inc. continues to spend to improve its technology platform.

Coventree’s results were very negatively affected by the change in accounting rules.

> Exchanges. Montreal Exchange Inc. , which is now publicly traded, had a big increase in net income — 57.1% to $7.7 million. TSX Group Inc. ‘s increase was a small one — 5% to $36.4 million.

TSX plans to launch a new derivatives exchange, the DEX, in a joint venture with the U.S.-based International Securities Exchange. The launch is scheduled for March 2009, when TSX’s non-compete agreement with the MX expires. TSX will own 52% of the DEX.

TSX also plans to bring onto one platform the natural gas and power products offered by the National Gas Exchange, which is owned by TSX, and the U.S.-based Intercontinental Exchange. That launch is planned for the third quarter of this year.

> Holding Companies. Desjardins Group had significantly improved results in its personal and commercial banking in the quarter, thanks to higher revenue and what it calls “effective control over operating expenses.”

In Dundee’s case, big increases in earnings from its real estate investments offset the substantial decline at DundeeWealth and lower earnings on its resources investments. IE