Industrial Alliance Insurance and Financial Services Inc. Tuesday reported a 49% drop in second quarter income due to a narrowing of interest rate spreads.

Net income to common shareholders amounted to $32.1 million, or 40¢ a share, for the second quarter ended June 30. That compared to $63.4 million, or 78¢ a share, for the same period in 2008, the Quebec City-based company said.

Return on equity for the quarter was 7.6% on an annualized basis, compared to 14.4% in the second quarter of 2008.

The company took an after-tax charge of $19.3 million, or 24¢ a share, resulting from variation in the fair value of debt instruments and their underlying assets. That compares to a $1.1 million gain in the year-earlier period.

“This reduction in value results from the narrowing of interest rate spreads during the quarter. Any difference between the market value of the debt instruments and the corresponding assets will be reversed as the debt instruments approach maturity,” Industrial Alliance said.

Excluding the charge, net income to common shareholders from regular operations was $51.4 million, or 64¢ a share, compared to $62.3 million, or 77¢ a share, for the same period in 2008.

Industrial Alliance said the stock market upswing during the quarter improved the profit by $5.6 million after taxes, or 7¢ a share compared to the expected result.

However, this gain was offset by the posting of a $1.5 million provision after taxes, or 2¢ a share, for two investments weakened by the current economic environment and by an increase in group insurance claims, which resulted in a $3.9 million experience loss after taxes, or 5¢ a share.

Yvon Charest, president and CEO of Industrial Alliance, said he was pleased with the company’s quarterly results.

“As has been the case since the beginning of the financial and economic crisis, our results are showing a great deal of resilience to the current environment,” Charest said in a conference call on Tuesday.

Premiums and deposits totalled $1.2 billion in the second quarter, which is 22% lower than the same period last year.

The strong upswing in the stock markets and positive net fund entries in all lines of business increased assets under management and under administration to a new high of $54.1 billion as at June 30, an increase of 9% for the quarter and for the year-to-date.

All asset components increased, including a 13% increase in segregated funds and a 13% increase in mutual funds over last quarter, the company said.

But sales of these products were down sharply from last year. Mutual fund sales in the second quarter totalled $225.4 million, down 42% from the second quarter of 2008. Segregated fund sales were $147.2 million, down 23% from last year. Overall, sales of individual wealth management products fell by 28% during the quarter.

“In spite of the stock market rebound, sales are soft on market related products,” said Normand Pépin, executive vice-president at Industrial Alliance, in the conference call.

But he noted that sales of GICs and other guaranteed products remain strong.

“Clearly, investors have not regained confidence in the market,” Pépin said. “They are still risk averse, and prefer to shelter their savings in guaranteed products, in spite of low interest rates.”

While Pépin admitted that he has witnessed improvements in investor sentiment, he said it would likely take a while for investors to once again become comfortable taking risks.

Although management at Industrial Alliance is encouraged by recent improvements in stock markets and economic conditions, Charest said the company is remaining cautious.

“In spite of the fact that the stock market rebounded from its March lows, and that a few economic indicators are giving us hope that the worst is behind us, I don’t think that it’s time to lower our guard,” he said in the conference call. “We are keeping our focus on financial strength, but at the same time, we are getting prepared to take advantage of an economic recovery.”

Industrial Alliance reiterated that its business plan provides for the quarterly dividend to common shareholders to be maintained at the current level of 24.5¢ for 2009.

IE