The fourth quarter of 2011 saw mixed results for Canada’s financial services companies. The banks managed an average earnings gain of 8.5% vs Q4 2010, but three of the four life insurers had losses. To top it off, the mutual fund and investment companies – as well as the brokerages – have struggled in the wake of volatile financial markets.

The average drop in earnings for the 43 companies in Investment Executive’s quarterly profit survey was 27.9%. Only 15 firms saw net income rise; just one, Anthony Clark Insurance Brokers Ltd., reported a profit (a mere $13,354) vs a loss in Q4 2010. Of the remaining companies in the survey, 10 were in a loss position and the rest saw their net income decline. (These figures exclude Great-West Lifeco Inc. and IGM Financial Inc., as their results are consolidated with those of their parent, Power Financial Corp.)

Of the firms that saw their earnings decline, three drops were particularly large. Manulife Financial Corp.’s net income dropped by $1.9 billion and Sun Life Financial Inc.’s fell by $1 billion, putting both companies in a loss position. The other firm that experienced a big drop was Brookfield Asset Management Inc., whose net income fell by US$1.1 billion yet remained in the black.

Manulife and Sun Life both took charges related to low interest rates. Low rates mean high product liabilities because lifecos have to restate their product liabilities – the amount needed to fulfil contract obligations, assuming rates stay at current levels – at least once a year.

Brookfield’s big decline is a matter of accounting. Under international financial reporting standards, which Canadian companies are now using, firms can revalue assets each quarter – and Brookfield has chosen to do so because this usually enhances earnings. But changes in fair value aren’t smooth, which results in a good deal of earnings volatility. In Q4 2011, Brookfield had a much smaller increase in the fair value of its assets (US$410 million) than in Q4 2010 (US$1.6 billion).

Nevertheless, Brookfield has raised its quarterly dividend to US14¢ from US13¢. Other firms that hiked their quarterly dividend include: Bank of Nova Scotia, to 55¢ from 52¢; Royal Bank of Canada, to 57¢ from 54¢; Toronto-Dominion Bank, to 72¢ from 68¢; Intact Financial Corp., to 40¢ from 37¢; and Guardian Capital Group Ltd., to 17¢ from 16¢. CI Financial Corp. has raised its monthly dividend to 8¢ from 7.5¢.

On the merger front, Fiera Sceptre Inc. announced it was acquiring Natcan Investment Management Inc. after the end of Q4 2011. This vaults Fiera into the big leagues, with around $54 billion in post-merger assets under management vs $28.9 billion as of Dec. 31, 2011. (See story on page 1.)

A closer look at the sectors:

– banks. Eight of the 15 deposit-taking institutions saw their net income rise. Among the Big Six banks, all had net earnings increases except RBC – and that was because it had a particularly strong quarter in Q4 2010. Increases for the other five were relatively modest, reflecting the drag from the impact of difficult financial markets on their capital-markets divisions.

Among the smaller players, Home Capital Group Ltd. had a big 67% increase in earnings. This reflects both its continued strong growth and much smaller realized and unrealized losses on derivatives ($330,000) than in Q4 2010 ($5.7 million).

On the other hand, Cash Store Financial Services Inc.’s big decline was due to reduced loan fees, infrastructure enhancements and the drag on earnings as the company continues to open new branches.

Despite earnings declines of about 30%, mortgage firms Equitable Group Inc. and First National Financial Corp. say they are well positioned.

Laurentian Bank of Canada reports that its acquisition of MRS Co. from IGM’s Mackenzie Financial Corp. subsidiary, which was finalized in November, is already increasing earnings. Furthermore, Laurentian expects its distribution of Mackenzie mutual funds, which began in January, to help broaden and deepen client relationships.

– life insurers. The losses at Industrial Alliance Insurance and Financial Services Inc., Manulife and Sun Life were all due to the low interest rate environment.

IA increased its reserves by $152.3 million and implemented initiatives over the past year to alleviate the impact of low long-term interest rates.

Manulife took a goodwill impairment charge of $665 million. The company is continuing to pursue growth aggressively in wealth management, insurance and fee-based products, which are less sensitive to interest rates and have fewer equities guarantees.

Sun Life had a goodwill and intangible asset impairment of $266 million, as well as a $635-million charge related to the valuation of variable annuity and segregated fund insurance contract liabilities. However, the firm reported record insurance and rollover sales in Canada, strong earnings in Asia and AUM of more than US$250 billion at MFS Investments, its U.S.-based wealth-management arm.

In contrast, GWL had an earnings gain of 33.2%, even though Putnam Investments, its U.S.-based wealth-management arm, continues to struggle. GWL had taken its measures to deal with the impact of low rates in Q3 2011.

– property & casualty insurers. Results were mixed in this sector: Co-operators General Insurance Co. and Intact posted big earnings gains; EGI Financial Holdings Inc.’s net income was virtually unchanged; and Fairfax Financial Holdings Ltd. saw a large loss.

All the firms in this sector but Fairfax had underwriting profits, as witnessed by their combined ratios of less than 100, although EGI’s was a little higher than in Q4 2010.

Co-operators and Intact both report better claims experience – particularly in Ontario’s auto insurance sector, in which the Sept. 1, 2010, reforms are having an impact. Intact’s earnings were enhanced by its acquisition of AXA Canada in late September.

A global player, Fairfax’s combined ratio shot up to 121%, thanks to large catastrophic claims, including the floods in Thailand.

– mutual fund and investment-management firms. Only CI and IGM had earnings increases, and CI’s was only 0.5%. But both CI and IGM had declines in AUM and were in net redemptions in the quarter.

The other big independent, AGF Management Ltd., had a 7% gain in AUM – but this was because of its acquisition of Acuity Funds Inc. on Feb 1, 2011, which brought in about $7 billion in AUM. AGF’s mutual funds remain in net redemptions, reflecting poor investment performance and the firm’s lack of in-house distribution.

Brookfield was the only other firm in this sector with an increase in AUM. Brookfield isn’t exposed to financial markets; rather, it invests in property, renewable power, infrastructure and private equity.

Lower performance fees affected the earnings of both Fiera and Gluskin Sheff & Associates Inc.

– distributors and suppliers. Only Anthony Clark had better financial results, but its net income was only $13,354. The firm says the insurance market remains soft.

Five of the other companies in this sector had lower net income, and Coventree Inc. and Northern Financial Corp. had losses. The difficult financial markets were responsible for the large earnings drops at brokerages Canaccord Capital Inc., GMP Capital Inc. and Oppenheimer Holdings Inc.

– stock exchanges. TMX Group Inc. experienced lower listings and equities trading as a result of the difficult markets, which affected its performance.

– holding companies. Desjardins Group’s big gain was mainly because its Q4 2010 results were very weak, while Power Financial’s reflect the earnings gains at GWL and IGM.

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