On the surface, the second quarter looks like a good one for the 47 financial services companies in Investment Executive’s quarterly profit survey. They reported an average 12.3% gain in net income from the same quarter a year earlier, with 29 (or 60%) of the companies citing an increase; in addition, Integrated Asset Management Corp. and its subsidiary, BluMont Capital Corp., moved into the black.

There are 54 companies in the table, but five companies besides BluMont — Dundee Wealth Management Inc., Great-West Lifeco Inc., IGM Financial Inc., Northbridge Financial Corp. and Lindsey Morden Group Inc. — are excluded from the total figures because their results are consolidated with their parent companies’. Also excluded is newly public FMF Capital Group Ltd. , which didn’t provide numbers from last year.

In order to gauge the profitability of the companies’ underlying businesses, net income in the survey excludes unusual or non-recurring items, which can have a significant impact.
CIBC’s net income, for example, excludes a $2.5-billion hit related to Enron Corp. If these and other unusual items were included, CIBC would have had a $1.9-billion loss.
TD Bank Financial Group was also involved with Enron, but not to the same extent. It has yet to reach a settlement with U.S. regulators but took a $238-million provision in anticipation, which was also excluded. If it and other charges had been included, TD’s net income would have dropped $154 million, or 27.3%, to $411 million.

Besides CIBC’s huge Enron settlement, the biggest news in the quarter is income trust conversions. GMP Capital Corp. has announced it plans to convert to an income trust, CI Fund Management Inc. has requested a tax ruling on doing the same, and AGF Management Ltd. president and CEO Blake Goldring has said the company would “seriously consider” going that route. IGM executives, however, have said they have no immediate plans to do so.

Excluding unusual items, the 13 banks and lenders (excluding FMF) had an average 10% increase in net income, with only Bank of Montreal reporting a drop and start-up mortgage originator Cervus Financial Group Inc. still in a loss. BMO’s decline was mainly because of an unusually strong quarter a year earlier, when it was able to reduce loan-loss provisions by $110 million.

Although up strongly this quarter, Laurentian Bank of Canada remains problematic. U.S.-based rating agency Standard & Poor’s Corp. has lowered its rating. “Operating performance is not expected to return to historical levels and the full benefits of the repositioning might take time to materialize,” S&P says. “The frequent changes in Laurentian Bank’s business strategy in past years suggests it has been challenged in expanding and defending its business franchise.”

The four life insurers all reported increases, ranging from 9.3% for Sun Life Financial Inc. <.b> to 32.1% for Manulife Financial Corp.

Holding companies Desjardins Group and Power Financial Corp. had strong earnings gains, while Dundee Corp. was down because of a gain associated with converting Dundee Precious Metals Inc. into an operating company a year ago.

Results were mixed in the other sectors. Both P&C insurers and distributors and suppliers reported an average increase for the categories overall, but mutual fund and investment firms had an average 2.6% decline.

Five of the 14 mutual fund and investment management firms saw earnings drop, and three were in a loss position. Only CI, Guardian Capital Group Ltd. , IGM and Saxon Financial Inc. had increases.

With the exceptions of Sceptre Investment Counsel Ltd. and Seamark Asset Management Ltd. , all saw hikes in assets under management. Sceptre has been in decline since 1998, with AUM falling to $6.1 billion as of May 31 from $19.3 billion on Nov. 30, 1998. The company is looking for a merger partner to give it the size it needs to compete.

Seamark’s problems are recent, the result of poor performance in 2004. Former president and CEO Robert McKim left in May because of “irreconcilable differences” with the board of directors, the company says. It intends to maintain its investment management approach.

YMG Capital Management Inc. is another firm that has suffered from internal dissension. Former CEO Greg Edwards tried unsuccessfully to get the shareholders to remove all existing directors and elect new ones on the basis that “the current strategic direction is not optimal.” On May 16, the shareholders elected a company-nominated board of directors.

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Despite a 5% increase in AUM, AGF remains troubled. The higher AUM is entirely because of its growing private-client business, at $10.4 billion as of May 31 vs $6.2 billion a year earlier. Mutual funds are still experiencing large but declining net redemptions — $603 million in the quarter ended May 31 and $460 million in the quarter ended August 31, once the $276 million in mutual fund assets it acquired from ING Investment Management Inc. on August 8 are excluded.

AGF’s strategy to turn its mutual fund business around focuses on reconnecting with advisors, but that has yet to bear fruit. AGF also appointed Martin Hubbes as its new chief investment officer in June. He has been with the firm 13 years, mainly as a portfolio manager.

With the focus on investment management, AGF is selling Unisen Holdings Inc. , its back-office service provider, to a division of U.S. giant Citigroup for $122 million. The transaction is expected to close before yearend.

Other firms had net positive fund sales in the quarter: $884 million for CI, $85 million for vClarington Corp. , $481 million for Dundee Wealth, $302 million for IGM, $28 million for Mavrix Fund Management Inc. and $60 million for Saxon. At IGM, Investors Group funds had $40 million in net sales, Mackenzie Financial Corp. had $207 million and Investment Planning Counsel had $55 million. Clarington’s loss was from amortization of deferred sales commissions.

Integrated Asset Management’s and BluMont’s move into the black is because of large performance fees at BluMont, which is still attracting assets despite the bad publicity surrounding hedge products. Avenue Financial Corp. is having difficulty breaking into this market.

Guardian appears to be delivering on its promise to increase net income once it had finished investing to build its various business lines. Year-over-year, net income was up 37.5% to $3.1 million. But that is a decline from the previous two quarters ($3.2 million and $3.4 million, respectively). The firm says it is developing new products and services.
Its 12-month trailing return on equity is still low at 6.4%.

Three of the six P&C insurers saw profits drop. The next quarter could be worse, given the August 19 storm in Ontario and hurricane Katrina.

Fairfax Financial Holdings Ltd. will be hardest hit. It estimates its losses from Katrina at a net US$108 million-US$134 million. This includes the C$10-million pretax hit expected by its Northbridge subsidiary as a result of of the Ontario storm. Kingsway Financial Services Inc. expects only a US$2-million pretax hit from Katrina, and C$2.5 million-C$3.5 million from the Ontario storm.

Co-operators General Insurance Co. , Fairfax and Optimum General Inc. all saw declines in net income this quarter. Both Co-operators’ and Optimum’s combined ratios (expenses and losses as a percentage of earned premiums) rose sharply but remained below 100, indicating an underwriting profit. Co-operators attributes the rise in its ratio to auto premium rate reductions and earlier than usual summer storm weather. Optimum had “some isolated major losses.”

Fairfax, whose combined ratio was down to 94.1 from 94.9, attributes its earnings decline to removal of adverse development coverage provided by reinsurers for the discontinued business of a U.S. subsidiary.

Fairfax has received a subpoena from the U.S. Securities and Exchange Commission for “documents regarding any non-traditional insurance/reinsurance product transactions.” It is co-operating.

Of the 12 distributors and suppliers, seven had increases in net income, two were down and three were in a loss position.

Brokerage houses Canaccord Capital Inc. , GMP and Rockwater Capital Corp. all had increased earnings. Northern Financial Corp. , which is still establishing itself, remained in a loss position.

Oppenheimer Holdings Inc. , with both brokerage and asset-management operations, was up, but Jovian Capital Corp. , with a similar mix, was down. Oppenheimer operates entirely in the U.S. while Jovian is fully Canadian.

Loring Ward International Ltd. , the spinoff of the Assante Corp. operations not acquired by CI, was up, as were Hub International Ltd. and Western Financial Group.

Accord Financial Corp. , a provider of asset-based financial services, saw a decline. And Anthony Clark International Insurance Brokers Ltd. and Lindsey Morden Group Inc. , a Fairfax subsidiary, also reported losses. IE