Canada’s financial services sector continued to post strong results in the third quarter, with net income at most companies increasing significantly from the same period a year earlier. A common factor affecting those companies with less robust returns was the substantial cost related to hurricane damage.

The average gain in net income for the 46 companies surveyed was 8.1%, with 30 reporting increases and two — Jovian Capital Corp. and Northern Financial Corp. — moving into the black. Of the other 14, nine had declines and five net losses. This excludes Dundee Wealth Management Inc., Great-West Lifeco Inc., IGM Financial Inc.. Northbridge Financial Corp. and Lindsey Morden Group Inc. , whose results are consolidated with their parent companies, as well as newly public FMF Capital Group.

Earnings used in the survey are before unusual and non-recurring items, in order to see how a company’s underlying operations have performed. In some cases, however, the non-recurring items need to be flagged. Royal Bank of Canada is a case in point. In its fourth quarter ended Oct. 31, it included a $326 million after-tax reserve for claims that might arise from litigation concerning Enron Corp. CIBC took a similar but much larger hit of $2.5 billion in the third quarter. If the Enron reserve is included, Royal Bank’s earnings would have been $522 million, down $117 million or 18.3% from a year earlier.

Royal Bank’s underlying operations are doing well, however, despite $203 million in after-tax claims in its insurance business because of the 2005 hurricanes. Yet the earnings’ gain of 32.7% is somewhat deceptive because net income a year earlier was pulled down by a $130-million goodwill impairment charge on its struggling U.S. mortgage operations, which Investment Executive does not view as an unusual item but as core operations.

The horrendous hurricane season had a big impact on Fairfax Financial Holdings Ltd. , pushing it into the red to the tune of US$220 million. Fairfax also suffered from hurricane claims in 2004, although to a lesser extent, with a 2004 third-quarter loss of US$109.4 million.

Two big life insurers also had hurricane losses this year: $30 million for GWL and $165 million for Manulife Financial Corp. Without that hit, GWL’s earnings would have been up 10.2%, instead of 3.1%, and Manulife would have gained 18.8%, rather than dropping 4.3%.

The big news in the quarter was the federal government’s decision not to put additional taxes on income trusts but rather to level the playing field with corporations by increasing the dividend tax credit. GMP Capital Corp. has completed its conversion to an income trust, and CI Fund Management Inc. is still considering the possibility.

Another development is Industrial Alliance Insurance and Financial Services Inc. ’s acquisition of Clarington Corp. beating out CI. This is good news for Seamark Asset Management Ltd. , which will probably continue to manage almost $3 billion in Clarington assets. CI would have moved the money management in-house.

Seamark needs all the help it can get. It is struggling because of weak investment performance and has lost some mandates. Assets under management were $10.2 billion, down 4.7% as of Sept. 30 from a year earlier.

All the banks had increases in net income, with the exception of CIBC, which was down 14.3%. FMF Capital, a Michigan-based mortgage originator that became a Canadian income trust in March, reported a loss. It suspended distributions in November, causing its share price to plunge. Class-action suits have been launched against FMF, its principals and the Canadian underwriters, which were led by BMO Nesbitt Burns Inc.

TD Banknorth Inc., TD Bank Financial Group’s U.S. retail subsidiary, is buying Hudson United Bancorp for $1.9 billion, adding New Jersey and Connecticut to its New England franchise. Bank of Nova Scotia is investing $390 million in banks in Peru.

Both Industrial Alliance and Sun Life Financial Inc. increased earnings. Sun Life’s Boston-based subsidiary, MFS Investment Management, is slowly increasing AUM following a substantial drop as a result of its involvement in mutual fund scandals.

Fairfax subsidiary Lindsey Morden, a U.S.-based provider of claims’ services, has been struggling for a long time. It was profitable in the last half of 2004 and the first quarter of 2005, but is back in the red. Debt interest exceeded operating earnings, and it had a loss from discontinued operations.

@page_break@Anthony Clark International Insurance Brokers Ltd. has also been struggling. Revenue was up 8.1% as a result of U.S. acquisitions, but that added to costs. It also has expenses related to a legal suit related to a previous acquisition.

Mutual fund manufacturer Mavrix Fund Management Inc. ’s losses have been declining as business grows. AUM were $620.9 million and assets under administration were $188.6 million, for a total of $809.4 million as of Sept. 30. It expects to be “nicely profitable” when AUM and AUA combined reach $1 billion.

Companies with declines in net income include AGF Management Ltd. , which remains in net redemptions. Even with the $276 million of assets that came in with the acquisition of ING Investment Management Inc. in August, AGF had net redemptions of $184 million for the quarter ended Aug. 31. It continued to have net redemptions through November, totalling $329.9 million, but at a decreasing rate, with November being $78 million.

What has saved AGF’s bacon is its institutional and private-client business, which accounted for $11.1 billion in AUM, or a third of the total, as of Aug. 31— up from only $5.0 billion as of Nov. 30, 2003.

AGF is selling its back-office service provider, Unisen Holdings Inc., to U.S.-based Citigroup for US$97.5 million in a deal that closed after quarter-end. It is focusing on its core investment-management business and the introduction of new products.

The other mutual fund manufacturers are doing much better, all posting net sales in the quarter and all with higher earnings.

Among investment-management firms, however, Sceptre Investment Counsel Ltd. has been struggling for much longer than Seamark. Its AUM, $6.3 billion as of June 30, is less than a third the $19.3 billion it had as of Nov. 30, 1998 — but it is up from March 31’s $6.1 billion. The company is still profitable, however, albeit with much lower earnings, and it still pays a dividend, although a much lower one. The company is looking for a merger partner to vault it back into the big leagues.

Guardian Capital Group Ltd. ’s AUM, revenue and earnings are up strongly from a year ago but its 12-month trailing return on equity is still a very low 7.1%. Most of the firm’s assets are in Bank of Montreal stock, acquired when it sold its mutual fund subsidiary to BMO.

YMG Capital Management Inc. is being sold to Montreal-based Fiera Capital Management Inc. , which in June merged with Toronto-based Senecal Investment Counsel. With YMG, Fiera will have more than $26 billion in AUM. The shareholders who have agreed to the deal control 53.2% of YMG’s shares and include Greg Edwards, a YMG founder and former CEO who tried unsuccessfully to bring in a new board of directors earlier this year.

All the brokerages and investment-banking firms had strong returns, as did Western Financial Group, which operates a network that sells property and casualty insurance, life insurance, banking products and investment products.

Besides CIBC, Manulife, AGF, Seamark and Sceptre, the other firms with drops in net income were Co-operators General Insurance Co., Accord Financial Corp., Desjardins Group and Dundee Corp.

Co-operators was the only P&C insurer to have poorer results than a year earlier. Its combined ratio (claims and insurance expenses as a percentage of earned premiums) was more than 100%, indicating an underwriting loss, which it attributes to “storm losses and increased severity in all fire lines.” The remaining four, including Northbridge, Fairfax’s Canadian operating subsidiary, all had underwriting profits. ING Canada Inc. had the lowest combined ratio.

Accord, which provides factoring and other asset-based financial services, attributes its decline to client turnover and lower shipping volumes.

Desjardins had a declines in earnings in personal and commercial banking and securities; brokerage and wealth management; and general insurance. Only life and health insurance posted a gain.

Dundee’s major business, Dundee Wealth, had a 202.8% increase in net income, albeit up from an unusually weak quarter a year earlier. But earnings from its real estate and resource investments were down.

Earnings were up at holding company Power Financial Corp. reflecting the solid results from GWL and IGM Financial Inc.

Both the Montreal Exchange and TSX Group Inc. reported strong earnings in the quarter. IE