After a solid 2007, earnings at Desjardins Financial Security (DFS) were hobbled by market turbulence and the commercial paper liquidity crisis in Q1 2008.
The Quebec-based insurer reported a 27.1% decrease in net income in the first quarter of 2008, which was $36 million compared to $49.8 million in 2007. This downturn stems from a write down of its assets under management in ABCP in the first quarter of 2008. DFS also wrote down $17 million in the last quarter of 2007.
Nevertheless, the first quarter of 2008 saw sales grow to reach $618.1 million compared to $553.4 million in 2007. This quarter produced a return on equity of 21.5%, which is the same as the preceding quarter. This is excellent performance under the circumstances, said Richard Fortier, president and COO of DFS. “We do not have the results of all the member companies of the Desjardins Group yet, but at 21.5%, if we’re not on top, we’re not far from it.”
Mr. Fortier declined to comment on whether additional writedowns would occur this year. “The current crisis in no way affects the quality of the assets underlying the ABCP. It’s simply their liquidity that’s uncertain. We will write them down depending on the turbulence we observe on the financial markets.”
The judgment on the Crawford proposal, intended to revitalize ABCP by converting it into long-term debt instruments, had not yet come down at the time of the interview. In fact, the ABCP restructuring proposal was approved on June 5.
Growth in revenues
DSF’s 2007 fiscal year ended with growth in terms of revenues and net income. Net income rose by 43% compared to 2006 to reach $216.7 million.
Premium and deposit revenues increased by 5.6% in 2007 to reach $2.6 billion compared to $2.4 billion in 2006.
The return on equity hit 27.5% compared to 20.7% in 2006.
Mr. Fortier attributes the strong results for 2007 and good return on equity in the first quarter to sales efforts and cost control. “In group insurance, for example, the unit cost decreased by 6% in 2007 compared with 2006.”
He says that group insurance business is growing strongly. As examples of this success, he mentioned a contract that DFS landed in Alberta at the end of May for a group of $15 million in premiums. At the same time, DFS will have to fight to keep its group insurance contract with the city of Montreal, which has launched a call for tenders. “We’re presenting a very enticing offer,” Mr. Fortier promises.
In addition, individual life insurance premiums are continuing to grow. “We are continuing to invest in line with our three year plan to increase our distribution capacity. We’re seeing sales revive in Quebec: we met our ambitious budget objectives, something we hadn’t done in a long time.”
Mr. Fortier also points out the growing popularity of segregated funds with guaranteed minimum withdrawal are still being buoyed by investors seeking security: the insurer’s new Helios product garnered $50 million in assets in the first quarter.
Some other highlights from 2007: individual insurance sales outside of Quebec grew by 42%; the number of life insurance policies issued by the network of advisors in Desjardins’ Caisses hit 100,000; and four new financial centres in the independent network were opened in Nova Scotia, Ontario and British Columbia.