In its final economic report for 2015, released last month, the Cayman Islands Economics and Statistics Office cited “mixed results” over the year for the islands’ financial services industry.
With technologies such as blockchain, steeper regulatory burdens for offshore finance, and increased competition among jurisdictions, it remains to be seen whether the slowdown is a cyclical change for the industry or if there is a structural shift going on.
Cayman’s economy overall saw growth last year, with gross domestic product rising 2 percent. The GDP growth rate slowed from 2.4 percent in 2014, following global trends of slowing growth.
Financial services, a cornerstone of Cayman’s economy, “continued to exhibit mixed performance,” the ESO writes in its Annual Economic Report 2015. The report states, “The financial services industry continued to exhibit mixed performance. New company registrations and partnership registrations grew while mutual funds registration (including master funds), insurance licences, stock exchange listing, and banks and trusts declined.”
Financial Services Minister Wayne Panton, responding to questions by email, said financial services have held steady despite movements in the global economy. “In recent years, we’ve had increases in financial services revenue. However, we ended 2015 with a very slight decrease in overall financial services revenue, from $239.9 to $234.9 million. This is not unexpected, because global markets are reacting to economic and political developments worldwide such as pre-Brexit, Brazil, Cuba and China.”
Finance Minister Marco Archer said in a statement upon release of the report, “Despite challenges from the global economy, I am pleased that the combined performance of all our productive sectors achieved a growth rate that is higher than expected.”
Banks and trusts
Marla Dukharan, RBC’s group economist for the Caribbean, said the drop in banking licenses with the Cayman Islands Monetary Authority is part of a structural change that pre-dates the 2008 financial crisis.
“There is a steady downward trend. This is a secular decline,” she said in a phone interview from Trinidad.
Figures from CIMA show the number of licenses and other entities supervised by the authority’s Banking Supervision Division has dropped from 477 in 2002 to 209 in the first quarter of 2016. Dukharan said that amounts to an average 5.6 percent drop per year since 2002.
The ESO notes in the annual report, “Amidst sustained challenges in global banking, the registration of banks and trust licenses maintained a downward trend, falling by 7.1 percent to 184 in 2015 relative to a year ago.”
The government report notes losses in Class A local banks and Class B banks that are restricted to offshore business. The number of Class B banks dropped 7 percent to 172, which, the ESO states, reflects “recent loss and increasing difficulties of Caribbean banks in maintaining correspondent banking relationships with global banks engage in ‘de-risking’ behaviour.”
De-risking occurs when banks pull correspondent relationships because the regulatory burden or the perceived risk is too high to make it worthwhile to deal with a bank in another country.
Licensing in the insurance sector weakened last year, following a plateau in the year before. The number of insurers registered in the Cayman Islands, most notably in captives, dropped by 48, about 6 percent, to 739 at the end of 2015.
Licenses for captives dropped from 724 to 679. But, the ESO writes, “Despite the slowdown in license registration, the financial performance of captives as measured by key variables strengthened in 2015. Net premiums totalled US$12.8 billion, 5.4 percent higher than a year ago and in contrast to last year’s 4 percent decline. Total assets improved by 14.7 percent to total US$59.1 million and overall net worth rose by 25.6 percent to US$15.5 billion.”
The makeup of the captives industry in Cayman stayed about the same as in earlier years. “North America remains the dominant risk location, accounting for 89.8 percent of insurance captives registered,” the ESO states, with the rest coming from the Caribbean and Latin America (3.1 percent), Europe (2 percent), and the remaining 5.1 percent from the rest of the world.
Cayman added Class A domestic insurers in 2015, ending the year with 31, up by three domestic insurance licenses from the year before. The ESO says this is the highest number of Class A insurance licenses in 10 years.
Gross premiums for domestic licensees, according to the ESO and CIMA, totaled $357.9 million for the first three quarters of 2015, according to unaudited consolidated financial statements. Health insurance accounted for 46.1 percent of that total. Net insurance claims totaled $157.7 million, with 67.9 percent of those claims for healthcare.
The number of registered mutual funds dropped slightly last year by 0.6 percent from 2014. The drop in registered funds was tempered by a 4.5 percent growth in master finds.
The ESO explains: “The number of registered funds maintained a downward trend, falling by 2.3 percent from 7,835 in 2014 to 7,654 in 2015. Administered and licensed mutual funds also followed a similar pattern of decline falling, respectively, by 1.6 percent to 380, and 2.9 percent to 101 in 2015.”
The report continues, “The number of terminated mutual funds totalled 1,642 exceeding the 1,416 new registrations. According to the Investment and Securities Division (ISD) of Cayman Islands Monetary Authority (CIMA), higher terminations are partly attributed to a ‘clean-up’ following enactment of the new Director Registration and Licensing Law (DRLL) in June 2014. Other reasons cited by the ISD include liquidation, the culmination of the fund, transfer to other jurisdictions, the fund never having carried on business, and the fund no longer being economically viable.”
Listings on the Cayman Islands Stock Exchange dropped by 20 last year to end the fourth quarter at 1,046 listings.
“Growth in the listing of sovereign debt securities (up by 36) was offset by declines in the mutual funds listing (down by 33) and insurance linked securities (down by 24),” the ESO states.
Total market capitalization, despite the drop in listings, hit a record last year at US$195.3 billion, up by more than 15 percent from 2014. According to the ESO, “The increase was due to higher specialist debt and sovereign debt securities, which combined to account for 91.8 percent of the total market value of traded shares, increasing respectively by 5.9 percent and 32.0 percent.”
The number of companies registered in Cayman dropped last year after a high in 2014 that almost hit 100,000. The total number of companies registered “declined marginally by 0.6 percent to 98,838.”
The registry added 11,864 companies last year, but removed 12,062 companies. The number of exempt companies in the registry grew by 0.8 percent. The ESO states, “Exempt company remains the preferred vehicle for the conduct of business accounting for 84.4 percent of all incorporated companies.”
The number of foreign companies registered in Cayman but incorporated elsewhere went up more than 9 percent. Non-resident and resident companies dropped by more than 12 percent.
“In the aggregate, new company registrations expanded by 7.8 percent to 11,864 in 2015 as growth softened from the 19.0 percent recorded a year earlier,” according to the ESO.
Despite the new registrations, the report notes, “The number of terminated companies accelerated in the review period, rising from 7,602 in 2014 to 12,062 in 2015. Of these terminations, 71.6 percent were removed by the Registrar, which originated mainly from the exempt category, 24 percent were voluntarily dissolutions primarily from the exempt category, and 2.2 percent were voluntary cessations of foreign companies.”
New partnership registrations grew by 16.5 percent last year from 2014. Active partnerships increased by 16 percent to end the year at 18,041.
The ESO states, “Foreign partnership, a new class of partnership introduced in 2014, climbed from 32 to settle at 77 in 2015, a 140.6 percent increase.”