THE international environment for investment funds continues to be depressed. Equity markets worldwide continue on their upward surge (up 70% from their low in March of 2009).

However this performance is widely believed to be short term and not supported by market fundamentals. In major G20 economies unemployment levels continue to be high and the consensus remains that a global economic recovery cannot begin while this is the case.

Within the funds environment however, there are signs of new life as market volatility, the lifeblood of the hedge funds industry, has remained high over the last 12 months and certain hedge fund groups have done exceptionally well with their market performance and consequently have attracted increasingly greater capital allocations from institutional investors.

The Isle of Man picture has continued to be downbeat with FSC official statistics showing a flat position for funds under administration for the period to end December 2009. 

During the quarter, anecdotal information on banking suggests some decline in new business flows, although on the deposit taking side there have been some reported successes, notably amongst the larger banks.  The banks have been very resilient throughout the last 12 months. That said the climate is still challenging and a few issues, particularly international regulatory developments and their impact, are still outstanding and causing uncertainty.

The January to March period is usually the quietest part of the year for company and trust formation but latest indications are that the figures are slightly up for the quarter.  However, uncertainty regarding the UK election and the introduction of the 50% tax rate, plus resurrection of the Gaines Cooper case on residence, have caused a lot of interest in private wealth arrangements to be re-examined and restructured. Together with interest in potential High Net Worth migration overseas, this could translate into new business for local companies.  

While detailed figures are not yet available, it seems that business levels for life insurance companies have stabilised. Unaudited figures for 2009 show a reduction in new business (premium inflows) from ?8 billion in 2008 to just under ?6 billion for 2009. Stock market performance as well as business retention has meant that total funds under management in the life sector at the end of 2009 (again unaudited) rose from ?36.7 billion to ?41.5 billion over the year. 

Those companies with exposure to international business continue to fare better, particularly with regular premium business, and there are at least two life companies with definite plans for new expansion of sales representation into the Middle and Far East.

The strategy for the captive insurance industry has almost been finalised and activity plans are being developed for 2010/11. In line with global trends business levels remain fairly constant, with a number of new captive formations replacing those captives being closed, meaning overall numbers remain static. 

The strategy for the next 12 to 18 months is to continue activity in terms of conference sponsorship, journalist engagement and other promotional activity to ensure that when the market for new captive formation picks up, the Island will be well placed to take advantage. In addition, Isle of Man Finance and the Isle of Man Captive Association are actively seeking alternative market opportunities for captive formation.

The increase in Isle of Man-based companies operating QROPS schemes through subsidiaries in other jurisdictions, notably Guernsey, has continued. This is due to the perceived advantage of zero tax being charged on non- residents compared to the tax levied by Isle of Man-based pensions, and this issue will need to be re-examined.

The Isle of Man looks well placed as an insurance domicile, and the reputation of the Island as a well regulated and internationally responsible jurisdiction continues to be maintained.  The life industry continues to be affected by global investment trends but is still strong. Further diversification into non-UK markets should further strengthen its dominance as a global centre. 

Investor confidence in global markets as a whole continues to play a major part and as the global economic situation improves new life insurance business levels should start to rise. It is also perceived that the increase in UK tax rates to 50% and the freeze in inheritance tax limits will see an increase in work for those companies with a strong UK presence.

The captive industry remains stable which is in line with global trends, and a strategy is being implemented to ensure that the Isle of Man is in a positive position to take advantage of a future hard market in insurance premiums.

A new working group has been formed from industry to develop a strategy to market the Isle of Man as the Domicile of Choice for International Employee benefits. Moving forward this is another potential growth area for the Isle of Man and can benefit a number of different financial sectors. 

The reinsurance market is also an area where the Island may have another opportunity to grow, and this will be another target area for longer term development.

The general outlook for funds remains unchanged from the previous report in that regardless of the result at the UK general election the macroeconomic status quo will largely remain in the UK and the Isle of Man will continue to be challenged in respect of achieving significant growth in the sector in the short to medium term. 

This year will again be very challenging and we should expect to see the performance of the banking sector mirror that of the global economy. The Isle of Man focus will be on doing as much as possible to support our banking sector such as continuation of work with the key elements of the banking review.

It is anticipated that group strategic changes will be brought forward by some of the banks during the year and it likely that this will be something of a “mixed bag.”  There have been some redundancies in the 2009 period although these have proved to be very few.  Any forward strategic changes will tend to reflect group head office views of the international political climate and the lower profit expectations brought about by increased regulation and a reduction in global GDP.

The fiduciary industry has historically been innovative and resilient and opportunities exist following the introduction of the higher rate of tax in the UK, while the diversification of business models across this sector enables some to seek out other opportunities in other markets such as India and China.