Buffett swoops on hopeless quango
Published 28/07/2013 | 05:00
HAS Warren Buffett lost his marbles? What in the name of God is the lofty Sage of Omaha doing, mixing it with the lowly VHI?
Out of the blue, last Thursday morning an Irish Independent exclusive revealed that the wiliest investor in the world had been sucked into one of the deepest swamps in Ireland.
The headline described it as a "massive coup" for the decrepit company. In fact, it was a massive coup for Charlie Weston, who broke the story. Media reports suggested that Buffett's entry to the moribund health insurance market would save the Irish taxpayer up to €90m.
So triumphant was the spin that we wondered if the old wizard had – in his own words – been caught "swimming naked" when the tide was out?
The entire globe admires Warren the shrewd investor; as the years go by we have learned to love Warren the modest philanthropist. Fair play to him, but saving the tottering VHI is surely taking works of charity a bit too far.
It is a mystery how the story surfaced, but the over-the-top response in Ireland suggests that the VHI was delighted with the release. When I asked one of its spokesmen how it plopped into the public arena, he protested, po-faced, that he was as puzzled as I was.
After Weston broke the story, the VHI was spinning like a mad mullah. The normally media-shy juggernaut was making spokesmen available to bask in its day in the sun. So bullishly was the deal portrayed that some of us were beginning to think Warren the investor had finally surrendered his identity to Warren the Good Samaritan.
It was even leaked – by someone – that the saviour himself had "personally signed the contract".
Perhaps Warren has a weakness for Ireland? Although he was wrongly billed by over-ecstatic sources last week as never having done a deal here before, it was reported in March that he had taken a bath in Irish bank shares. Apparently, he had dabbled in our nightmare financial sector, losing 90 per cent of his money in 2008.
Admittedly it was a paltry €244m loss, a pittance for the maestro's €40bn portfolio, but memorable because he had dipped his coveted toes into a minefield and they had been blown up. In his annual report Buffett admitted his Irish misadventure with the words: "The tennis crowd would call my mistakes 'unforced errors'."
Unfazed, last March the Sage despatched key lieutenants back to Ireland to quiz Energy Minister Pat Rabbitte about the prospects here. It was thought at the time that he had taken a shine to Bord Gais, one of the few jewels in the sick State sector .
Today that manoeuvre looks like a dummy pass; but if you swallow the VHI spin, instead of bidding for a profitable semi-state, the magician has been taken for a ride by a health insurance basket case.
Or has he?
Remember, the VHI is in permanent crisis. It has been featherbedded by a State guarantee since its foundation. It has been the quintessential can, kicked down the proverbial road for decades. It currently has its back to the wall in its race against time to meet a year-end deadline.
At long last, a dark diktat from the European Commission has insisted that the VHI can no longer rely on a guarantee from a bankrupt nanny State to guarantee its solvency. Instead, like its competitors, it must now produce real, live cash reserves. Otherwise, without State support, it will be technically insolvent.
As things stood before the deal, the State was going to be required to inject around €100m in order to meet European requirements before December 31. Ireland Inc does not have the money.
Across the Atlantic, Warren was watching. From distant Nebraska he spotted an invalid in distress. He offered assistance. The invalid took his arm off.
The result of negotiations mean that the VHI has apparently passed €700m of its claims risks to Buffett. If the risks of claims are down, so are VHI's solvency requirements. Consequently, it will now need less money from the State because its potential liabilities have tanked.
As presented this week the State is off the hook, the VHI management are geniuses and Warren is the sucker in the middle.
Of course, the real agenda is that the VHI is over the moon about its association with the man they call Midas. It is hoping that some of the magic dust will rub off on its battered reputation. It should think again.
Warren's involvement is far from a vote of confidence in the VHI. It is not – as the semi-state claimed last week – "an investment in the insurance company in Ireland". If he wished to, Buffett could have bought a stake in the company. Warren has definitively not bought shares in the VHI. Less shrewd investors have already looked at the prospect and run screaming from the room.
Warren is a professional vulture with a friendly face. He has been cherrypicking the VHI's insurance book, taking approximately half of it off its hands.
It is not known how much the VHI paid for this little bit of reinsurance, because the old semi-state goes all coy – pleading "commercial confidentiality" – when asked about the price of the deal.
There must be a suspicion that Warren has picked nearly all the low-hanging fruit and left the VHI with the rotting rubbish.
More likely, he has screwed the semi-state into the ground by extracting a record fee from it at a time when its December 31 options were fast running out.
Would the benign old grandpa really pillage the pickings from the VHI corpse? Would he what?
We do not know how much was paid by the VHI to Buffett. It is a deep secret. The VHI is happy to boast that €700m of cover has been transferred to Warren – but not willing to say how much money it has paid to link up with him.
My guess is that, short- term, the VHI is out of a hole. Long-term it is in deeper trouble than ever. It has undoubtedly paid over a king's ransom to be rescued.
The oversold 'Warren Buffett' angle to the deal conveniently obscures the reality of the chronic ill-health of the VHI. Its immediate solvency problems may be temporarily resolved (just for this year) but it remains a crippled patient. Its core health insurance business is in freefall, it is insuring an ageing population and its cost base remains catastrophic.
Its premiums to you and me continue to rocket. This deal will do nothing to bring them down.
No one seems to have mentioned that the so-called VHI "surplus" (profit) will fall further as a result of Warren's arrival. The ingredients of that "surplus" remain obscure, as the accounts for 2012 are, inexplicably, still unavailable. Nor has it been highlighted that the Buffett deal is limited to just 12 months. The VHI was seeking a much longer commitment. If the Sage of Omaha has not profited from his little venture within a year he will head for the hills.
Any gain to Midas is a loss to the invalid VHI.
Midas is no mug. His marbles are intact.