Tuesday 23 January 2018

VHI hits capital target with €90m from 'Sage of Omaha'

Warren Buffett
Warren Buffett
Donal O'Donovan

Donal O'Donovan

A €90m deal with Warren Buffett's Berkshire Hathaway allowed State-owned insurer VHI to meet Central Bank capital rules without tapping the exchequer.

VHI will come under Central Bank supervision as a regulated insurer at the end of this month, ending an historic exemption that applied to the insurer which has operated as a statutory body since it was established in the 1950s.

A European court ruled in 2011 that the government here was in breach of EU rules by not requiring VHI to be regulated. A deadline to comply with that ruling is due to run out at the end of this month.

"Completion of the authorisation process removes Ireland's exposure to substantial EU fines," Health Minister Leo Varadkar said in a statement.

As a regulated general insurance company and retail intermediary, VHI, which has around one million customers, will now be free to compete beyond its traditional health insurance focus.

That is now likely to include marketing policies to protect incomes in the event of illness and other health-linked types of cover but the business has no plan to move into areas such as property or motor insurance.

The company will now be authorised under the same rules as other health insurance operators - crucially including a requirement to meet a Central Bank target to hold €540m of capital as a buffer against potential claims, a so-called solvency capital target.

The shift to regulated status also means that the board and senior executives at VHI are subject to the Central Bank "fitness and probity" regime.

There were fears taxpayers could be hit to cover a shortfall in the solvency target, however a €90m seven -year subordinated loan from Berkshire Hathaway, part of "Sage of Omaha" Warren Buffett's (inset) vast investment empire, combined with the company's own reserves of €453m, means it has achieved the target independent of exchequer funds. The seven-year loan is understood to carry an interest rate in excess of 8pc a year.

Berkshire Hathaway has provided re-insurance services to VHI since 2013, but VHI chief executive officer John O'Dwyer said the new loan is not tied to maintaining a relationship with the US firm.

Central Bank authorisation and the financing from Berkshire Hathaway both represent "votes of confidence in VHI", Mr O'Dwyer said.

He said the finance secured from the US means fears that taxpayers could be asked to contribute to VHI's capital are off the agenda, such State aid would have involved a potentially lengthy European Commission approval process.

"VHI is now a good State asset," he said.

The company has no plans to raise premiums, he said.

VHI reported a €49.8m "net surplus" last year on gross earned premiums of €1.46bn. That was down from surpluses of €65m in 2013 and €54.3m a year earlier, but added to the company's reserves which count towards the capital target.

Last year the company took in €1.46bn in customer premiums and paid out €1.37bn to settle claims.

Irish Independent

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