Cantillon

Inside the world of business

Quinn Healthcare is the elephant in VHI room

IT HAS been clear for some time that something had to give in the health insurance market. The Government owning the dominant player while needing the other two to subsidise its existence was never legally palatable, even before the Supreme Court shot it down in 2008. Plus, VHI’s solvency hole of several hundred million euros was a problem that was just going to keep on growing if not addressed. So, some movement on the issue, or at least the prospect of movement, is not only welcome but essential on a number of counts.

But why now? The issues have been outstanding for some time but, equally, could easily have slipped on for another year or so without causing too much angst outside the health insurance market itself. And it’s not like the Government doesn’t have other meaty matters with which to distract itself.

Could it be, perhaps, that the elephant in the room is the future of Quinn Healthcare, the clear number two in a very lop-sided market? VHI’s biggest competitor is for sale as part of Quinn Insurance, and urgently at that. The longer the administration process at the company goes on, the weaker (and cheaper) it becomes and the more nervous the outside world becomes of the insurance market as a whole.

Potential buyers are said to be numerous but some, if not all, including attractive candidate Liberty Mutual, have made it clear that they are not looking at the health insurance part of the group.

A health insurance orphan left behind after a buyer has cherry-picked the best of Quinn would be disastrous.

The party with most to gain (or lose) in a Quinn sale would be State-owned Anglo Irish Bank, weighed down as it is by the Quinn family debt. It is thus firmly in the Government’s interests to make the health insurance market appear as attractive as possible to the outside world. Buyers like clarity and Irish health insurance was far from clear before this week.

Getting EBS fixed

And so a third financial institution comes under the wing of the Government with the State taking over the Educational Building Society to fill the hole left by bad lending.

The building society’s current advertising campaign is badly timed. The EBS, which until this week was owned by 450,000 members, has been proclaiming to the public that it has been selling loans and buying savings for 75 years.

Falling, wounded as it is, into the arms of the taxpayer is a rather strange way of marking such a landmark anniversary.

The effective nationalisation of the EBS with an injection of €100 million extinguishes its members’ rights. Minister for Finance Brian Lenihan is calling the shots now.

The society needs a further €775 million to replenish capital depleted by losses on €1 billion in loans heading to the National Asset Management Agency. Lenihan will hope there is a chance this will come from Irish-owned Cardinal Asset Management and US private equity firm JC Flowers, who eyed up Bank of Ireland in 2008 and who have now switched their attention to EBS.

At first, it’s difficult to read what they see in little old EBS, which will return to its roots as a traditional savings and mortgage lender post-Nama. One benefit is that four in every five loans at the EBS are either variable or fixed rates which means it has more flexibility to increase profitability quickly.

Rival lenders have as much as 60 per cent of their loan books on tracker rates which will be loss-making for many, many years.

The EBS has raised variable rates by 0.6 percentage points. A further 0.9-point increase would bring them in line with European peers. This is clearly attractive for private equity interests. The EBS is also cheaper than applying for a banking licence and establishing a financial institution from scratch.

Getting the EBS fixed with private investment would solve one of the Government’s many banking problems and may secure a return on the State’s €100 million injection.

Is free such a good deal?

More than 400 million members of Facebook regularly share details of their private lives on the servers of the Californian company. Google processes more than two billion searches a day. People have uploaded several billion of their personal photos to Flickr.

People are happily sharing private data with companies who generate big money selling ads on the back of that content. Although privately held, it is expected Facebook could generate up to $2 billion in revenues this year. Google had revenues of $23.6 billion last year while Flickr’s parent, the perennially in-crisis Yahoo, generated turnover of $6.4 billion.

During the heady days of the dotcom boom, internet companies had a distant relationship with revenue generation, not to mention actually generating a profit. Sometime about 2002, even the buoyant US equity markets realised the business model didn’t stack up.

Google realised that online advertising could be made to work if the ads were targeted to the activity that someone was doing at the time. It allowed airlines, for example, to bid on the right to display ads to the people searching for “budget flights”.

As far back as the mid-1990s, the founders of Yahoo were gathering vast amounts of data about what people were doing on their site. They admitted at the time they would figure out how to make money out of it later but they knew the data was a potential goldmine.

Web services are not free. The users pay by giving up their privacy and advertisers provide the revenues. The backlash against Google and Facebook in particular suggests users may be starting to question if free is such a good deal.

NEXT WEEK

The latest Live Register, exchequer balance and private-sector credit figures are due to be released. On the corporate front, Ryanair reports full-year results on Tuesday.

PODCAST

This week John Collins meets Matt Cutts of Google, hears about AIB’s €500 million scheme for small business recovery, interviews John McColgan of Gateway Ireland and chats to Barry O’Halloran about CC’s results.

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