PLATFORM:With a reported interest by insurance giant Hibernian in Vivas, the third leg of the private health insurance industry, it should be asked whether Vivas is a suitable candidate for an equity stake by an outside body. And what future has it?

Any health insurer contemplating entry into the domestic market should look closely at the latest accounts from Vivas, which is already backed by AIB and Dermot Desmond. Despite the outer glow, the figures show the financial difficulties involved in establishing a new operation.

A cursory glance indicates a healthy surge in written premiums from €9.3 million to €29.8 million in 2006, and a net profit of €686,000 - importantly after a deferred tax credit of €949,000. What is striking, however, is Vivas's increasing reliance on its reinsurers.

In 2005, reinsurers accounted for 26 per cent of the premiums written. This soared to 66 per cent last year and, if Vivas's projection of a rise in members to 150,000 by the end of the year is realised, this reliance will deepen further.

This has, so far, been to Vivas's advantage. Vivas has a solvency requirement of 50 per cent, which puts a brake on its expanding business. Based on its last balance sheet, this would have allowed it to write premiums of only between €10 million and €11 million. It actually wrote €10.1 million, leaving the lion's share, €19.7 million, to be written by reinsurers. And this has all the appearances of jumping substantially further this year.

The latest accounts show a transfer of €5 million of reinsurance profit commission to Vivas, or about half of its profits, before costs such as administration etc. But here is the crunch: only €200,000 went to the reinsurers. That represented a mere 1 per cent return to the reinsurers. With a minimum return of 3 to 4 per cent probably necessary, it will not be surprising if the 1 per cent return increases substantially.

Overall, Vivas incurred a loss before tax of €262,000, but the clawback of a deferred tax credit of €949,000 gave it a net profit of €686,000, compared with a net loss of €3.6 million the previous year. Losses were to be expected for the first few years of operations, but real profits will soon have to be generated.

Chief executive Oliver Tattan, a major shareholder, made the following rather obscure comment in October: "All our profits are reinvested back into things like marketing so our bottom line is very adjustable; it's just a question of how much profit to make at what stage . . . we might look to declare slightly larger profits but we're very much in invest mode so we'd look to reinvest most of the money."

Without clawing back the tax credits from previous years, Vivas would have had a fall in shareholders' funds from €4.96 million to €4.7 million, and not a rise to €5.7 million, as revealed in its balance sheet.

That would have restricted the amount of premiums Vivas could write. This year's results will be interesting as it will have little or no tax credit to write back to bolster its profit and loss account or balance sheet.

Vivas is a welcome competitive addition to a sector that is dominated by VHI, with its 73 per cent market share. And Vivas is optimistic, saying it should have 350,000 members in four years' time. Last April it claimed to have 120,000 members but a Health Insurance Authority (HIA) report two months later said it had 96,000 members, or 4.6 per cent of the market.

Vivas stands over its figures, attributing the difference to the way the HIA compiled its figures. Vivas can be expected to continue to grow its membership. At the moment it claims to have some 7 per cent of the market and, on that basis, it could end up an important niche player with a 10 per cent market share provided it reaches its stated targets.

So how can all this growth be achieved? Unless Vivas starts to generate strong profits, the expansion can only be achieved by further reliance on reinsurers (at an unknown cost), more equity from its shareholders, an injection by a new shareholder, or a combination of these.

With its reliance on younger and more profitable members - some 72 per cent are aged 39 or younger and just 3.2 per cent are aged 60 and over, according to the HIA - and thus a relatively low claims expense rate, it is surprising that Vivas did not grow its membership faster during the Bupa Ireland pullout.

Vivas has high administration costs of €9.5 million - a figure that compares starkly with the €10.1 million premium it wrote (€29.8 million including reinsurance) last year.

Vivas is adamant that it has sufficient capital in place to finance its planned expansion.

However, it will be surprising if its reliance on reinsurers does not increase. It has a small issued shareholding: just €8,709 in ordinary shares and €320 in convertible shares. Share premiums bring these up to €12.5 million but more than half of this has been eroded by accumulated losses, so it could be argued that fresh equity funds would be the best way forward.

Alternatively, a new equity partner could be the answer. Vivas would not comment on a report that insurance group Hibernian is considering entering the market, taking a stake in Vivas.

Hibernian is the Irish arm of international insurance group Aviva and already has close contact with Vivas through health insurance packages it sells called Hibernian Health.

However, the uncertainties in the Irish private health insurance market - including the expected report on the future direction of VHI and the uncertainties over community rating and risk equalisation - could make potential investors wary about entering the market.