VHI Healthcare recorded significantly reduced losses last year but has warned that it needs to improve its performance by a further €60 million annually.

Losses at the insurer fell from €41.7 million in 2009 to €3.1 million last year, as the premiums earned by VHI increased by 1.6 per cent to €1.335 billion and its spend on healthcare fell 1.4 per cent to €1.307 billion.

VHI incurred a €25 million loss on its underwriting activities last year, according to its annual report, but managed to reduce its operating expenses by more than 2 per cent to €90.3 million.

VHI chief executive Jimmy Tolan said 2010 was a better year for the company but he warned that there were challenges ahead.

"We still have to improve our annual performance by €60 million in order to fund our customers' healthcare needs and also to meet the requirements of the Central Bank and European Commission in due course," he said.

He said an increase of 21 per cent to the cost of private beds in public hospitals and changes to the tax credit system would have to be overcome this year.

VHI said the Government's healthcare strategy is the most ambitious and radical in the history of the State and that it hopes to play a significant role in the healthcare market in the future.

"We believe that a break up of VHI Healthcare would increase healthcare costs for our customers and also result in lower investment in prevention and community based services," Mr Tolan said.