HIH Insurance
Encyclopedia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
's second largest insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
company. It was placed into provisional liquidation
Liquidation
In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation...
on 15 March 2001. The demise of HIH is considered to be the largest corporate collapse in Australia's history, with liquidators
Liquidator (law)
In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets of the company and settling all claims against the company before putting the company into dissolution....
estimating that HIH's losses totalled up to $5.3 billion. Investigations into the cause of the collapse have led to conviction and imprisonment of a handful of members of HIH management on various charges relating to fraud.
History
HIH Insurance was founded in 1968 by Ray WilliamsRay Williams (businessman)
Raymond Reginald Williams is an Australian businessman and corporate criminal. In 2005 he was imprisoned for two years and nine months for filing false financial statements and failing his duty as a director....
and Michael Payne and at this time it was known as "M W Payne Underwriting Agency Pty Ltd". It was acquired in 1971 by British company CE Heath PLC and Ray Williams was appointed to the board of CE Heath PLC in 1980. The business operations of this CE Heath PLC were transferred to "CE Heath International Holdings Ltd" in 1989 and CE Heath PLC retained 90% ownership of CE Heath International Holdings. In 1992, CE Heath International Holdings floated on the Australian Stock Exchange.
In 1995, CE Heath International Holdings acquired CIC Insurance Group. The remaining 48% holding that CE Heath PLC maintained in CE Heath International Holdings was sold to a subsidiary of CIC Insurance Group called CIC Holdings Limited. CIC Holdings increased its share in CE Heath International Holdings to 50% and CIC Holdings was purchased by Winterthur Swiss Insurance Company (Winterthur Swiss). In May 1996, CE Heath International Holdings changed its name to HIH Winterthur.
Through 1997 and 1998, HIH Winterthur acquired a large number of companies both in Australia and globally, including Colonial Ltd General Insurance's operations in Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
and New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
, Solart in Argentina
Argentina
Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...
and Great States Insurance Co in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. Most notably however, HIH acquired the large Australian insurance company FAI Insurance, whose chief executive Rodney Adler
Rodney Adler
Rodney Stephens Adler is an Australian businessman and former director of telecommunications company One.Tel and insurance company HIH, both of which collapsed in 2001. He was jailed in 2005 for his conduct related to the collapse of HIH....
became a director of HIH in 1999. Winterthur Swiss sold its 51% share in HIH Winterthur to the public and HIH changed its name to HIH Insurance Ltd.
Collapse
With $7.8 billion in assets, HIH was considered one of Australia's largest insurance firms. However after offsetting its assets with debts and potential insurance claims against the company, HIH was left, on paper, with net assets of only $133 million. McGrath & Riddell described HIH's solvency as "marginal" and stated in their report that "an extremely small movement (just 1.7%) in the value of assets could move the balance sheet into net asset deficiency." That is, even the slightest setback would cause the company to become insolventInsolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
.
In 2001, the board appointed a provisional liquidator to take control of HIH and 17 of its controlled entities. The board hoped this would give HIH time to review its operations and assess its financial position. On the same day, HIH was to announce its first-half result for the six months to 31 December 2000. The announcement had already been delayed once and rumours suggested that HIH's first-half result was a loss of $100 million. This figure quickly ballooned to $200 million, and then $300 million. Although the result was never announced, when McGrath announced his appointment as provisional liquidator he estimated that HIH had lost over $800 million over the six months to 31 December 2000. He attributed the HIH company failures to rapid expansion, unsupervised delegation of authority, extensive and complex reinsurance arrangements, underpricing, reserve problems, false reports, reckless management, incompetence, fraud, greed, and self–dealing.
HIH insurance is currently in run–off, which means it is managing its outstanding claims and not writing any new business. This process could take several years to complete; some have suggested as long as 10 years.
The demise of HIH was the largest corporate failure in Australia's history. HIH liquidators estimated that the company collapsed with losses totalling up to $5.3 billion.
Royal Commission
Following the failure of HIH, Prime Minister John HowardJohn Howard
John Winston Howard AC, SSI, was the 25th Prime Minister of Australia, from 11 March 1996 to 3 December 2007. He was the second-longest serving Australian Prime Minister after Sir Robert Menzies....
announced that a Royal Commission
Royal Commission
In Commonwealth realms and other monarchies a Royal Commission is a major ad-hoc formal public inquiry into a defined issue. They have been held in various countries such as the United Kingdom, Australia, Canada, New Zealand, and Saudi Arabia...
would be established to inquire into the company's collapse. Justice Neville John Owen headed the Royal Commission, which tabled its report to Parliament on 16 April 2003. The findings of the Royal Commission are available on the HIH Royal Commission web site.
Adler pleads guilty
Former HIH director Rodney AdlerRodney Adler
Rodney Stephens Adler is an Australian businessman and former director of telecommunications company One.Tel and insurance company HIH, both of which collapsed in 2001. He was jailed in 2005 for his conduct related to the collapse of HIH....
was sentenced on 14 April 2005 to four and a half years jail, with a non-parole period of two and a half years. Adler's jail sentence came after pleading guilty on 16 February 2005 to four criminal charges, which included:
- two counts of disseminating information knowing it was false
- one count of obtaining money by false or misleading statements
- one count of being intentionally dishonest and failing to discharge his duties as a director in good faith and in the best interests of the company
The sentence was a lenient one, since the judge accepted the defendant's plea of mitigation, citing that he had not sold any of his own shares, or personally benefitted from his actions.
Stock market manipulation
Criminal charges for stock market manipulationMarket manipulation
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency...
were laid against Adler after an investigation by the Australian Securities & Investment Commission (ASIC) into the purchase of HIH shares by Pacific Eagle Equities Pty Ltd, an Adler-controlled company. Pacific Eagle Equities purchased 1,873,661 HIH shares on 15 June 2000, 951,339 HIH shares on 16 June 2000 and 425,000 HIH shares on 19 June 2000 (ASIC, 2002) with HIH funds after Adler persuaded Ray Williams to shift $10 million from HIH to Pacific Eagle Equities. Adler's defence team negotiated with the Commonwealth Director of Public Prosecutions to drop charges of stock market manipulation in exchange for a guilty plea to other charges (Elias, 2005).