HIH Insurance Company is known to be Australia’s second largest insurance company in the early part of this century. It was provincially liquidated on 15
March 2001, which is still regarded as one of the biggest corporate collapse in Australia’s history. This resulted in around $ 6 Billion losses borne by HIH Insurance Company. The investigation led to imprisonment and conviction to many of the HIH management due as there were fraud and mismanagement charges using their official capacity.
Ray Williams and Micheal Payne are known to be the fore fathers of HIH Insurance which was founded in 1968. At that time, it was known as “M W Payne Underwriting Agency Private Limited.” Basically, the company used to provide underwriting services for Initial Public Offerings for many other companies. In 1971, M W Payne Underwriting Agency Private Limited was acquired by a British Company CE Heath PLC. In this acquisition, Ray Williams was appointed as BOD in 1980. The company flourished with the passing time and business and managerial concerns were transferred to CE Health International Holdings Limited in 1989; where CE Health got more than 85% shares of ownership. It was not until 1992 that CE Health International Holdings decided to float its share in Australian Stock Exchange by IPO. By acquiring capital by selling shares, CE Health International Holdings were able to acquire CIC Insurance Group in Australia. As a matter of fact, the remaining holdings that CE Health PLC has had in CE Health International were sold down to CIC Insurance group named CIC Holdings Limited. In 1996, Wintherthur Swiss Insurance Company decided to purchase it and CE Health International Holdings changed its corporate name to HIH Winterthur.
With the time span of one year; between 1997 till 1998, HIH Winterthur started strategic maneuvering on a wider scale and acquired numerous companies in (Australia Colonial Limited General Insurance), New Zealand, Argentina (Solart) and United States (Great States Insurance Company Limited). Out of all, the acquisition of FAI Insurance Company of Australia stands more different from all others. It was not until 1999 than Winterthur Swiss sold its 51 percent shares to Public and changed its corporate name to HIH Insurance Limited (Australia).
HIH Insurance Company enjoyed the largest block of assets in Insurance industry in Australia. It was the second largest Insurance Company of Australia with total assets amounting to around $ 8.0 Billion. It was its debt leverage and insurance claims which left its asset side on the balance sheet confined to just $ 133 Million. The figure is said to be on the cliff edge as it was declared to be just 1.7 percent above “net asset deficiency” level for an Insurance company, signaling severe financial and managerial beacons. Even the auditors declared that a slight downward movement would cause the company to face complete insolvency.
Such situation caused the board to appoint a provisional liquidator so that the company could become able to generate income to lay-off the debt taken and insurance claims of the people. The provisional liquidator took control of HIH Insurance and around seventeen of its subsidiaries. The first half result for the six months operations was declared on 31st
December, 2000 which declared a approximate loss of around $ 100 Million to the company. This figure was estimated on the lower side as the total loss was in total around $ 300 Million. Mr. McGrath was announced to be the official provisional liquidator for HIH Insurance, where he announced that the total loss which the company have had borne already is around $ 800 Million in the last six months. According to his analysis, he declared the flowing factors to be the potential reasons of the corporate collapse of HIH Insurance Australia:
2. List the sequence of activities (including months/years of any specific changes (takeovers or acquisitions or selling of companies within HIH)
Time line of important events
- Rapid expansion in Australia and other parts of the world
- Unsupervised line of authority in different functional areas of HIH Insurance
- Complex reinsurance arrangements
- Underpricing done to different products in order to attract customers and showing aggressive attitude in pricing competition
- Problems related to reserves with the company
- False reporting to tax and insurance authorities
- Careless and incompetence management
- Numerous fraud cases
- Self dealing
- Customer services on the lowest level
: HIH Insurance Ltd acquires CIC Insurance
HIH embarks upon a programme to make HIH Insurance able to provide direct and indirect finance for an amount near US 500 Million which is to be invested in movie production via a web of financial structure
: Swiss insurer Winterthur exits Australian insurance industry selling out around 51% shares in HIH-Winterthur to public. In the same month, the newly formed "Australian Prudential Regulation Authority" (APRA
) begins to assume responsibility for managing insurance industry as a whole, including HIH.
Late 1998January 1999:
HIH acquires FAI Insurance for A$300 million. Later, FAI is estimated to be worth just A$100 million.
A routine external audit by Arthur Andersen fails to raise the alarm. Regulators and others accept the company's declaration that it has A$939 million in assets.
September 2000: HIH sells more than 50% of all its insurance business associated to retail business. HIH share price falls in between A $ 1.05 and A$0.45 after an announcement of losses and rumors in the market about the underlying financial condition of company. Regulators decided not to send in an inspector, as the externally audited accounts seem to show the company is healthy.
December 2000: Ray Williams, founder director of HIH Insurance resigned as managing director having a Australian $ 5Million in severance agreement
APRA showed overdue financial statements for HIH Insurance. The regulatory authority started assuming that they will have to take certain steps. The Australian Securities and Investment Commission had their own concerns regarding the inability of HIH Insurance that it cannot bear such financial losses. This will bring a complete financial chaos in the Group.
27 February 2001: ASIC suspends shares in HIH after analyzing Group's paper work that make it concerned that the Insurance Group might no longer be solvent. ASIC through to scramble the line of authorities and controls for the sake of risk exposed to the policyholders and eventually succeed in transferring many of the HIH's portfolios which were exposed to risk to other companies
15 March 2001: HIH was put into provisional liquidation by ASIC. During March, government agencies are obliged to pledge money to cover some of HIH's obligations.
16 March 2001: APRA inspector sent into HIH.
August 2001: The government decided to step in and suggested in setting up an independent Royal Commission, announced earlier in May, to investigate the insurance company failure.
September 2001: The liquidator revises loss estimates upwards to somewhere between A$
3. List of all the key management personnel, their roles in the company; key responsibilities; roles played in various activities (above- part 2); style of management
|Ray Williams (Founder CE Health in 1968)
||Deputy Chairman and Chief Executive Officer
||Fraud, stock market manipulation, false statements
|Randolf Wein (replaced Ray Williams)
||Deputy Chairman and Chief Executive Officer
||Former partner Arthur Andersen
||12 Oct, 2000
||Former partner Arthur Andersen, and auditor of FAI in 1980s
||12 Oct, 2000
||Former partner Arthur Andersen
||Feb 26, 2001
||Sold FAI to HIH in 1998
Ray Willaims is the Founder of the whole said Insurance business. He remained the Deputy Chairman and Chief Executive Officer for the company. He resigned in December 2000. He also served as Company Director, HIH Insurance. He was charged with many accusations including stock market manipulation, fraudulent activities and false financial statements. He was sent for prison for around three years.
He was designated as the chairman of the businesses. Being the chairman, he was the Head of Board of Directors body. He was involved in most of the strategic level business decision of HIH Insurance Australia. He was also alleged with many fraudulent activities.
December, 2000 after the resignation of Ray Williams, Randolf Wein was declared to be the new Chief Executive Officer with immediate effect. He was declared to be the best candidate for the place. Randolf Wein was the CEO of HIH’s Asian operations and businesses and a reputable member of Board of Directors was able to give huge profit figures to the company.
He was the Director of HIH Insurance, who resigned on 12th
October, 2000. His job description included strategic business planning, financial decisions and dealing with all strategic business units working all across Australia and other parts of the globe.
Rodney Adler served as the director of an Australian telecommunication Company One .Tel and also been director of HIH Insurance company. He was the predecessor of Justin Gardener and took the same charge. He was also accused of the fraud charges and was sent behind bars.
4. Details of “bad” or “wrong” moves made by management (name those key people) and how and why they did – i.e. Their contribution in the collapse
The collapse of any company happens due to improper strategic decisions taken by the upper management. In the case if HIH Insurance Group Australia, serious managerial problems are evident including greed, personal dealings, under pricing, fraud, mismanagements, providing wrong financial reports, insolvent trading and stock market mismanagements were highlighted. As a matter of fact, many of the key top management’s officials were found guilty after proper accusations and put behind bars for several years including Mr Adler, Geoffrey Cohen, Ray Williams, etc.
Ray Williams is supposed to be the biggest culprit in Australia’s biggest corporate collapse with a total loss of around $ 6 Billion. He showed misleading and deceptive corporate conduct as a Chief Executive Officer and Director of HIH Insurance Group Australia. He is accused of providing misleading and false information to the shareholders about the financial position of HIH. His managerial capacity also declared him an incompetent director of a Public Insurance Group which took many untrue financial decisions which put millions of Dollars at stake belonging to millions of investors.
Rodney Adler served as the last Director of HIH Insurance Group of Australia. He was also declared as a criminal for the financial collapse of HIH Insurance Group. He was much into stock market fraudulent activities related to Insurance group and misused the power of his authority. It was not until the Company has had severe debt problems and increased its debt leverage for around $ 5 Billion. The insight was rather shocking. Trades were made by HIH Insurance Group with a corporation named Pacific Eagle Equity of which Adler turned out to be the sole director and financial beneficiary. Adler also bought around $ 4 Million shares in the three breakups of transactions which caused monetary effect on HIH’s stock prices based on inflationary grounds. He was put behind bars for around three years but he was also captured red-handed using his cell phone for unethical business transactions, for which he was transferred to a high security jail facility. Adler also misled the investors by providing false interviews to a finance journalist that he had purchased around 2000000 HIH shares and that the share prices will rise giving huge profits as the share prices are undervalued (Elias, 2005).
Adler was also accused of having an interest in a company called Business Thinking Systems (BTS). The said company was in financial trouble where Adler required around $ 2 Million investment from HIH Insurance Group. Ray Williams was informed by Adler that Business Thinking Systems had raised around $ 2.5 Million which in fact was not raised by the Company at all. Adler also told that he has prepared $ 500,000 to invest if HIH pools $ 2 Million in investment, which was a falsehood by Adler. Also, Adler attended the meeting and failed to disclose his financial interest in the business. Nor did he disclose his knowledge of its financial affairs (Elias, 2005)
Australian Securities and Investments Commission suspected Geoffrey Cohen for not taking sensible, practical and rational steps to guarantee that the information provided to the shareholders at annual meeting was not misleading about a joint venture between Allianz Australia Ltd (Allianz) and HIH. This created a state of mistrust amongst HIH Insurance Group and the stakeholders involved.
5. Comment on ethical/social issues on each of key management personnel (this can be combined with part 4)
Being ethical in business and management is really important. Giving priority to all the stakeholders is the key priority of ethics in management. Ethics are necessary from two angels:
- Internal customers
Ethics from the point of view of internal customers serves multi functions in order to bring peace and harmony in the organizational culture. It improves the work by keeping a positive and motivated atmosphere for the employees. Also, ethical behavior also demarcates the boundaries of good examples set for the employees. It also helps to inject a sense of responsibility for every employee with a sense of pride for the work and for the corporation in general.
- External customers
Handling external customers is of mere importance. External customers are the ones who generates cash flows for the business and therefore there demands and needs are to be give sheer responsibility. Each and every employee has to be ethical with the external customers since their trust, beliefs and hopes are to be given much weight for having overall positive public image of the business; and this is possible by developing supreme ethical behavioral conduct with the external customers.
In the case of HIH Insurance Group Australia, there is a lack of ethical management shown by the top management. Also, the line of authorities spread through out the hierarchy seems to be loosely controlled and monitored by the top management. The top management also looks to be more concerned to their personal profits misusing the authority they have been given in HIH Insurance Group. For example, Redney Adler was found getting benefits for his own private company using HIH’s financial resources. Also he mid lead the investors by announcing that he him self has purchased company’s share and that the share values are about to get rise as they are currently under value. The information was completely wrong which eventually was not beneficial for the company in result.
Investors are the stakeholders who trust in the company and invest their amounts of capital into company. Providing them with the right and complete information at the right time is very important and one of the basic rights of the investor. Geoffrey Cohen did not act ethically in his managerial decisions as he did not take practical and rational steps to guarantee that the information provided to the shareholders at annual meeting was not misleading about a joint venture between Allianz Australia Ltd (Allianz) and HIH.
As a matter of fact, HIH Insurance group failed to show consistency in having ethics for internal and external customers. This is the potential reason of such a huge collapse in Australia’s history since all of the fact mentioned above tilted Company’s repute, eventually ending in a financial demise.
Finally, each student to write in detail – How different decision choices by the directors (and all other key personnel) may have avoided the collapse. This will cover the strategic choices of the directors in acquiring/selling of companies; responsibility to the board and public and other ethical issues.
The case of HIH Insurance is a landmark for the corporate world to learn lessons from. Firstly, it is very necessary to follow the ethical line of conduct for both internal and external customers. First of all, it seems that the Group has hugely invested in many businesses across the globe which made it difficult to impose scrutiny for managerial as well as operational decisions. On the other hand, the top management comes out to be active in fraudulent activities with their personal benefit in the priority. This is the basic reason of IHI’s liquidation in such a humiliating way. It also put the mission statement of the company in jeopardy; also the investors money at stake. Right now the case shows that HIH Insurance Group faced a total financial dichotomy due to the unethical activities of the top management and a loose control of the acquisitions made by the company.
Also, numerous of the financial difficulties faced by HIH Insurance Group were due to their hard line and aggressive acquisition strategies in Australia and globally. They created more or less than 200 subsidiaries world wide and invested much of their capital in the said reason. The insurance industry was already over crowded with aggressive competition on pricing and non-pricing basis. This gave another shock to the Group as the cash flows were not anticipated positive.
Rodney Adler is supposed to be the main controversial actor in the whole story. He is also been associated with the acquisition of FAI in 1998. HIH Insurance group used its debt leverage options for the acquisition to pay huge sums of Australian $ 300 Million for the company but in the end stock market did not show an affirmative sign on the acquisition. Also the estimates of the purchase price were loosely accurate, since it should have been a deal not more than Australian $100 Million worth.
As far as alternative strategies are in question, HIH Insurance Group should not have gone aggressively towards acquisitions worldwide. Also, the Group should have made a strong inspection and scrutiny function in the hierarchy, from top till bottom in order to make sure that all the ethical and social responsibilities by the company is positively fulfilled.
HIH Insurance Case Study
. (2001, November ). Retrieved May 02, 2011, from ERisk: http://www.erisk.com/learning/CaseStudies/HIHInsurance.asp
HIH Casualty and General Insurance Limited