HIH Insurance Company Dishonesty Its Downfall
Posted Dec. 09, 2005
HIH Insurance was Australia's second largest insurance company, which was placed into provisional liquidation on 15 March 2001. The demise of HIH is considered be the largest corporate collapse in Australia's history, with liquidators estimating that HIH's losses totaled up to $5.3 billion.
HIH Insurance was founded in 1968 by Ray Williams 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 and the remaining 48% holding that CE Heath PLC maintained in CE Heath International Holdings was sold to an offshoot 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 and New Zealand, Solart in Argentina and Great States Insurance Co in the United States. Most notably however, HIH acquired the large Australian insurance company FAI Insurance. Winterthur Swiss sold its 51% share in HIH Winterthur to the public and HIH changed its name to HIH Insurance Ltd.
HIH directors Charles Abbott, Geoffrey Cohen, Justin Gardener & Randolph Wein met (as well as barrister Robert Stitt, who took part through a conference call) during the evening of 14 March 2001 with KPMG audit firm partners Tony McGrath & Tom Riddell. The directors were there to review a report, entitled "Solvency Review," that had been prepared by McGrath & Riddell for HIH.
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 $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." Even the slightest setback to HIH would cause the company to become insolvent.
After considering the Solvency Review, the directors had decided to place HIH and its 19 subsidiaries into provisional liquidation.
HIH received permission from the New South Wales Supreme Court to be placed into provisional liquidation on 15 March 2001.Tony McGrath of KPMG was appointed as provisional liquidator to HIH and 17 of its controlled entities. Provisional liquidation is a temporary form of administration giving HIH time for the provisional liquidators review of HIH operations and assessment of 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 lost over $800 million during the six months to 31 December 2000. He attributed 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 now in run–off, which means it is managing its outstanding claims and not writing any new business. This 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.
Following the failure of HIH, Prime Minister John Howard announced that a Royal Commission would be established to inquire into the company's collapse. Justice Neville 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 Adler, son of FAI Insurance founder Larry Adler, 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 comes after pleading guilty on 16 February 2005 to four criminal charges, which included:
The sentence was a lenient one, since the judge accepted the defendent's plea of mitigation, citing that he had not sold any of his own shares, or personally benefited from his actions.
Stock Market Manipulation
Criminal charges for stock market manipulation 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).
Disseminating False Information
Alder attempted to induce investors to purchase HIH shares by telling a finance journalist on 19 June 2000 and 20 June 2000 that he had purchased 1,873,661 HIH shares on 15 June 2000 and 951,339 HIH shares on 16 June 2000 for himself (ASIC, 2002). Adler also told the journalist that he believed the share price for HIH was undervalued and presented an opportunity for a quick profit (Elias, 2005).
Intentionally Acting Dishonestly
In October 2000 a company in which Adler had an interest, Business Thinking Systems (BTS), was in financial trouble. Adler sought a $2 million investment from HIH. Williams had been told by Adler that the company had raised $2.5 million, which it had not, and that Adler was prepared to invest $500,000, which he had no intention of doing, if HIH invested $2 million in BTS. HIH executive John Ballhausen was then told by Adler that he had invested the $500,000. The HIH board discussed and approved the $2 million investment in BTS in a November 2000 meeting. 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).
Two years before the collapse of HIH, Adler quipped to a Herald journalist: "You've read my father's biography? It's called From Cabbie to Chairman. Sometimes, I felt I was working on the sequel, From Chairman to Cabbie. " 
Whistleblowers have reported that Rodney Adler has received favorable treatment in jail in contrary to standard state correctional centre treatment. On his first night of admission he received a television set for his cell.
Former HIH Insurance chief executive Ray Williams sentenced to a minimum of two years and nine months imprisonment, with a maximum term of four years and six months.