HIH: Australia's Biggest Corporate Collapse

WHAT WAS THE HIH BOARD DOING WHILE THIS SAGA WAS GOING ON? WHAT SHOULD THEY HAVE DONE?

Acquisitions and expansions

A review of the chronology of key events, as published by the HIH Royal Commission, will show that the leadership of HIH Insurance has made a series of acquisitions both local and international. As discussed in Wikipedia online (2014), 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. HIH acquired the large Australian insurance company FAI Insurance, whose chief executive Rodney Adler became a director of HIH in 1999.

In the documentary HIH : The Inside Story Of Australia's Biggest Corporate Collapse (Westfield, M. 2003), the story of HIH Insurance’s collapse was aptly described as being due to the management’s gross mismanagement, largely charging too little for premiums and failing to put away enough to pay out claims. The HIH leadership concealed financial losses by under-reserving (which boosts profits) and using "financial reinsurance" contracts to turn losses into gains. Williams, the chief executive, distracted the investment community with a string of takeovers, culminating in paying $300 million for Rodney Adler's FAI Insurances in 1998.

Focusing on expansion while neglecting monitoring of financial situation

From the year 1997 to 1999, a mere span of 3 years, HIH Group made 7 acquisitions (Colonial General Insurance in 1997; Solart of Argentina in 1998; Nang Sen Insurance in February 1998; Cotesworth Group Ltd in April 1998; Great States Insurance Co of Arizona in June 1998; FAI Insur...

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...imited – FAI was implementing detrimental provisioning practices, including among others failure to monitor claims lower than $100,000 and lack of clear methodology on how claims estimates were monitored. These reports were made in 1997, a year before HIH announced its proposed takeover of FAI in September of 1998.

Due diligence and proper research would have warned HIH of the losing proposition of acquiring FAI, which was completed in 1997.

As the leadership body of HIH, the board of directors should have come up with plans to improve its research and investigating capability with respect to targeting possible acquisitions. The board of directors could have considered even forming a separate committee dedicated for this purpose. Unfortunately, the core group of HIH gave weight to persuasion from its members, particularly Adler, to approve the acquisition.