Skip to content

2. The rise and fall of HIH Insurance Group



The origins of HIH Insurance Limited can be traced back to 1968 with the establishment of M W Payne Liability Agencies, a workers’ compensation underwriter. Subsequently acquired by a United Kingdom (UK) insurer, the company was restructured and later renamed CE Heath International Holdings, and partially listed on the Australian Stock Exchange (ASX) in 1992. The partial float was the first by a general insurer on the ASX.4

In 1995, the company entered into a merger with Swiss-owned CIC Insurance Group and soon after was renamed HIH Winterthur. The company then experienced rapid growth through a series of acquisitions, including: Heath Cal and Great States Insurance in the United States (US); Colonial Mutual General Insurance in Australia and New Zealand (NZ); Solart in Argentina; and Cotesworth Group in the UK. Some of these offshore businesses were to later encounter financial trouble.

Concerned about HIH Winterthur’s performance and financial position, Winterthur, the Swiss-based majority shareholder in HIH Winterthur, decided to divest its 51 per cent stake through a public share offer on the ASX.5 The offer was fully subscribed and the offering took place in August 1998. Two months later, the company changed its name to HIH Insurance Limited (HIH). Shortly afterward, the now fully publicly-owned HIH acquired UK insurer World Marine & General Insurance and Australian insurer FAI Insurance (the latter for $295 million);6 FAI being a company which was under intense financial pressure at the time, unbeknownst to the directors of HIH.

Not long after the acquisition of FAI, HIH’s aggressive growth strategy began to falter, with losses reported in its UK and US businesses (which together contributed nearly 30 per cent of HIH’s total Group-wide income).7 Its NZ business was also losing money and its Australian operation, which generated the bulk of its revenue, was struggling, recording a $21 million loss for the 18 months to 31 June 1999. In order to stem its losses, HIH placed its UK operations into run-off.8

Financial analysts grew uneasy about HIH’s performance, and some were blacklisted (frozen out of access to the management team) by HIH because of their negative assessments of the company. The market responded, with the price of HIH shares falling precipitously (Figure 1).

Figure 1: HIH’s share price

HIH's share price - June 1992 to February 2001 - Description: This chart shows HIH's share price from June 1992 to February 2001. It shows that HIH's share price peaked at $3.70 in July 1997 after which it fell steadily until the company's collapse.

Source: HIH Royal Commission, Final Report, Vol. 1

Following the April 2000 release by APRA of draft reforms to the prudential regulation of Australia’s general insurance industry (proposing stricter standards for capital adequacy, liability valuation, reinsurance and risk management),9 HIH sought to bolster its regulatory capital levels by entering into strategic joint ventures and selling off some of its underperforming businesses and property assets.10 Parts of HIH’s Argentinian and Asian operations were sold off.

A routine external audit completed in July 2000 by Arthur Andersen failed to raise alarm bells, instead concluding that HIH was in a healthy financial state. At this time, HIH accounted for 9.3 per cent of all gross written premiums in Australia by Australian Prudential Regulation Authority (APRA) regulated general insurers — it wrote $1.65 billion out of an industry total of $17.7 billion, for the financial year to 30 June 2000.11 Its annual report for that financial year showed total assets of $8.3 billion and total liabilities of $7.4 billion, a net asset position of $900 million.

In September 2000 it announced it had entered into an agreement to sell, for $200 million, a 51 per cent share of its domestic personal lines business,12 excluding its workers’ compensation, travel, professional indemnity, public liability and corporate broking lines, into an unincorporated joint venture with German-owned insurer Allianz Australia called Allianz Australia Advantage.13 HIH’s share price dropped sharply following the announcement. Its troubled US operation was placed into run-off the following month.

Concerned about its exposure to HIH, Westpac, HIH’s banker, requested in October 2000 that the company appoint Ernst & Young to conduct an audit of its finances. The audit report, presented to HIH a month later, concluded that its financial position was ‘delicately poised’. Apprehensions about HIH’s financial troubles intensified when it announced that its interim result to 31 December 2000 was likely to be a loss, coupled with its failure to lodge its December 2000 quarterly statement with APRA.

The final months of 2000 and the early months of 2001 were a tumultuous period, with a number of HIH’s directors resigning from the Board, including the company’s founder and Chief Executive Officer, Ray Williams. The company’s share price, and credit rating (Table 1), continued to decline.

Table 1: Standard & Poor’s rating of HIH, February 1997 to March 2001
Date Credit rating
17 February 1997 AA–
15 August 1997 AA–
27 February 1998 A: credit watch developing
24 September 1998 A: credit watch negative
22 January 1999 A–: off credit watch
22 August 2000 A–: credit watch developing
13 September 2000 A–: credit watch negative
2 November 2000 BBB+: credit watch negative
26 February 2001 BBB–
15 March 2001 B: lowered and withdrawn

Source: HIH Royal Commission, Final Report, Vol. 1

The commencement of the Allianz Australia Advantage joint venture on 1 January 2001 marked the beginning of the end for HIH. The structure of the joint venture required that HIH’s share of the premium income earned by the joint venture be placed under trust. Excess funds were to be distributed on a quarterly basis to the joint venture partners according to their ownership shares, but only after an actuarial assessment confirmed that there were sufficient funds over required reserves. The first actuarial assessment was due in May 2001. Needing to pay claims arising from business written prior to the commencement of the joint venture, HIH, already short of money, was deprived of desperately-needed funds. Soon after, it was forced to delay paying some claims as its liquidity problems became acute.

On 22 February 2001, at the company’s request, trading in HIH shares was halted on the ASX. Trading briefly resumed on 26 February, but was halted again on 27 February. Around the same time, the Australian Securities and Investments Commission (ASIC) served a notice on HIH concerning its investigation of a suspected contravention of HIH’s obligation to disclose price-sensitive information t
o the market. HIH shares were suspended from trading a final time on 1 March 2001.

On 6 March 2001, HIH announced that it would establish a joint venture company with QBE Insurance (QBE), QBE Corporate Insurance, which would offer to renew all corporate insurances written through major brokers by HIH and QBE in both Australia and NZ. The joint venture would see QBE, which had management control of the joint venture company, in effect take over 60 per cent of all of HIH’s corporate insurance business written in Australia and NZ.14

On the same day as the QBE announcement, HIH formally appointed KPMG to undertake a review of its financial position. Armed with the findings of this review, the Board of HIH took the decision on 15 March 2001 to place the company into provisional liquidation, only days after it sold the remaining 49 per cent stake of its domestic personal lines business to Allianz Australia andone day after selling its workers’ compensation business to NRMA Insurance. On appointment, the Provisional Liquidators, Messrs AG McGrath and ARM Macintosh, estimated that HIH had lost over $800 million over the six months to 31 December 2000. The Provisional Liquidators also declared that each of the major Australian insurance licence-holding companies within the HIH Group was clearly insolvent.15

At the time of its failure, the HIH Group consisted of more than 240 individual companies, of which eight were licensed or formerly licensed general insurance companies incorporated in Australia. The majority of the remainder were holding and investment companies, or in some cases licensed insurance companies incorporated in other jurisdictions.16 On 27 August 2001, the Australian companies in provisional liquidation were placed into formal liquidation, with Messrs AG McGrath and ARM Macintosh taking on the role of Liquidators (hereafter ‘the Liquidator’). By then, the deficiency in the HIH Group was estimated to be between $3.6 billion and $5.3 billion, making it the largest corporate failure in Australian history.


4 Clarke (2007), page 434.

5 Winterthur commissioned independent reports to assess the UK branch and its activities. Concerned with some of the findings (conflicts of interest, lax guidelines, poor financial reporting, huge losses in aviation and marine insurance) it decided to divest its interest in HIH Winterthur (s. The offering memorandum contained a claims-development table that was the first public revelation of HIH’s historical under-reserving. Nevertheless, the response from the investment community was favourable and the public offering was oversubscribed (see HIH Royal Commission (2003), Vol. 2, Chapter 12.

6 Kehl (2001). See Box 1 for further discussion of the FAI acquisition.

7 At this time, HIH’s Australian portfolio accounted for 64 per cent of HIH Group revenue, the Americas 16 per cent, the UK 13 per cent, NZ 4 per cent and Asia 3 per cent.

8 During run-off, an insurer ceases to write new policies, and any existing liabilities are ‘run off’ to conclusion.

9 Australian Prudential Regulation Authority (2000). This discussion paper followed three previous policy discussion papers released by APRA in September 1999 setting out the scope for modernising the prudential supervisory requirements for general insurers in Australia.

10 Now-defunct US investment bank Merrill Lynch analysed HIH’s financial position and concluded that under APRA’s proposed new capital standards for general insurers, HIH would be ‘significantly capital

11 Australian Competition and Consumer Commission (2002), page 101.

12 This was a largely profitable business acquired from FAI, and included home, home and contents and motor vehicle insurance.

13 The joint venture company issued private motor, compulsory third party, private pleasure craft, home building and home contents insurance policies. It also issued small business packages, rural packages and small commercial insurances (such as commercial motor, fleet motor less than 150 vehicles, property with asset value less than $20 million, public and product liability policies with turnover of less than $5 million, and marine) previously arranged by HIH through distributors other than international brokers. HIH would later sell its remaining 49 per cent stake for $125 million.

14 Profits from the joint venture company would be split according to ownership stakes, with QBE receiving 60 per cent and HIH 40 per cent. Soon after HIH was placed into provisional liquidation, and following discussions with the Provisional Liquidators, QBE decided to absorb 100 per cent of the joint venture business, thereby assuming HIH’s entire corporate insurance book.

15 Kehl (2001), op. cit.

16 HIH Insurance (2013). For a corporate chart of the companies in liquidation, visit the HIH website.