Australian Insurer HIH Seeks Bankruptcy Protection as Losses Mount

HIH Insurance Ltd., following in the footsteps of ReAC and GIO, became the latest Australian insurance company to be forced to the wall by mounting losses. Rumored to be in deep trouble for the last six months, the company, at one time Australia’s second largest general insurer, sold off insurance lines and assets in a desperate effort to stave off insolvency. However, with estimated losses reaching U.S. $395 million and its shares suspended from trading, the company finally gave up, and on March 15, it petitioned the Supreme Court of New South Wales to appoint a provisional liquidator.

Tony McGrath, a partner in KPMG, was appointed to oversee the marshalling of assets and the runoff of the insurer’s business. At a press conference, as reported by Reuters News Agency, he stated that HIH’s creditors and its 2 million policyholders would suffer some short-term pain. “Our initial view is that, ultimately, policyholders and creditors will not get paid in full,” he indicated. “As to what that loss position may be, at this stage it’s too early for us to clarify.”

He later told the Australian Financial Review that “the bulk of people who have claims are frozen for the time being whilst provisional liquidators either develop… a scheme of arrangement or consider placing the company into liquidation.”

While policyholders may experience some delays in receiving payments on claims, a number of HIH’s liabilities have already been assumed by other insurers. Allianz has taken over most of its personal lines and Australia’s NRMA Insurance Group Ltd. purchased its workers’ compensation business. QBE, another local company, agreed to buy out HIH’s corporate and travel lines, but will only assume liability on the latter.

HIH’s two biggest corporate creditors are Australia’s Westpac Banking Corp., which has an estimated exposure of $148.36 million, mainly from letters of credit it issued on the company’s behalf, and the Australian subsidiary of French bank Société Générale, which reportedly has secured and unsecured loans in excess of $173 million.

Thousands of HIH stockholders, who have watched the share price decline from $1.04 a year ago to around 8 1/2 cents, when trading was halted last Feb. 27, aren’t even numbered among its creditors, and have in all probability lost their investment. There’s no chance the shares will again trade on the Australian Stock Exchange; stockbrokers have ceased covering the company and Standard & Poor’s has withdrawn its ratings.

S&P’s timing confirmed that it had a pretty good idea of what was about to happen. A few hours before the liquidation announcement, it issued a press release stating, “It is Standard & Poor’s opinion that HIH will report a significant loss that will have a material impact on the company’s balance sheet, the magnitude of which is expected to be outside the tolerance of the rating.” S&P also announced that it was withdrawing all ratings at the request of HIH management

Besides its California subsidiary (see related story, page 10), HIH also has operations in Hong Kong, HIH (Asia), in the U.K. and in New Zealand, HIH Casualty and General Insurance (N.Z.) Ltd. The provisional liquidator is currently evaluating the Hong Kong and U.K. units, which are said to include substantial investment portfolios, and indicated they would most likely be sold off.

HIHNZ remained largely unaffected by the demise of its parent. For one thing, the company is separately managed and has no obligations to HIH Australia. For another, QBE was in the process of acquiring its operations when the liquidation proceeding was announced. It still plans to close the deal by midyear and will assume HIHNZ’s liabilities.

The liquidation represents the final act in a long decline. HIH was in virtual runoff before it ever went to court. Last September, as part of a joint venture, it transferred a large portion of its automobile, household and compulsory third-party insurance to Germany’s Allianz for $160.73 million. Allianz exercised a pre-existing option and bought out HIH’s remaining minority interest at the end of February for $62.2 million. It promised to honor all claims, and even went so far as to issue several thousand new checks to replace those delayed or dishonored when HIH filed its petition.

Australia’s largest insurer, NRMA, which started life as an automobile association, finalized negotiations with HIH to acquire its workers’ compensation business for $64.68 million two days before it went to court.

After discussions, NRMA confirmed it would proceed with the deal, but succeeded in knocking $4.98 million off the price. It plans on fully integrating the HIH business with its own, and will take over responsibility for present policies in force. It also profits from payment guarantees by the Australian government on workers’ comp policies written there. This does not, however, extend to policies issued by HIH’s foreign subsidiaries.

QBE was in talks with HIH about a joint venture aimed at transferring control of HIH’s core corporate insurance business to QBE for $149.25 million. The filing put those negotiations on hold, but QBE subsequently worked out a deal with the liquidator for it to absorb all of HIH’s corporate and travel business on terms that the company described as “consistent with the transaction previously announced.”

In addition to corporate coverage, holders of HIH professional liability policies, including a lot of lawyers in New South Wales, are the main group left without cover. Some attorneys were threatening to cancel court appearances unless a solution was found. So far no insurer has shown interest in acquiring these policies.

While HIH denied it had “collapsed,” and policyholders with pending claims were being warned of delays reaching nine months or more, the Australian financial community was seeking an explanation as to how HIH’s troubles could have reached the level they did without regulatory authorities taking action.

Despite the asset sell-off, HIH’s shares were suspended only three weeks prior to the filing of the petition seeking provisional liquidation.

The Australian Prudential Regulation Authority (APRA), which oversees the insurance industry, was severely criticized for failing to launch an investigation into HIH’s affairs sooner, and for failing to act to protect the public. APRA spokesmen defended the agency saying that it had had no “solid grounds” to launch any proceedings before the beginning of March, when it did in fact seek to inspect HIH’s finances. By then, however, it was too late.