Australian insurance firm losses could blow out to $5b

By BINA BROWN

SYDNEY - At first it was just shareholders and policyholders in insurance giant HIH feeling sick at the sight of the multi-million holiday home of HIH founder and former chief executive Ray Williams.

But the pain and the anger of the collapse of Australia's second largest general insurance company have spread to a much wider audience.

Every Australian taxpayer and every Australian with an insurance policy is about to pay for what is shaping up as the biggest corporate collapse in Australia's history.

Complete with its own chapel and boat garage, Mr Williams' home on the New South Wales North Coast was just weeks ago receiving some maintenance. Meanwhile hundreds of Australians were left with half-finished dwellings because builders had gone bust or stopped work while they found other insurance.

According to the Master Builders Association, almost A$2 billion ($2.45 billion) worth of construction is on hold while builders insured with HIH find another backer.

Car accident victims insured with HIH are waiting for A$190 million for medical procedures in Queensland alone.

Total losses are expected to be at least A$1 billion and possibly A$4 billion, ($4.9 billion) but nobody will know the real damage until the outcome of the Royal Commission, announced this week by the Federal Government.

HIH liquidator Tony McGrath of KPMG, who yesterday handed his first report on the extent of the disaster to the Federal Government since he was appointed in March, reckons it will take 10 years to sort out HIH.

The Australian Securities and Investments Commission, itself embroiled in the catastrophe, isn't waiting for any Royal Commission to apportion blame.

On Thursday ASIC obtained court undertakings to freeze the multi-million assets of former HIH directors Ray Williams, Rodney Adler and former chief financial officer Dominic Fodera.

In orders among the toughest sought against directors of a public company, ASIC asked that the directors pay compensation for the company's collapse.

ASIC also commenced civil proceedings against the three former directors, alleging that they had breached their duties as directors in relation to a payment of A$10 million by an HIH subsidiary (HIH Casualty and General Insurance) to Pacific Eagle Equities , a company of which Mr Adler was a director. ASIC also alleges a breach of director's duties in respect of Pacific Eagle Equities.

It is expected to be just the start of a range of civil and criminal proceedings.

The issue of compensation has been a thorny one and an issue that quickly turned Australia's fifth financial collapse in 15 years into a political minefield.

In this week's 2001-2002 federal budget, the Government set aside in excess of $A500 million to be spent over the next four years on bailing out affected policy holders.

The budget also included an additional $A5 million for the ASIC inquiry, but which could soon be handed to the Royal Commission.

In Queensland, motorists are being asked to pay a $A5 levy for compulsory third party insurance to recover $A400 million in costs for claims.

In New South Wales the Government has offered a $A600 million bailout package for policyholders and wants the insurance industry to contribute $A69 million a year to a Policyholder Protection fund.

Naturally, shareholders and policyholders will be looking to blame someone for the collapse, and directors, managers, the regulators and auditors are all under suspicion.

Mr Williams, who founded the company in 1968, said he was devastated by the collapse, which he said came as a shock. He is personally owed a $A5 million severance payment and is holding 405,000 now worthless shares.



The HIH losses largely stem from its $A300 million purchase of Rodney Adler's FAI Insurance and its moves into general insurance markets in the United States and Britain.



Mr Williams now admits FAI was too expensive.

The insurer's troubles were blamed on rate reductions combined with weather catastrophes.

Meanwhile HIH auditor Arthur Andersen - which in October 2000 signed the accounts as true and fair with net assets of A$939 million - is also in the spotlight.

Six months later the insurer was found to be worth at least A$2 billion less.

As for APRA's role: chief executive Graeme Thompson had looked into concerns it had about management, profit and liquidity problems, but was obviously not tough enough in seeking explanations.

While revelations continue to be startling, certainly the demise of HIH did not come entirely out of the blue.

Late last year and early this year the market sensed trouble well before the facts emerged. The share price fell; the directors appointed a new chief executive and the media reported significant losses were expected.

In February this year the Australian Stock Exchange halted trading in HIH shares at the company's request. Four days later the directors said they were not yet aware of the size of the interim loss the company expected to make and that they proposed to make an announcement on March 16.

ASIC stepped in and concluded, from information received from the company, that it was essential to prevent HIH shares trading in an uninformed market.

On February 27 the shares were halted for the last time and ASIC announced an investigation relating to corporate governance, market disclosure and possible insolvent trading.

On March 15 HIH sought approval from the New South Wales Supreme Court to place the company into provisional liquidation, which enabled the board to appoint KPMG to HIH and its 18 controlled entities.

The next day APRA appointed an inspector to investigate the financial affairs and condition of the company.

The shock liquidation followed a Board-commissioned review of operations by KPMG, which indicated a loss of approximately $A800 million.

Losses from discontinued HIH UK and United States business, as well as other discontinued international business written from Australia, could no longer be sustained by the Australian operations.

The liquidation of HIH had no impact on New Zealand commercial risk insurer HIH Casualty & General Insurance , which earlier this week was sold to QBE Corporate Insurances.

A legal structure, including the appointment of an independent prudential supervisor, was put in place in December 2000 to ensure that HIH NZ has a separate financial profile from HIH Insurance Ltd. The only distributions made to HIH NZ's parent company were through commercially prudent dividends.

While many questions remain unanswered, the role the reinsurers might play is an important one.

Reinsurance is designed to cover blowouts in liabilities such as these, although not usually to this degree. The extent of liabilities will become clear with Mr McGrath and KPMG's inquiries. Then it is a case of going to the reinsurers with specific claims.