HIH grew by buying insurers it never checked — then became Australia's biggest collapse

HIH Insurance grew from a modest Australian insurer into the country's second-largest general insurer by buying other insurers, fast. Through the late 1990s it acquired businesses in the United States, New Zealand, Argentina and the United Kingdom, and in Australia it bought FAI Insurance for $295 million — a company that, as a later inquiry found, was already under intense financial pressure, unbeknownst to HIH's own directors.

The growth hid a hole. HIH had been under-reserving — setting aside too little to pay the claims it had already written — and the businesses it bought added losses of their own, especially in aviation and marine insurance. Its Australian operation, which generated most of its revenue, was itself losing money. A routine audit by Arthur Andersen in July 2000 concluded the company was in a healthy financial state; a bank-commissioned review by Ernst & Young a few months later called its position 'delicately poised'.

The end came quickly. HIH's shares were suspended on 1 March 2001, and on 15 March the board placed the company into provisional liquidation. By the time of formal liquidation the deficiency in the HIH group was estimated at between A$3.6 billion and A$5.3 billion — making it the largest corporate failure in Australian history. A royal commission later examined the collapse in detail.

HIH is the textbook case of growth by acquisition outrunning the ability to know what you have bought. The company expanded faster than it could understand the reserves and risks it was taking on, and by the time the under-reserving surfaced, the holes were too large for the balance sheet to bear.