The HIH collapse is now shaping up as one of the worst in Australian corporate history. Provisional liquidator Tony McGrath says each of the major Australian insurance companies within the HIH group is “clearly insolvent”.

The crisis that has followed the collapse – a large amount of former HIH business has still not been accepted by underwriters – has ensured that businesses won’t take their insurance arrangements quite so lightly in the future.

Commentator Terry McCrann said the HIH crash “will almost certainly prove to be the biggest collapse in Australian history of what might be termed a normal company – as opposed to Bond Corporation-like entrepreneurial players.” McCrann also warned that many people associated with HIH “are going to be badly burned” – a contention that the provisional liquidator’s initial report tends to support.

As much as 50 cents of every dollar of assets claimed in the accounts may no longer exist. No one knows for sure, and liquidator McGrath said it will be “many months” before a detailed financial position of each of the companies is available. “[We] are continuing the consideration of whether each company should go into liquidation or be subject to a scheme of arrangement.”

Highlights of Mr McGrath’s initial report to stakeholders:

• The financial position of each of the three main licence-holding companies is worse than the stated balance sheet position “by a very significant margin”.
• The deficiencies reflect previous optimistic valuation of assets, and extensive under-estimation of liabilities.
• The very substantial losses which will be revealed will not be restricted to the last nine months of operation.
• Although significant losses have been suffered on some overseas elements of the business, the failure of the group cannot be attributed to this cause alone.

Nor will reinsurance recoveries help much. Although these are covered by section 562A of the Corporations Law, the HIH companies have extensive and varied reinsurance arrangements that will probably require court direction to sort out. Mr McGrath said although the intention of section 562A is very clear, “its application in practice is not straightforward”.

The news that all the major insurance companies owned by HIH are “clearly insolvent” has also stung ASIC into action, with Chairman David Knott revealing that its investigation which began on February 27 includes possible offences for insolvent trading. “We will be seeking the co-operation of the provisional liquidator in pursuing our inquiries.”

ASIC doesn’t expect to have any solutions – or prosecutions – in the short-term. Mr Knott said ASIC’s investigation is “likely to take many months. We fully understand the complexity of this situation.”

Mr McGrath will meet again with the major stakeholders today.