HIH保险公司破产案例分析.doc

MGT382HIH Insurance bankruptcy caseContentsThe situation of HIH. - 3 - 1. Introduction. - 3 -2. Data analysis - 3 -2.1 The evolution of HIH. 3 - 2.2 The share of HIH in half of 2000 - 4 -2.3 The balance sheet of HIH (1999-2000) - 5 - 3 .Company strategic issues - 5 -3.1 Strategy making and execution - 6 - 3.2 Rapid expansion. - 7 -3.3 Top managers ability - 7 -4. Company operation - 8 -4.1Reinsurance. -8 -4.2 Risk management - 8 -4.3 Financial operation. - 9 - Summary. - 9 -Reference. - 10 - The situation of HIH1. Introduction:The HIH was established in 1969, after struggle 20 years it gone public. Because of HIH is influential in Australia insurance market, its stock increase in front of Australia stock market. success in the capital market let it get massive funds to develop the oversea market.March 15, 2001, the High Court of Australia New South Wales New South Wales (NSW). Place ordered to HIH and its 17 subsidiary companies in Australia, local provisional liquidation, and specify the KPMG Consulting firm (KPMG)Tony McGrath, Mr. and Alex Macintosh, Mr. provisional liquidator.After a preliminary investigation found that the carrying amount of HIH losses as high as $ 800 million, plus possible outstanding claims and potential recourse, even if the more optimistic estimates, actual total loss may be as high as $ 36-53 billion. Convinced HIH insolvent circumstances, the High Court of Australia officially announced on May 17, 2001 HIH bankruptcy, this is the following Reinsurance Australia, GIO Australia, the New Cap Re three of the company went bankrupt, the Australian insurance industry suffered another heavy blow, at the same time the largest bankruptcy cases in the HIH is Australias history.2. Data analysis2.1 The evolution of HIH1968, a man named Raymond of Reginald Williams, who founded a major agent of Lloyds of London (Lloyds) underwriting underwriting agency that the MW of Payne, underwriting agency. In the next 32 years, the company through a series of mergers and acquisitions and convertible equity process, the premium income and total assets are increasing, and developed into one of 29 companies as the main body, a total of more than 250 companies, including the huge insurance Group (its structure as shown in Figure 1), Australias second largest non-life insurance companies. In 32 years time, Mr. Williams has been the senior management of HIH, presided over the companys business. Mr. Williams because of serious differences in the Pacific, the Eagle Equities and other issues with shareholders and until a few months before the company went bankrupt in October 2000, resigned as chief executive officer. Figure 1: the HIH Insurance Group structure (Source: KPMG)2.2 The share of HIH in half of 2000A series of blows to HIH share price plummeted from the start of the second half of 2000, the HIH share price fell from $ 1 to around A $ 0.3 (see Figure 2). In addition, there are 1000 HIH employees lost work, they may or policyholders and shareholders, the HIH bankruptcy will change their destiny.Figure 2: the HIH share price chart (Source: www. .au)2.3 The balance sheet of HIH (1999-2000)Table 1 shows the HIH as a listed companys balance sheet (1999-2000), the table is taken from the HIH audit by Arthur Andersens 2000 annual report to regulatory agencies, audit material, is now sufficient evidence that the large number of falsestatements and records.1999200019992000cash assets638,700461,600Dont earn premium reserve1,038,9001,069,400Short-term receivables1,498,9002,081,500outstanding loss reserve1,415,5001,423,400current investment1,485,200882,400Accounting period cope with623,900381,000Other current assets693,80025,000borrowing164,50019,600Total Current Assets4,316,6003,450,500Drawing expense in advance46,30083,700Total Other Current Liabilities3,289,1003,026,300Long-term account receivable35,0001,388,900permanent investment1,189,0001,753,100outstanding loss reserve2,284,0003,007,500fixed assets147,800164,600term debts335,800504,400Other noncurrent assets2,037,000738,800accrued expenses6,0004,100Non-current assets total3,408,8004,045,400Other noncurrent liabilities-Total assets7,725,4007,495,900The total amount of current liabilities3,489,9003,530,500total liability6,779,0006,556,800book value935,100927,500Table 1: the HIH balance sheet (Unit: $ 1000s. Source: www. .au)3 .Company strategic issues3.1 Strategy making and executionThe first step of strategic management is developing a strategic vision. And then is setting objectives. (John.& Arthur. P.15. ) analysis and survey must be done before making decision. The wrong strategic vision can result the strategic failure finally. HIHs strategy making is not in a system. The top managers making a strategic dissection without all aspects of survey. Ultimately, HIH was in a big trouble. Evaluating performance and initiating corrective adjustments also are the significant step in strategic management . Along with the time gone market will be some different. Company must make sure their strategic will succeed in the different environment. Otherwise, the strategic must be adjusted correctly. Successful strategy execution entails vigilantly searching for way to improve and then making corrective adjustment whenever and wherever it is useful to dos.( John.& Arthur. p.28. ). In the market of California, HIH developed from a subsidiary of CE Heath plc, and became the greatest employees compensation insurance underwriter in a few years. Till 1955, HIH could get mild profits from the business. In 1955, California abolished on the setting of the statute of the lowest rates to encourage the insurer in the form of competition. HIH think insurance rates changes in three years usually for a cycle, so in this year HIH decided to temporarily leave Californias employees compensation insurance market. Three years later, HIH returned to the market. And it is in this year, California court significantly raised the trace amount of employees compensation, reinsurance person also require the dominant insurers in the market take more risks. HIH makes a strategic mistake in returning the California market this year, and the three-year cycle assumption is also miscalculated the risk status. HIH noticed the pressure comes from the market, but it didnt make a decision to quit the market seasonable. HIH paid more than $300 million for its mistake.The impact of host government policies cannot be ignore when operate the strategy. The policies can affect the industrys development through change the tax rate, national security concerns. It include some policies which focus on dominate market. But HIH operate the strategic without thinking about the variety of the market. 3.2 Rapid expansionThe direct results of HIHs large-scale expansion strategy are that it has had more than 200 branch companies within 20 years and the insurance income increased by 26% annually. Furthermore, the high speed comes with cut-throat competition and almost saturation market. How could HIH leaps into Multinational Corporation from a Cor. Correspondent within 32 years? Like other companies, which want to expanse quickly, HIH uses the strategy of low charge rates, high commission, engaging in risky business and merger other companies. You can understand it from several overseas marketing strategies of HIH here.Low-cost provider is a powerful competitive approach in markets with many price-sensitive buyers. There are two ways to achieve Low-cost. The one is the impact of host government policies cannot be ignore when operate the strategy. The policies company effect the industrys development trough change the tax rate, national security concerns etc. it include some policies which focus on dominate market. HIH use the old strategic in the new market environment. It is dangerous for company. 3.3 Top managers abilityThere are severe defects existing in the HIH management structure. The Modern Firm which adopts share-holding system is the managerial authority separates from the ownership of enterprise. The based relationship is more complex than sole proprietorship and partnerships. Therefore the standard adjusts the relationship among all parties, especially the relationship between owner and operator is depends on the system of corporate governance. According to the Agency Theory, the system means the management of client to agent. The contents of corporate governance are constituted and guaranteed by a series of contracts which include formal and informal contracts. The formal contracts consist of laws, articles of incorporation, listing rules, accounting standard, guild regulations, etc. The informal contracts rules based on culture and society. The corporate governance is divided into two parts: one is management structure, and another is administrative organization. The administrative organizations consist of equity structure, board of directors, board of supervisors, management teams, etc. Management structure includes personnel system, supervise system and encourage system.HIHs board of director which lack of independence leads to performance deterioration and cant evaluate the performance of management system. Because the board have wrong decisions to speculative and be short of develop strategies, which leads to faulty decisions about overseas expansion and FAI. Roy William, who was one of the company founded people, as the CEO of the company until October 10th because retirement. But he still has unlimited rights on decision making, contribution, payment of stuffs, even he quitted the duty of CEO.4. Company operation4.1ReinsuranceDocuments before the commission also suggest that HIH may have used sham reinsurance contracts to inflate its short-term profits artificially. (Becky. 2002. ) Reinsurance contracts to be a financial tools again. Different from traditional insurance product that scattered risk on the space, it scattered risk on the time. In fact, the main purpose that HIH takeover FAI is also for adjusting the balance sheet, but turned out to the financial of HIH worsened. In this case the insurance trade became the focus. Reinsurance is an main approach to diversify risk and reinforce the solvency of the insurance company was used repeatly. but as reinsurance technology is more complex and higher requirement for confidentiality. It was often used to adjust the accounts and avoid the tax and the supervision. In particular transfer the insurance companys financial risk to reinsurer. It played an important role in the HIH events.4.2 Risk managementRisk management is a scientific management system that based on predecessors experience and the modern scientific achievement, which could identify and analysis to reply the risk of impact on strategies or the targets. The enterprise management of risk is a management science which is based on experience of forefathers and modern science ,also affect strategies or reach goals that identify ,analysis or dealing . the enterprise risk is process , including the risk of distinguish ,balance or control. The aim at diminished losses down and improve business efficiency.4.3 Financial operationHIHs board doesnt understand the conception and relevance of conflict of interest. During the treatment, the board didnt publish the interest initiatively and didnt dispose the problems. June of 2000, a sub company of HIH offered a loan to a real economy which belongs to a strong stock holder Alder of HIH. The company use 4 million Australia to make the lie that all the people thought Alder buy the stock in private made the price of stock fallen. Alder used the other 4 million to purchase private shares of ICT, at last, the investment failed. The last 2 million was lend to Alder without record. Alder was one of the members of HIHs investment committee. The rules of the committee are the entire boarder should approve the program of loan. But the Alders investment hasnt the processes.SummarySWOT analysisThere are five step in strategic management process (John.& Arthur. p.15.):1. Developing a strategic vision2. Setting objective3. Crafting a strategy to achieve the objectives and the vision4. Implementing and executing the chosen strategy5. Evaluating performance and initiating corrective adjustmentsTop managements views about the companys direction in the strategy making are related to the success on the operation. HIHs board make decision without developing vision. therefore it failure operation in the England in 1993. In the market of California, HIH paid more than $300 million for its mistake. Because of loss the last step of strategic management which is the trigger point for deciding whether to continue or change the companys vision, objectives, strategy, and strategy execution method