From hero to zero in 1.5 years

This is a story on how a very boring insurance company that had been running of its liabilities for next to 20 years first made a deal that looked to be very nice indeed, and was insolvent 1.5 years later, thanks to poor wording in a policy clause more than 12 years ago, and not uncovered in the due diligence.

I stumbled upon a tweet announcing that East West Insurance Company went into administration. This isn’t terribly unusual, but as I work in a run-off business, and have worked for a company which had a decidedly East-West connotation, I was curious. I started to dig into it, and wrote a small thread.

In the following, I will mostly copy that thread to preserve it in a more robust matter.

One would think that insurance run-off is a boring industry, especially for a portfolio that has ceased underwriting in 2012. What was the issue? In 2018, EWIC acquired a portfolio of UK Building Guarantee Insurance, with an exposure to 55,000 contracts.

These were completely in the final stage of this kind of insurance (Structural Indemnity Period), 10 years in which the insurance will cover damages which originated in the construction period. Now, 2018 appareantly was a bad time to take over such a portfolio.


But Grenfell already happened in 2017, so these implications should have been priced in. Judging from the change in assets, EWIC was compensated with about 83 mil USD for accepting liabilities valued at about 41 Mil USD. A markup of 100% – well done.

Using the standard measure of insurance companies, the Solvency Ratio, the company was well capitalised – it had 185% of the required capital. The solvency capital requirement is supposed to equate a 1 in 200 years event. Any outsider would expect this to be a healthy company.

So, what went wrong? Fine print the the policy clauses went wrong. One insured claimed for damages under the policy. The insurance policy had a maximum liability cap, which where „poorly drafted“ in the words of the judge. (For a good summary of the judgment see and for the original verdict see

In this case, the insurer expected that its maximum liability would be around 3.6mil instead of the higher actual damage. But the appeals court found that the actual maximum liability in this case is more than 10 mil. Now, on first glance one would think that even if this higher cap was operational, and the total damage would be 7.4 mil higher than initially thought, East West should have plenty of reserves to pay these 7.4 mil. After all, they collected 42 mil more in assets than liabilities.

The problem is that this was just one case. Applying this case to all similar claims lead to a „strengthening of reserves“, and 41 mil liabilities in June 2018 turned into 93 mil liabilities at year end 2019. And so what seemed to be a great deal in 2018 became an insolvency in 2020.

For now, you can read more about the company on their website, and especially in their Solvency and Financial Condition Reports, which where my main source.

See the announcement from the FCA here: