AerCap deal sets framework that reduces $10bn+ Russia loss to ~$2bn

Aviation (re)insurers and executives attending the Monte Carlo Rendez-Vous have welcomed last week’s landmark AerCap deal as heralding a framework that could see the industry’s overall loss shrivel from $10bn+ to $2bn-$2.5bn via commercial settlements rather than litigation.

  • $645mn deal could be model for future settlements
  • Framework sees lessors reduce loss to around 20-25% of insured value
  • Settlement approved by US Treasury and is “consistent” with sanctions
  • Commercial settlements between (re)insurers and lessors would reduce gross claims further = potential for $2bn loss (or less)
  • $10bn+ of disputed claims currently: most in London

AerCap, the world's largest aircraft lessor, last week agreed to settle an insurance claim over 17 jets and five engines leased to flag carrier Aeroflot and its subsidiary Rossiya, part of a wider dispute involving more than 400-owned Western planes stranded or confiscated in the wake of the invasion of Ukraine.

The $645mn commercial settlement – which was approved by US and Russian authorities – is expected to be a model and framework that AerCap will try to replicate with other Russian airlines and operators and also for other lessors to adopt.

Crucially, it set a structure for other settlements to follow which – if agreed – would see the current ~$10bn of disputed claims shrink to $2bn-$2.5bn and which could then be subject to further negotiated settlement between insurers and the lessor companies.

An expert familiar with the structure of the deal explained Aeroflot and its subsidiaries paid around two-thirds of the insured value of the aircraft and engines to AerCap. In addition, AerCap retained its circa 10 percent maintenance reserves, which means the “insured loss” fell to circa 25 percent of the assets in scope.

He predicted that this would then likely be the sum that would be subject to commercial negotiations between lessors and insurers, the latter also being ranged against each other as providing different scopes of potential cover.

Following the settlement, AerCap said it was reducing its claim to $2.75bn from $3.5bn.

AerCap is the world’s largest aviation lessor and is widely regarded as a pivotal force in deciding the overall loss picture. It was the first lessor to file claims against insurers and – at over $4bn in the aggregate ­– still the highest in total. AIG leads the larger all-risks policy and Atrium leads the contingent war placement.

Executives attending the Rendez-Vous privately predicted further settlements will follow, noting that there is commonality of interest on all sides with Russian airlines keen to keep hold of the seized aircraft and lessors equally keen to dispose of assets which have been left unmaintained for over a year.

They also said it was not in anyone’s interest to proceed to trial with the litigation considering the costs, litigation uncertainties and also the fact a settlement framework has now been established.

A source close to the settlement also said that one of the unexpected difficulties was executing on the transaction once it had been signed off, even though this included the US Treasury.

“Finding banks willing to process the settlement was very difficult but we got there in the end,” the source explained.

Speaking on the eve of the Rendez-Vous, Beazley CEO Adrian Cox welcomed the settlement: “I think it's pleasing that settlements are happening before this thing goes to trial. It is a very complex situation, but no one wants this stuff dragging through years of litigation through courts and the like. So I think it's positive that settlements are beginning to happen and I hope more will follow.”

Beazley is a significant aviation war underwriter through its support for London MGA Hive, although Cox was keen to downplay the group’s net exposure.

Lloyd’s CEO John Neal also welcomed the deal, saying: “It’s good news for us too, it means we can sit down and start to have the conversation about what is the claim."

Lloyd’s is a leading aviation all-risks and war (re)insurer and a number of syndicates have potential exposures. including Atrium, Beazley and Cathedral.

The Insurer has tracked more than 95 legal actions filed in the UK, Ireland and the US – with 80 filed in London alone – and claimants are typically reserving rights on both all-risk and war covers, although the claims are complicated by issues of coverage wordings, causation triggers, cancellation clauses and the impact of Western sanctions.

London (re)insurance legal expert Jonathan Sacher, a partner with Bryan Cave Leighton Paisner, said: “I personally believe that a settlement between lessors and (re)insurers will be likely in many cases. This would be a preferable outcome for many lessors.”

However, he warned there is always the risk that in cases of multiple litigation there is always the danger an “outlier” does go to litigation and creates an unhelpful precedent.

This morning (11 September) Hannover Re predicted “positive pricing momentum in aviation reinsurance to be sustained for 2024”. However, it added: “Due to the comparatively better starting position, rate increases might not fully live up to the level of the previous year.”

The Insurer Comment:

Clearly good news. There is still the intriguing battle, of course, between all-risks cover and aviation war, where self-interest is largely determining one’s view on liability (if at all). Does a commercial settlement between corporate parties which reduces the loss suggest the cover is more all-risks than war? It is certainly an argument that aviation war-exposed (re)insurers are likely to put forward…