Aviation reinsurers flying high after first AerCap settlement lands
It hasn’t been an easy few years for aviation reinsurance and retro underwriters.
The Boeing groundings which began in 2019 spiralled into a $3bn+ loss impacting multiple XoL treaties and retro programs, while Russia’s invasion of Ukraine created the black swan event whereby ~400 Western-owned aircraft were left behind in the pariah state.
The latter – as we documented in yesterday’s edition of our Monte Carlo Dailies – has prompted a tidal wave of litigation from aircraft lessors against insurers providing different pockets of coverage, including contingent all risks and war.
Our tracker – also published yesterday – lists claims worth ~$10bn principally in the UK courts. However, this has the potential to grow, as most estimates suggest the total value of aircraft trapped or confiscated in Russia at around $13bn.
The situation is fiendishly complicated and, on account of the traditionally high limits expected in aviation reinsurance, potentially costly. It also raised the prospect of years of highly paid lawyers arguing multiple points around wordings coverage, the impact of sanctions, loss causation and cancellation terms.
But on the eve of the Rendez-Vous came a potentially major breakthrough. AerCap – the world’s largest lessor – agreed a settlement with Russian operator Aeroflot relating to 17 aircraft which, crucially, had the approval of US authorities and indeed banks, and was thus not in breach of sanctions.
After all, if the lessors are able to strike deals with the Russian operators, then this not only reduces the loss but also opens up the possibility of the international insurers reaching commercial settlements with the leasing companies.
As Lloyd’s CEO John Neal said: “It’s good news for us too – it means we can sit down and start to have the conversation about what the claim is."
Indeed, this publication understands that the outlook may be even more positive than originally assumed, following our analysis of the structure of the settlement after talking to aviation specialists familiar with the deal.
The $645mn settlement saw Aeroflot pay around two-thirds of the insured value of the aircraft and engines. In addition, AerCap retains its circa 10 percent maintenance reserves, which means the “insured loss” falls to around 25 percent of the assets in scope (following the settlement AerCap reduced its claim against all-risk insurers to $2.75bn).
Being the largest and most influential aircraft lessor, it is reasonable to assume this will be a framework that AerCap will apply with other operators and which may also be adopted by other lessors.
Furthermore, one sticking point had been US sanctions and Western banks wary of transacting any deal. This settlement proves there are workarounds with regulators and financial institutions.
If the overall loss falls by circa 75 percent then there is clearly a much more manageable figure to negotiate commercial settlements between insurers, reinsurers and the lessors. Few would want to roll the legal dice of uncertainty in that situation.
In other words, the likelihood of the worst loss outcome has significantly reduced – this can only be good news for primary aviation insurers and their reinsurers.
Indeed, there is more good news. Risk-adjusted aviation reinsurance rates have climbed in recent renewals (in light of the above), and reinsurers attending the Rendez-Vous appear confident this will continue in 2024.
Speaking yesterday, Hannover Re’s P&C reinsurance head Sven Althoff issued a report saying that while the rate of increase may taper off: “On the whole, Hannover Re anticipates the positive pricing momentum in aviation reinsurance to be sustained for 2024.”
Before we get too excited, however, there’s always the chance of further deterioration on the Boeing loss with another review expected shortly. Let’s hope it is not a case of the Lord giveth and he taketh away…