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Russian aviation leasing losses 'at lower end of expectations'

The seizure of leased aircraft trapped in Russia might not lead to the losses feared given the timing of the loss event and policy cancellations, according to analysts

Potential losses from a Russian seizure of leased aircraft stranded in Russia as a result of its invasion of Ukraine will be at the lower end of estimates of $1bn to $10bn, according to analysts at Jefferies.

According to Jefferies, the loss event is likely to be after policy cancellation and the most likely loss trigger event is March 14, when Russia introduced a law that allowed Russian airlines to register planes locally.

“In our view, this is the first point in time Russia demonstrated an intent to confiscate the aircraft, so we also view this date as the most likely trigger event,” Jefferies said. “Crucially, we believe most war risk policies were already cancelled at this point.”

War risk policies tend to include a seven-day notice of exclusion/cancellation as standard and Jefferies expects most insurers started issuing this notice as soon as Russia invaded Ukraine and up until end of February.

As a result, Jefferies believes most policies were cancelled by March 7 to 12 and therefore off risk before March 14 (most likely date of loss).

AerCap – the world’s largest aircraft leasing firm – holds war risk insurance cover that reportedly does not have this clause. This is unusual, according to Jefferies, and it expects most policies come with the cancellation clause as standard.

This policy has a $1.2bn annual loss cap, thus only partly covering AerCap’s $2bn-plus fleet stranded in Russia, according to sources.

“We expect insured losses towards the lower end of $1bn to $10bn range,” Jefferies said. “Our expert’s best estimate of insurance losses is $5bn, which we view as very prudent."

Lloyd’s chief executive John Neal said last week he expects insured losses to be between 15% and 20% of asset values. "This would imply a low single-digit-billions loss, based on total asset values of close to $10bn, which we expect largely relates to the AerCap policy," Jefferies said. 

The analysts said they now regard potential litigation as "very likely" and therefore do not expect insurers to recognise and disclose explicit claims reserves arising from aviation losses.

Instead, most insurers will increase loss picks – effectively building up their margin in reserves, Jefferies said. This would help cover against future losses in the event of a severe downside loss scenario. If this downside scenario does not occur, this may lead to higher reserve releases in future years, the analysts added. 

The Lloyd’s insurers that are most exposed to a downside aviation loss scenario (as a percentage of group premiums) from most exposed to least exposed are Lancashire, Beazley, Hiscox and Axa, Jefferies said. 





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