AerCap's $3.5bn aviation claim will worry insurers

The $3.5bn insurance claim lodged by AerCap, the world’s largest aircraft leasing company, to cover the potential loss of its planes and engines that remain stuck in Russia will have sent shockwaves through the insurance market.

The claim on its all risks policy, which AerCap acknowledges is more than the assets at risk of around $2.5bn, is expected to lead to a protracted legal battle with insurers.

AerCap said it will “vigorously pursue” its insurance claims as well as “other legal remedies” that may be available.

The size of AerCap’s claim is ahead of what many in the insurance industry had expected and raises the prospect of the doomsday scenario for aviation insurers of a loss bigger than the September 11, 2001 terror attacks, which was around $6bn.

Analysts at Jefferies had suggested an AerCap claim would be limited to around $1.2bn given reports of an annual loss cap in the contract.

The industry will now be wondering whether the $3.5bn notification changes the assumptions.

The planes and engines belonging to AerCap are not the only trapped aviation assets in Russia.

AerCap said it has retrieved 22 of the 135 planes and three of the 14 engines that had been placed with Russian airlines before the start of the war.

It is estimated that more than 500 planes financed or owned by non-Russian lessors are stranded in Russia due to sanctions imposed by numerous western countries in response to the invasion of Ukraine.

Analysts have put the total asset value as high as $13bn, but the potential losses for aviation insurers are difficult to quantify given the loss limits written into policies and whether coverage was in force.

In particular, there are likely to be disputes over whether coverage automatically expired once sanctions were imposed or was cancelled by the insurer before the actual claims event.

'I am sure the settlement of some of these losses will end up in court. It will take years'
^{John Neal
Lloyd's}

The amount and timing of impairment charges to be taken by lessors is subject to a number of variables as well as negotiations with airlines, and this will affect assumptions regarding future recoverable value.

Lloyd’s chief executive, John Neal, said last week he expects insured losses to be between 15% and 20% of asset values, implying a low single-digit-billions loss. As a result, analysts at Jefferies suggested an aviation war insured loss of $1.5bn, largely driven by the expected AerCap claim.

But the $3.5bn claim is way above this, suggesting a significantly higher total market loss.

Fitch has previously put a “realistic scenario” insured loss of $5bn to $6bn for the trapped planes, with a worst-case scenario of $10bn, which would be by far the largest annual claim in the history of aviation insurance. Broker Marsh has estimated a possible loss in the region of $5bn.

A $5bn loss is potentially looking more realistic.

But the legal arguments over the claims will only just be beginning and will take a long time to resolve.

“I am sure the settlement of some of these losses will end up in court,” Neal said last week. “It will take years.”

Given this, it may ultimately be very difficult to establish what the final cost to the insurance industry of the trapped planes is.