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Insider in Full: Aviation and the AerCap deal: What comes next

The announcement of a landmark settlement between number-one aircraft lessor AerCap and state-backed Russian airline Aeroflot has raised the prospect of a significant reduction in the $12bn+ claims bill being faced by aviation insurers...

The deal, which complied with all “applicable sanctions regimes” and was approved by the US Department of Commerce and the US Department of the Treasury, has also created a pathway towards the avoidance of years of litigation.

In a best-case scenario, a succession of similar, successful negotiations with affected lessors and airlines could shrink the industry claims tally to a fraction of the $12bn-$15bn worst-case scenario previously discussed. There is huge uncertainty, but sources said that if similar deals are widespread in their adoption the overall claims tally could fall to $2bn-$4bn.

But where the ultimate quantum lands after a strenuous period of negotiations will heavily depend on the outcome of a number of complex discussions and scenarios due to play out in the coming weeks and months.

The aviation market is currently operating under the cloud of what could be its largest ever loss event, with the seizure of 400+ leased planes by Russia in the wake of the Ukraine war.

The claim is subject to major coverage disputes that have spawned dozens of lawsuits already, with questions not only around whether coverage was still in place at the time of the seizure, but the cause of loss and how claims might be spread across interlocking all-risks, war and contingent war policies.

This publication first revealed that AerCap was in talks with Russia’s flag carrier, Aeroflot, in February of this year. In a statement issued to this publication at the time, Aercap denied that it had engaged in any talks with Aeroflot or other Russian airlines.

Last week, it then announced that AerCap had struck a deal with Russian airlines Aeroflot and Rossiya, a subsidiary of Aeroflot, to sell some 17 aircraft and five engines.

In doing so, AerCap said it had reduced its insurance claim from $3.5bn to around $2.75bn.

What the deal certainly has done is start to build a framework which other lessors and airlines could effectively copy to agree similar settlements.

A significant reduction in the total claim value makes the prospect of a commercial settlement between insurers and lessors more likely. In this scenario, the settlement would likely see payments made by both the all-risks and the war market, with the lessors also obliged to accept some financial loss.

However, with reinsurers still likely on the hook, a further negotiation between cedants and reinsurance partners would need to take place. Sources said that to date, getting their reinsurers to the table to discuss potential losses had been difficult.

With hundreds of millions of dollars spent on legal bills and major uncertainty hanging over them, all sides have an incentive to reach deals. But it will be a challenge to secure airline-lessor deals, and then to follow them up with commercial settlements with insurers that depend on an agreed split between all-risks and war insurers, and an agreement from reinsurers around what they will pay.

The challenge of these parallel negotiations will be made worse by the time pressure. Sources said regulators have set an end of September deadline for all lessor-airline deals to be agreed. There has been speculation this could be extended until the end of the year, but even this would leave parties to the negotiations sprinting to the finish line.

There are also a number of complexities and nuances which need to be navigated before the (re)insurance industry has a clearer picture on what its final loss bill will look like. We explore these below.

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Next in line

Firstly, AerCap is the only lessor to have publicly disclosed a deal with a Russian airline, and, while its claim is the largest, the reduced claim would still have a material impact on insurers were they to pay it.

   

Sources told this publication that some lessors – but certainly not all of them – had notified their insurers they had opened conversations with Russian carriers but that the talks were still in their infancy. These lessors are thought to include number two leasing company SMBC and Air Lease Corp.

One factor for consideration is that settlements are understood to be based on the fair value of the aircraft at the date of the invasion – creating a mismatch between those values and total insured values.

Sources told this publication of their frustration that not all lessors had entered into talks with Russian airlines. “I don’t understand why they wouldn’t be trying to talk [Russian carriers],” one source said.

One underwriter, meanwhile, said the deal “significantly weakens lessors’ claims” because they need to prove that all avenues have been exhausted for insurers to pay a claim.

At the same time, other airlines are negotiating their own deals with AerCap.

It is understood S7 is one of the Russian carriers, aside from Aeroflot and Rossiya, open to buying the planes in its possession. Its deal is being closely scrutinised as the first private airline to strike a deal with a lessor – and could provide a template for other private carriers to follow.

However, given that the Russian government is funding the purchase of the aircraft, a major question mark is whether a private company would be comfortable with what would effectively be nationalisation.

Court documents from earlier this year showed that S7 had applied for and received permission to return some aircraft, although this seemingly never materialised.

Other Russian airlines believed to be pursuing deals with lessors include Ural Airlines and low-cost carrier Smartavia.

All-risk vs war

Senior market sources also noted the deal between Aeroflot and AerCap had changed the dynamics of the claim.

At the beginning of the conflict, there was much speculation about which market the claims would fall into, but the picture might now be a little clearer.

Because the planes have not been seized or nationalised, as many lessors claimed, but rather have been bought, the claims are now likely to fall more heavily on the all-risk market, sources said.

       

One source told this publication that, in the wake of the deal, it is now “very difficult to see how this is a war peril”.

This could actually be beneficial for lessors, as aviation all-risk policies, unlike aviation war policies, do not have annual aggregate caps.

   

For instance, AerCap initially sued its all-risk insurers for $3.5bn, but it sued its contingent war insurers for $1.2bn, due to the aggregate cap.

Sources told this publication that they hoped the AerCap-Aeroflot deal would serve as a wake-up call to all-risk insurers, as they have “buried their heads in the sand since the start of this conflict”.

The all-risk market has remained relatively soft. This is in stark contrast to the aviation war market, which has remained exceptionally hard, with average rate increases of around 100% at the last key renewal date.

One senior market source told this publication the all-risk market, after Russia’s invasion of Ukraine and the subsequent legal fallout, had been in “total denial” over its position.

SMBC declined to comment.

 

Insurance Insider delivers global wholesale, specialty, and (re)insurance Intelligence that enables you to act first. Redeem your complimentary 14-day trial for more premium content from Insurance Insider. 

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