Lessors of planes stranded in Russia since the imposition of sanctions have warned insurers of potential claims if the planes are not returned. Meanwhile, insurers are canceling some policies, including those for war risk, and may challenge claims on coverage that is still in force, according to industry participants.
"The magnitude of potential loss here is staggering," said Garrett Hanrahan, global head of aviation and space for Marsh, a Marsh McLennan company.
"This may be the largest aviation insurance loss in market history."
Both parties are attempting to improve their positions following President Vladimir Putin's decision to allow Russian airlines to keep aircraft until the end of their lease terms and re-register them in the country. Under European Union sanctions and broader banking prohibitions, leasing companies seeking to repossess planes have until March 28 to cancel contracts. As the focus shifts to the insurance market, coverage providers are attempting to avoid being overburdened with claims. The standoff poses a threat to firms all the way up and down the insurance industry's food chain.
According to aviation consultant IBA, foreign lessors rented 509 aircraft to Russian operators as of March 16. That's 14 fewer than the 523 planes counted on March 10. According to IBA, some of the 14 planes were outside of Russia when the sanctions were imposed and have since been returned to lessors. As of March 10, the world's largest leasing firm, Dublin-based AerCap Holdings NV, had 142 of the original total, followed by SMBC Aviation Capital with 35, though it is unclear how many of the leased planes remain in Russia.
According to people familiar with the matter who asked not to be identified because they were discussing private information, Lloyd's of London provides the vast majority of aviation coverage.
AerCap and SMBC Aviation representatives declined to comment on whether they had sent any notices of claim. Lloyd's of London declined to comment on the market's potential exposure to claims.
AerCap stated late last month that it will comply with EU sanctions. As of February, SMBC Aviation had terminated all of its Russian leases and had aircraft in Russia with a net book value of $1.7 billion.
Concerning Insurance
According to a person familiar with the situation, Lloyd's of London expects a "significant but manageable overall loss," with a final bill of $1 billion to $4 billion after reinsurance payouts. A request for comment on the estimate was not responded to in the exchange.
Russia's decision to keep planes that had their leases terminated could help lessors with insurance claims, said Steven Udvar-Hazy, chairman of Air Lease Corp., at a JPMorgan Chase & Co. conference on Wednesday.
"It demonstrates the intent to confiscate, which I believe is an important aspect of our war risk insurance," Udvar-Hazy said.
Credit Suisse Group AG analysts said in a note on Thursday that whether primary insurance coverage will be effective will be the subject of "significant debate." However, secondary coverage held by lessors — contracts with insurance companies unrelated to Russian entities — is likely to remain effective, according to the analysts led by Moshe Orenbuch.
When primary insurers receive notices of potential claims, they may seek payment from their reinsurers. Legal wranglings may erupt as firms argue over what is and isn't covered, according to James Healy-Pratt, an aviation lawyer and partner at Keystone Law in London.
"The issue with the leased planes in Russia will be very complex," he said, "because countries do not normally seize large fleets of aircraft." "Whatever happens, the lessors will have to take a massive writedown in the value of their assets, and we haven't seen any SEC filings from the lessors thus far."
Healy-Pratt cited Iraq's invasion of Kuwait in 1990, during which Iraqi forces seized a number of commercial aircraft, sparking nearly two decades of litigation.
"While not identical, the scale of the challenge ahead will be massive, and I anticipate years of litigation between lessors, insurers, and underwriters over who pays the bill," he said.
Legal squabbles
At least one lawsuit has already been filed in response to the contentious situation. This week, Singapore-based lessor BOC Aviation Ltd. sued Russia's AirBridgeCargo Airlines LLC over a Boeing Co. plane that is currently based in Hong Kong. BOC Aviation claims that the cancellation of a reinsurance policy triggered a default under their lease agreement, allowing the jet to be repossessed.
According to the lawsuit, "as a result of the canceled and invalidated insurance, BOCA terminated the leasing of the aircraft and exercised its contractual right to demand the immediate return of the aircraft with all necessary records." "AirBridge, on the other hand, refuses to recognize the termination of the aircraft lease and refuses to return the records." Instead, it is requesting that BOCA grant permission for the aircraft to fly from Hong Kong to Russia."
The exposure of the insurance industry has yet to be determined. According to Marsh's Hanrahan, if leasing companies successfully retrieve all of their aircraft from Russia, any claims may be waived. The dominance of Lloyd's of London in the market may also deter claims, as holders with cancelled policies may refrain from suing the main provider of insurance coverage for fear of being shut out, according to people familiar with the matter.
According to Lloyd's of London, the world's largest insurance exchange, activities in Russia and Belarus account for less than 1% of its total business. According to two people familiar with the exchange, it provides loss or damage coverage, liability policies, and a type of "confiscation" insurance for aviation.
"This is a new challenge, and I believe we must tell ourselves, 'This is not the last of these challenges,'" Hanrahan said.