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Cancellation clauses may limit aviation losses from Ukraine crisis: Jefferies

29th March 2022 - Author: Katie Baker

Cancellation clauses could limit aviation insured losses from Ukraine crisis, according to analysts at Jefferies.

JefferiesThe analysts believe that when Russia introduced a law that allowed Russian airlines to register planes locally, this is the first point in time that the country demonstrated an intent to confiscate the aircraft, so they also view this date as the most likely trigger event.

“War-risk policies tend to include a seven-day notice of exclusion/cancellation as standard, and we expect most insurers started issuing this notice as soon as Russia invaded Ukraine, and up until end of February,” say analysts.

As a result, the investment banking agency believes that most policies were cancelled between 7th and 12th March, and therefore off risk before the 14th (most likely date of loss).

Aircraft leasing firm AerCap holds war-risk insurance cover that reportedly does not have this clause, which Jefferies considers unusual, and expects that most policies come with the cancellation clause as standard.

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This policy has a $1.2bn annual loss cap, thus only partly covering AerCap’s $2bn+ fleet stranded in Russia, according to the Insurance Insider, although the firm didn’t comment.

Jefferies expects insured losses towards the lower end of $1bn-$10bn range, with the company’s analysts estimating insurance losses of $5bn, which it views as very prudent given the situation.

The Lloyd’s CEO has also suggested that he expects insured losses to be between 15% and 20% of asset values, which would imply a low-single-digit billions loss, based on total asset values of c.$10bn, which we expect largely relates to the AerCap policy mentioned above.

The analysts see potential litigation as very likely, and therefore do not expect insurers to recognise and disclose explicit claims reserves arising from aviation losses. Instead, they believe that most insurers will increase loss picks, effectively building up their margin in reserves.

This would help cover against future losses in the event of a severe downside loss scenario, in our view. If this downside scenario does not occur, this may lead to higher reserve releases in future years.

Jefferies noted that the Lloyd’s insurers that are most exposed to a downside aviation loss scenario, from most exposed to least exposed being Lancashire, Beazley, Hiscox and AXA.

In the context of conflict losses most likely being manageable, Jefferies expects Lancashire and Beazley to present the best buying opportunities with share prices declining 22% and 13% respectively since 21 February.

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