Jefferies has calculated that aviation war losses due to the Russia-Ukraine conflict could reach $1.5bn for the market.
A new note from the financial services company points to recent pronouncements from the CEO of Lloyd’s of London that estimated insured losses were to be between 15% and 20% of asset values. This, said Jefferies, implied a low-single-digit billions loss.
The firm added: “We believe the total loss will largely relate to the war-risk policy held by AerCap, which we understand does not include a cancellation clause and has an annual loss cap of $1.2bn, according to the Insurance Insider. We understand that Beazley does have exposure to Aviation War risks (we estimate <1% of group premiums), whilst Hiscox only has limited exposure in its reinsurance book.”
Jefferies said the range of potential losses is ‘significant’, saying that the majority will be amongst insurers who have exposure to the AerCap contract. Conflict losses, meanwhile, should be ‘manageable’.
Jefferies added: “We think further conflict-related losses could arise across Marine, Political Risk, and Terrorism lines of business. However, with Marine underwriters issuing cancellation notices before Russia invaded Ukraine, and the market generally limiting exposure in Ukraine since Crimea was annexed in 2014, we believe that losses will be manageable.”
The firm also looked at earnings going forwards.
It said: “With US 2-yr treasury yields rising 161bps YTD, this will have a significant impact on earnings in 2022 and beyond. Rising yields result in unrealised losses in the P&L for both Hiscox and Beazley; however, this is purely an accounting impact. Ultimately, rising yields are a long-term tailwind for earnings, as the majority of Beazley’s and Hiscox’s investments are fixed income.”
As a result, Jefferies said it was reducing its Beazley estimates for this year by 23%. The company’s group premiums were likely to sink by 4% due to lines of business being impacted by the conflict.
It added: “As a result, the business will likely incur losses, albeit we expect these to be manageable, as well as noting a wide range of possible outcomes. Across the exposed lines of business, we assume losses of $80m arising from the conflict for 2022F. For context, Beazley incurred catastrophe losses of $195m last year. In addition, US treasury yields have increased again since our last model update for Beazley, and so we recognise a further $69m of unrealised losses. As a result, we reduce our EPS estimates by 23% for 22F but increase our 23F estimates by 5% driven by rising yields.”
The earnings for Hiscox should be impacted by rising rates, said Jefferies in recognising $15m in additional claims coming from the conflict this year, along with $158m in unrealised losses from rising yields. Therefore, it said it was reducing its 2022 EPS by 35%%, despite increasing its 2023 estimate by 17% due to rising yields.
