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“Russian nationalisation of stranded planes biggest risk to London market” – Berenberg

16th March 2022 - Author: Pete Carvill

The greatest risk to the London insurance market could be in the aviation lines due to Russia’s nationalising of planes trapped within its borders due to international sanctions.

In recent days, the Russian state has moved to deal with the issue of the 500+ leased jets that cannot leave the country due to sanctions. A new law, swiftly enacted by the Duma, looks to ‘ensure the stable functioning of the national transport system’ by allowing the vehicles to be certified and registered within the country.

Some sources state that the new laws will allow foreign jets to be registered in Russia. Those reports state that 515 jets worth about $10bn are within the country. It is thought that they will be used to fly domestic routes within the country.

The move, said Berenberg in a new note, could be the greatest risk to London markets in terms of insured losses.

It added: “The potential exposure arises from 515 leased jets that are reportedly stranded in Russia – of which 425 are immediately at risk of being recovered, worth c$10bn, according to Reuters.”

Stratumn, by SIA Partners

The problem began to bubble up after Russia invaded Ukraine at the end of February.

As Berenberg explains: “Sanctions imposed after Russia’s invasion of Ukraine give leasing firms until 28 March to free themselves from deals with Russian airlines and recover their jets. However, based on reports so far, little to no progress has been made in regards to the latter. Insurance news organisation Insurance Insider has reported that the biggest names in the London-focused contingent war market who could have exposures are believed to be – in alphabetical order – Atrium Underwriters, Axa XL, Beazley, Chubb, Fidelis, Liberty Specialty Markets, and Tokio Marine Kiln.”

In response to the sanctions, Putin’s new law allows for the planes to be used to fly domestic routes. However, there are questions that arise over the maintenance and upkeep of the vehicles, since sanctions mean new parts cannot be sent to Russia. It is also impossible for the planes to be flown elsewhere for maintenance.

The new law, said Berenberg, “[…] would allow Russian airlines to retain and operate planes rented from foreign aircraft lessors that have pulled out of the market and cancelled contracts because of the sanctions. Under the proposed law, Russian airlines will pay leases in roubles throughout 2022 (lease contracts are typically USD-denominated). If a foreign lessor terminates the agreement, a special government commission is to decide whether the aircraft can be returned or rule that the aircraft must stay in Russia. This late development further raises the risk of the jets being potentially unrecoverable.”

This has led, said the company, to an ‘unprecedented’ situation that is ‘complex, uncertain and, arguably, ongoing’.

Berenberg added: “[…] it is impossible to estimate the ultimate outcome. Various sources reported that insurers, airlines and lessors could be heading into a decade- long legal battle over liability, should these jets be written off. In a worst-case scenario from an insurance point of view, we believe that this could ultimately result in a $10bn loss, of which a big proportion would be borne by the London Market – assuming no reinsurance recoveries are made and most policies are triggered. We consider this to be a very low probability high-severity event.”

It went on: “In reality, should valid claims emerge, it is likely that the London market is able to make recoveries. In the note, we show the sensitivity of expected exposure to reinsurance recoveries and joint probability of claims, plus the sensitivity of expected exposure to Lloyd’s excess capital, as of H1 2021.”

Other firms have weighed in in recent days, with Russell Group referring to Russia’s machinations as a ‘hostile act’. It said that the move will deepen the conflict between Russia, Ukraine, and its relationship with the West. The firm also estimated that the cost of the jets will top $13bn (although this was the market rate).

Bank of America released a note in recent days that said the stranded planes were the biggest issue for aviation lines.

It wrote: “[…] if the sanctions didn’t void the cover, the insurers often have an ability to pull coverage for specific regions in the event of war for aviation policies. For aviation contingent war covers (policies issued to leasing companies, rather than airlines) there tends to be a 7 day cancellation notice period.”

It added: “According to industry press, notices have generally been sent since the 24th of February up to about a week ago, suggesting that any contingent war covers that can be pulled might have expired by now. For the contingent all-risk covers (issued to leasing companies, with war exclusions) the notice period is typically 30 days. Therefore even if policies have been notified the cover will exist for another couple of weeks.”

There were also questions that Bank of America has raised around when claims can or should be triggered. The bank questioned whether the introduction of sanctions was a trigger, or if the planes had not been returned by a certain point.

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