Our analysis of November airline renewals indicated that average premiums had risen by more than 20% for the seventh consecutive month. December, however, is the real crunch month with around 65 major airlines due to renew.

Having reviewed the December renewals, we believe that insurers were only able to achieve a premium growth of approximately 12% – and this includes the renewal of a very large European flag carrier that suffered a major loss earlier this year, and therefore incurred a significant premium increase. Looking at 2009 as a whole, overall premium growth was approximately 15% compared to 2008.

So, has insurers’ resolve weakened? Have overcapacity and strong appetite for the major risks had a part to play? Time will tell (and much will depend upon the frequency and severity of losses in early 2010), but one thing is clear – total airline premium for 2009 is likely to be closer to US$1.85bn than the US$2bn many had hoped for (and expected after the very poor run of losses earlier in the year). With current estimated losses including an allowance for attritionals standing at over US$2.3bn, 2009 will be a third consecutive unprofitable year for most airline insurers.



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Global Economic News
News came in October that the US unemployment rate had risen above 10% for the first time in 26 years. The figures were worse than expected, with the unemployment rate rising from 9.8% to 10.2%, and were described by President Obama as “sobering”. Non-farm payroll data showed that 190,000 jobs were lost, again higher than expected but well down on figures of 500,000 a month seen earlier in the year. The numbers mean that some 15m Americans are now out of work, with 8.2m joining the unemployment register since the recession began. In the housing market, more than 300,000 American homeowners received foreclosure notices on their properties in November. Whilst around 18% up from a year previously, the figure is lower than October’s. A US government subsidy for first-time buyers helped house prices to rise 0.3% in the third quarter – good news for the one in four homeowners who are currently in negative equity.

Bank of America is to pay back $45bn in US bail-out funds. The bank will use $26.2bn of its own cash and raise an additional $18.8bn in the markets through the sale of stock in the largest-ever capital raising by a US bank. The repayment will be the biggest by any of the companies rescued by US authorities during the recent banking crisis, and will add to the pressure on other borrowers from the troubled asset relief programme (TARP). All told, US taxpayers will earn a $3.6bn profit from dividends on the $45bn investment.

Britain’s Treasury has outlined its restructuring plans for troubled banking groups Lloyds and RBS, reportedly involving bailout funds of around £33.5bn in total. The Chancellor told MPs that RBS “may need more capital” in order to return to stability. RBS is to receive a further £25.5bn to prop it up plus a further £8bn for emergencies. He also announced a new capital injection of £5.7bn for Lloyds. The bank is planning, amongst other measures, a £15bn rights issue to extricate itself from the government’s Asset Protection Scheme. Under EU law, the price to be paid for receiving state help will force the two groups to make disposals of parts of their respective businesses. RBS is likely to sell its insurance arms Direct Line and Churchill, while Lloyds will seek to sell its Cheltenham & Gloucester and TSB brands over the next four years as a result of the directive.

The UK government is also planning to split Northern Rock into two parts – the so-called “good bank, bad bank” solution. The hope is that the good part can be sold, but this would mean that many borrowers will become financial prisoners as their loans are bundled up into the bad part.

The UK economy is still struggling to shake off the recession, despite the best efforts of various analysts to talk up the recovery. China, on the other hand, is posting some spectacular figures. Gross Domestic Product (GDP) was 8.9% higher in the third quarter compared with the same period last year and rose by 7.7% in the first nine months of the year. The official target of 8% for the full year would appear to be achievable, particularly as industrial production for November rose by 19.2% – higher than expected. However, in Japan the outlook appears less positive following a huge downward revision to its latest quarterly growth figures. Official government figures released in December showed annualised real GDP for the third quarter was 1.3% rather than the 4.8% reported originally.

Non-Airline Market News
The non-airline markets continue to present a far less volatile rating environment. Overall in the third quarter, premiums declined by approximately 2%. All sectors other than manufacturers showed small reductions while the manufacturers recorded overall increases of around 2%.

Aviation Industry News
Following the failure of the Brit Insurance takeover approach to Chaucer, Pamplona Capital Management is continuing to build a stake in the company. Pamplona’s shareholding stood at 16.27% in late October.

Aspen recorded a Q3 net profit of US$144.7m. This compares to a net loss after tax of $126.1m for Q3 last year. Net earned premiums for the quarter rose to $470.9m, up from US$434.2m this time last year. The group also reported investment income of US$58.9m - up significantly from the US$19.2m it reported this time last year.

Ace continued its recovery, posting strong Q3 results. Net income for the quarter rose to U$494m from U$54m, while net realized investment losses fell to US$207m from US$450m.

Axis Capital reported a net loss for Q3 2009 of $96m, compared to a net loss of $249m for the corresponding period last year. Net income for the first three quarters was US$179m, compared with US$220m for the corresponding period in 2008. Net written premiums rose 8% to US$595m in the quarter.

Swiss Re reported net income of CHF 334m for Q3 compared to a loss of CHF 304m in the same period in 2008. Earned premiums for the quarter dropped 12% to CHF 3.6bn from CHF 3.17bn in the previous year’s period.

Starr Aviation Agency has entered into an agreement with Ironshore Specialty Company to underwrite Aviation risk for Ironshore. The business will be written worldwide and will include airlines, aviation manufacturers, airports, aviation refuellers, fixed base operations, corporate aircraft and other general aviation risks.

In December, Marsh confirmed it is buying HSBC Insurance Brokers for £135m and said it will manage HSBC’s existing accident, health and contingency, cargo, specie and North American practices as a dedicated business unit under a revived Gibbs Hartley Cooper (GHC) brand.

News from the major manufacturers does not give much hope for an early recovery. Airbus announced that, whilst it should achieve its 2009 target of around 480 units delivered, it predicted that the knock-on effect of capacity cutbacks and aircraftlay-ups across the industry at present would lead to deferrals and cancellations in 2010. Boeing saw a 13% growth in revenue for its commercial aircraft divisions in the third quarter, but delays in the 787 and 747-8 programmes resulted in a US$1.6bn loss compared to a US$695m profit for the same time last year.

One surprise during the third quarter was the announcement by Trans State Holdings, parent company of Trans State Airlines and GoJet Airlines, of a Letter of Intent to acquire 100 Mitsubishi Regional Jets – the first order for this aircraft outside of Japan. An interesting choice in a market that is currently dominated by Embraer and Bombardier.

Significant Losses
Following the major losses (and loss of life) headlining this section of our previous three newsletters, we can report the following significant, rather than major, losses during the final quarter of 2009:

Other significant losses since our last newsletter are:

• A VIM Airlines Boeing 757-200 sustained significant fuselage damage during take off from Rimini on 27 September.
• A Windjet Airbus A319-100 was damaged by hail in flight above Sicily on 1 October.
• A Malaysian Airlines Boeing 737-400 was substantially damaged on 2 November when its left main landing gear collapsed whilst parking at Kuching.
• On 4 October a JAT Airways Boeing 737-300 received substantial damage when it overran landing at Istanbul.
• A Boliviana de Aviacion Boeing 737-300 was damaged by hail in flight near Cochabamba on 7 October.
• On 20 October a Centurion Air Cargo MD-11F was damaged during a heavy landing at Montevideo, Uruguay.
• A Denim Air DHC-8-300 was significantly damaged on 22 October when it landed at Barcelona with its nose landing gear retracted.
• An Asiana Airlines Airbus A321-200 suffered a tailstrike on landing at Osaka on 23 October.
• A Kingfisher Airlines ATR-72-200 was damaged beyond repair when it overran landing at Mumbai on 10 November.
• A Jetlink Express CRJ-100ER was probably damaged beyond repair on 12 November when it overran its parking stand at Kigali, Rwanda. The aircraft subsequently caught fire and at least one passenger was killed.
• A Frontier Airlines Airbus A319 suffered multiple bird strikes on take off from Kansas City on 14 November.
• A MD-82 of Compagnie Africaine d’Aviation (CAA) may have been damaged beyond repair when it overran landing at Goma, DR Congo, on 19 November. Around 20 passengers were injured.
• A Win Win Services DHC-8-300 was damaged beyond repair when it made a force landing at Tarakigne, Mali on 19 December.
• On 28 November three of the seven crew on board an Avient Aviation MD-11F were killed when the aircraft failed to take off after rotation from the runway at Shanghai. The aircraft was destroyed.
• A Merpati Nusantara Fokker 100 sustained significant damage when its left main landing gear collapsed on landing at Kupang-El Tari, Indonesia on 2 December.
• On 7 December an SA Airlink ERJ-135LR was possibly damaged beyond repair when it overran landing at George Airport, South Africa.
• An Air Transat A310-300 was damaged on 13 December when it jumped its chocks and hit trees at Rio, Brasil during a ground test run.
• An American Airlines Boeing 737-800 was damaged beyond repair when it overran landing in heavy rain at Jamaica on 22 December. There were fortunately no fatalities, but around 40 passengers were injured.

Market Personnel News
Since our last issue, the following personnel moves have been announced:

• Peter Bilsby (formerly with XL) has joined Talbot.
• Chris Clark (formerly a Deputy Chairman of Willis) has joined JLT.
• Antoine Lamy has left Catlin to become Aviation Underwriter in Singapore for Asia Capital Re.
• Richard Power has left CV Starr to take up the position of Senior Underwriter and Head of Airline Underwriting at Catlin.
• Mark Stanley has left Global to join Catlin.
• John Westoby and Adam Hemingway (both formerly with Marsh) and Simon
• Blanden (previously with Willis) have joined the Aviation team at Aon.

Outlook
Despite the respite from 20% plus premium increases for major airlines in December, insurers’ resolve to increase premium levels and avoid a fourth consecutive unprofitable year remains strong.

Underwriters have adopted a far more technical, tiered approach to rating levels.

Much will depend on the level of losses in early 2010 and a clear picture of the market’s direction for the year is unlikely to emerge until renewal activity picks up in April.