The general trend toward smaller aviation insurance premiums that began in 2004 and continued through the summer is now in doubt as half of the world's airlines begin the annual task of rewriting their policies. The unknown variable is not the spate of six mainline airliner crashes in August and September, but instead the impact of Hurricanes Katrina and Rita.

In the next three months, 50 percent of the world's airlines renew their hull and liability coverage, but these are the biggest carriers who pay 75 percent of the premiums. Eight percent of the industry writes its policies in October, and December is by far the busiest time for renewing the policies.

The October renewals include two major U.S. regionals: SkyWest [SKYW], now much larger with its acquisition of Atlantic Southeast Airlines, and Mesa Air Group [MESA].

"It is a radical decision-making process right now that goes one way one day and the other way the next," said an aviation insurance industry executive who asked not to be named. He noted that many involved in the industry this year are "tight-lipped" because of the fluid situation.

One international carrier recently renewed an extended policy with a "massive" rate reduction. "The market is now resisting these type of renewals," he noted.

"The impact of the hurricane season will spread far and wide among the insurance community, and a hardening of the markets in all classes seems inevitable," according to a newsletter prepared by Aon, an industry underwriter. "Despite the good recent returns provided from the aviation sector, the market will be under pressure from capital providers to continue to deliver at this level. This will no longer be based on aviation market performance alone, but against expectations of change in other sectors."

The hurricanes' direct impact on aviation will be limited since most aircraft had been removed from the Gulf region before either storm struck. Aon said the "internal competition for capital" will put pressure on insurers to hold the line on premiums as the insurance industry as a whole is braced for a record number of claims.

At this point, the industry has enough underwriting capacity so that the premiums should not be impacted. "There is enough capacity to go around," the insurance executive said.

Alan Levin, an aviation insurance attorney with the Hartford firm of Edwards & Angell, echoed those comments. "There is a lot of capacity out there. The rates seem to be remaining where they have been."

Aon estimates that worldwide premiums this year will pass the $2 billion mark.

The impact of the six airliner crashes has not impacted the aviation insurance pools, Levin said. The industry losses for 2005 now total $523 million compared to $295 million for the same period through September 2004, according to Aon.

The bankruptcies of major U.S. carriers and the resulting fleet consolidations may also have an impact on the rates, the industry executive said. The bankrupt carriers that have shed aircraft are paying smaller premiums for the same coverage due to the reduced number of planes needing insurance. "The underwriters are very concerned. If we continue at this same rating structure, they will take a substantial reduction in premium income."

Aon estimates that the fleet consolidation has removed $30 million in premiums from the pool. Not included in Aon's calculations are probable fleet reductions by Delta Air Lines [DALQ], Northwest Airlines [NWACQ] and Independence Air [FLYI]. Northwest alone has identified more than 100 airplanes that it may shed.

>>Contact: Alan Levin, Edwards & Angell, (860) 525-5065.<<