Fitch: Pension Shortfalls not a problem of material credit for U.S. Insurance Industry

 

Wednesday, Aug 26,2009, 9:47:17 AM   Click:

NEW YORK - (BUSINESS WIRE) - According to a Fitch Ratings special report published today, the recent decline in the funded status of American life and non-life insurers' pension plans to defined benefit (pension) No is not a concern of industry equipment yet. Fitch believes that the funded status of pension plans averaged 73.4% at the end of fiscal 2008, down 95.8% in 2007. This rise in pension deficit (defined as pension assets minus projected benefit obligation (PBO)) only add further pressure on corporate capital, an area already suffered from the deterioration of financial markets .

However, Fitch continues to assess the importance of the pension deficit on a specific company, which could put pressure on the ratings of each company. Fitch notes that the funding status is variable over time making pension of impact on the ratings difficult project. Uncertain future performance of pension assets, various assumptions within the PBO and the evolving regulatory landscape all contribute to the complexity. Fitch has analyzed 37 insurance companies when the PBO was at least 5% of equity (total adjusted capital (TAC) for reporting non-GAAP).

Given the decrease in the funded status many companies may be expected to make additional cash contributions in 2009. At year-end 2008, the industry expected to make cash contributions of $2.1 billion (0.46% of equity) in 2009 compared to $2.3 billion (0.38% of equity) the prior year. The average was $65 million with a range as low as $0 up to a high of $304 million. Fitch does not anticipate the expected cash contribution to be a significant liquidity issue for the industry but could be a concern on a company specific basis. Additionally, the easing of regulatory guidelines may also influence the amount of required contributions.

A driver of the increase in the pension shortfall was the 18% decrease in pension assets in 2008 versus the prior year. The decline is primarily attributable to the negative 20.6% average return on assets during the year. The allocation of pension assets has shifted towards fixed income securities from equities in 2008 compared to 2007. Total fixed income securities rose to 42% in 2008 from 36% the prior year, while equities declined to 45% from 54% over the same period. However, it is difficult to tell how much of the shift was due to weak asset performance versus intended reallocation by plan sponsors.

For more details on Fitch's pension study see the special report 'Pension Shortfalls: An Issue for the U.S. Insurance Industry?' that is available on Fitch's web site at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.





Fitch Ratings

Lauren M. Kalinowski, CPA, 212-908-0524

Olu Sonola, CPA, CFA, 212-908-0583

Brian Bertsch, 212-908-0549 (Media Relations)

brian.bertsch@fitchratings.com



Source: Fitch Ratings