A press release said Fitch analyzed 37 insurance companies where the projected benefit obligation (PBO) was at least 5% of shareholders’ equity (or total adjusted capital (TAC) for non-GAAP reporters) and estimates that the average funded status of these pension plans was 81% at year-end 2009, up from 73% at year-end 2008. Fitch said the improved 2009 funded status was due to two reasons: great improvement in investment returns on pension assets and significant pension plan sponsor contributions.
The ratings agency said it believes that overall, the funding status required by the Pension Protection Act is obtainable. Given the strong liquidity and cash flow position of most of the industry, it does not anticipate the need to make additional cash contributions as a significant issue for the industry but could be a concern on a company specific basis.
However, although the funded status increased in 2009, many companies still set expectations for additional cash pension contributions in 2010. In early 2010, the industry set expectations for cash contributions of $2.3 billion (0.3% of equity) in 2010, compared to actual contributions of $4.1 billion the prior year. Through the first nine months of 2010, close to 90% of expected industry contributions have been made. Several companies have already made actual contributions that exceeded $500 million (versus the expected high of $340 million) and others have not completed expected or reported third quarter contributions (many mutual companies have not reported their third quarter financials yet).
This leads Fitch to believe the expected contribution of $2.3 billion for 2010 will be significantly exceeded just as the expected contribution of $2.1 billion was exceeded in 2009.
According to the press release, in 2009, the allocation of pension assets to equity securities increased to 49% from 45%. However the increase was mainly due to a rebound in equity investment returns, which improved 19%-23% as measured by leading indexes, while through the first nine months of 2010 those same indexes show only a 2%-3% increase. Absent high levels of equity market performance improvement the longer term trend of asset allocation shift towards fixed income securities and alternative investments (to a smaller extent) from equities will continue, Fitch said.The report, ‘Pension Shortfalls: Still An Issue for the U.S. Insurance Industry?’ is available at http://www.fitchratings.com.