Pension Shortfalls not a Material Credit Concern for Insurers

According to a news release, Fitch estimates that the average funded status of pension plans was 73.4% at year-end 2008, down from 95.8% in 2007. This increase in the pension shortfall (defined as pension assets less the projected benefit obligation (PBO)) adds only incremental pressure on industry capital, an area already negatively impacted by deterioration in the financial markets, Fitch said.

However, the rating agency continues to evaluate the significance of the pension shortfall on a company-specific basis, which could put pressure on individual company ratings. The report notes that the funded status is variable over time which makes the impact pension plans have on ratings hard to project. The uncertain future performance of pension assets, varying assumptions within PBO, and the changing regulatory landscape all contribute to the complexity.

Fitch analyzed 37 insurance companies where the PBO was at least 5% of shareholders’ equity (or total adjusted capital (TAC) for non-GAAP reporters).

The decrease in funded status means many companies may be expected to make additional cash contributions in 2009. At year-end 2008, the insurance 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.

Fitch said it 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. The report pointed out that the easing of regulatory guidelines may also influence the amount of required contributions. Fitch recently reported that the telecom sector may experience credit quality pressures as a result of the expected pension contributions (see Telecom Sector Credit Ratings May be Affected by Pension Contributions ).

According to the news release, a driver of the increase in the pension shortfall was the 18% decrease in pension assets in 2008 versus the prior year – primarily attributable to the -20.6% average return on assets during the year.

The report, “Pension Shortfalls: An Issue for the U.S. Insurance Industry?” is available at www.fitchratingss.com .