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Fitch: Pension Shortfalls Still Not a Material Credit Concern for U.S. Insurance Industry

CHICAGO, Nov 12, 2010 (BUSINESS WIRE) -- According to a Fitch Ratings special report issued today, the funded status of U.S. life and non-life insurers' defined benefit pensions plans (pension plans) improved in 2009 almost without exception. 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). Fitch estimates that the average funded status of these pension plans was 81% at year-end 2009, up from 73% at year-end 2008. The decrease in the pension shortfall (defined as pension assets less the PBO) lowers the incremental pressure on industry capital. The improved 2009 funded status was due to two reasons; great improvement in investment returns on pension assets and significant pension plan sponsor contributions. However, 2010 investment returns do not appear to be as high as 2009 and may not improve much in 2011. Also more and more companies are decreasing the discount rates used to calculate their PBO in recognition that pension asset returns may not be high as the past, which has the affect of increasing pension funding shortfalls. Further significant contributions will still be needed if insurers are to meet the stepped up funding requirements of the Pension Protection Act of 2006 (The Act) given the investment environment and changing pension assumptions.

Fitch believes that overall, the funding status required by The Act is obtainable. Given the strong liquidity and cash flow position of most of the industry, Fitch 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. Fitch continues to evaluate the significance of the pension shortfall on a company specific basis, which could put pressure on individual company ratings. Fitch 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, the level of pension disclosure in some insurers' financials, and the ever-changing regulatory landscape all contribute to the complexity.

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.

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 indices, 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.

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

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research: Pension Shortfalls: Still An Issue for the U.S. Insurance Industry? http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=571393 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.

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SOURCE: Fitch Ratings CONTACT: Fitch, Inc. Bruce Cox, Director +1-312-606-2316 70 West Madison St. Chicago, IL 60602 or Olu Sonola, Director +1-212-908-0583 or Media Relations Brian Bertsch, +1-212-908-0549 brian.bertsch@fitchratings.com Copyright Business Wire 2010 -0- KEYWORD: United States

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New York INDUSTRY KEYWORD: Professional Services

Finance

Insurance SUBJECT CODE: Bond/Stock Rating