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Rating Action:

Moody's affirms Ohio National's ratings and revises outlook to negative

26 Sep 2018

New York, September 26, 2018 -- Moody's Investors Service ("Moody's") has affirmed Ohio National Financial Services, Inc.'s (Ohio National) Baa1 senior debt rating as well as the A1 insurance financial strength (IFS) ratings of Ohio National Life Insurance Company (ONLIC) and Ohio National Life Assurance Corporation (ONLAC), the core insurance subsidiaries of Ohio National. The outlook for the ratings of Ohio National and its subsidiaries was revised to negative from stable. Please see below for a complete list of rating actions. The rating action follows the company's announcement on September 6, 2018, whereby it will exclusively focus on life and disability income insurance businesses to drive long-term growth, no longer accept applications for annuities or new retirement plans, and reduce its workforce.

RATINGS RATIONALE

In affirming Ohio National's ratings, Moody's says that the action reflects the solid capital position, an aligned variable cost distribution, and consistent growth in life insurance sales, and a diverse source of earnings. The company's capital adequacy as measured by the combined NAIC Risk Based Capital (RBC) ratio is high, largely to enable the company to proactively manage the volatility and tail risk associated with its variable annuity block. The company's financial profile also benefits from a conservative investment portfolio with minimal exposure to higher risk asset classes such as equities, alternative investments, and CMBS; under a stress scenario, the investment portfolio is expected to perform well relative to peer companies in terms of its impact on capitalization.

Commenting on the change in outlook to negative, Moody's said it is primarily driven by the downward pressure on profitability and capital adequacy due to capital strain from above average new business sales, restructuring costs to exit the retirement business, the challenges to run-off its high risk profile concentration in variable annuities (VA) with guarantees relative to its other businesses (VAs represent approximately 60% of the company's total statutory reserves), and the transition risk the company's business strategy faces to compete in the highly competitive life insurance market dominated by larger competitors. Ohio National also faces the risk exposures related to its concentration of inforce variable annuities with guarantees and the modest projected statutory net capital generation partially due to the high cost of hedging market sensitive liabilities. Moody's added that the company has a relatively higher level of financial leverage compared to its similar-sized mutual company peers, which together with its concentration in VAs, presents a relatively higher overall risk profile.

While the decision to discontinue the issuance of new annuity contracts is expected to reduce the company's earnings volatility over the long-term, the annuity segment is susceptible to earnings volatility and substantial statutory reserve pressure as the company restructures / reduces its tail risk from VA's with guarantees and from the upcoming NAIC VA capital and reserve reform. Ohio National relies on internal hedging, external reinsurance, as well as its well-capitalized offshore captive to manage its VA risk and capital requirements. While these risk mitigation activities reduce some of the company's tail risk exposure, Moody's believes that the hedging program is not comprehensive and subject to ineffectiveness under stress policyholder behavior and other forms of basis risk. Along with other insurers in the VA space, Ohio National has de-risked its VA product offering less aggressive and capital intensive guarantees, which have helped reduce the rate of growth of the company's VA tail risk. However, lower than expected growth in net capital generation, the company's inability to reduce its VA concentration and tail risk, and the inability to profitable grow its life insurance business could lead to a rating downgrade.

RATING DRIVERS

Given the ratings have a negative outlook, Moody's noted that the following factors could put positive pressure on Ohio National's rating: 1) reduction of variable annuities to less than 25% of the company's total reserves and more comprehensive hedging, 2) sustained improvement in statutory earnings sufficient to support normal growth and return on capital (ROC) > 7%, and 3) earnings interest coverage > 7x.

The following factors could result in a downgrade of Ohio National's ratings: 1) volatility in hedge performance causes statutory capital to decline by more than 10%, 2) variable annuities consistently greater than 50% of the company's total reserves, 3) adjusted financial leverage consistently above 30%, or 4) annual ROC consistently below 4%.

The following ratings were affirmed with a negative outlook:

Ohio National Financial Services, Inc. -- senior unsecured debt rating at Baa1;

Ohio National Life Insurance Company -- insurance financial strength rating at A1, surplus notes at A3 (hyb);

Ohio National Life Assurance Corporation -- insurance financial strength rating at A1.

Ohio National Life Insurance Company (ONLIC), the lead insurance subsidiary of Ohio National, is headquartered in Cincinnati, Ohio. At June 30, 2018, ONLIC reported total statutory assets of $31.5 billion and total capital and surplus of $1.1 billion.

The principal methodology used in these ratings was Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Robert Garofalo
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Scott Robinson
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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