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