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Rating Action:

Moody’s affirms Ohio National’s ratings following announcement of sponsored demutualization; outlook remains negative

25 March 2021


New York, March 25, 2021 – Moody's Investors Service, ("Moody's") has affirmed the Baa3 senior debt rating of Ohio National Financial Services, Inc. (Ohio National), as well as the insurance financial strength (IFS) ratings of its core subsidiaries, Ohio National Life Insurance Company (ONLIC) and Ohio National Life Assurance Corporation (ONLAC) at A3. The affirmation follows the company's announcement that it has entered into a transaction with Constellation Insurance Holdings, Inc. (Constellation, unrated), an insurance holding company backed by Caisse de dépôt et placement du Québec (CDPQ, Aaa stable) and Ontario Teachers' Pension Plan Board (OTPP, Aa1 stable). The outlook remains negative. Please see below for a complete list of ratings.

Under the terms of the transaction, Ohio National Mutual Holdings, Inc. (ONMH, unrated), a mutual holding company that owns 100% of Ohio National, will convert to a stock company, with stock issued to Constellation pursuant to a sponsored demutualization under which ONMH's eligible members (policyholders) will receive a total of $500 million. Additionally, following the closing of the transaction, Constellation will invest $500 million into ONLIC over a four-year period. The transaction is expected to close in the second half of 2021, subject to regulatory approvals and other customary closing conditions.

RATINGS RATIONALE

According to Moody's, the ratings affirmation of Ohio National and its core life insurance subsidiaries reflects the company's solid in force life business, prudent investment management and improved capital, which has been aided by a rise in equity markets and interest rates. The affirmation also contemplates the potential of Constellation's $500 million capital commitment, which should help ONFS fund new sales growth and improve its capitalization and ability to manage funding needs associated with its variable annuity (VA) block in stress scenarios. It also reflects our expectations of management continuity, with the advancement of its strategy to grow its protection oriented business and proactively manage the risk associated with its VA block. A material change to Ohio National's strategy, which was not contemplated in our rating action, could have an impact on the company's credit profile.

The continuation of the negative outlook reflects the downward pressure on the company should the deal not close. Profitability and net capital generation are challenged at the company from the competing demands to support its protection business and manage the VA segment earnings volatility and the run-off of the closed VA block. While Ohio National has improved the reported RBC ratio of its entities in a low interest rate environment, our view of capital extends beyond the RBC ratio, and we believe the company's capital position is weaker when including captives. Specifically, the company needs to manage pressure on collateral needs of an offshore affiliate - Sycamore Re, LTD., in a downside scenario.

During the outlook period, Moody's anticipates gaining better visibility into Constellation's plans for Ohio National, as well as CDPQ and OTPP's support of Constellation and its investments. While Constellation has strong investment backers, as a newly formed company, they have a nascent track record in the US insurance market.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the ratings have a negative outlook, an upgrade is unlikely. Moody's noted that the following factors could result in an affirmation of the ratings with a stable outlook: 1) A closing of the announced transaction, 2) Meaningful improvement in its anticipated group capital position (including captives) post a stress scenario, 3) Sustained improvement in statutory earnings, along with growing life insurance sales and an actual / anticipated return on capital (ROC) > 6%, 4) Earnings coverage > 6x; and 5) Continued reduction of VA GMIB financial risk.

Additionally, strong support for Ohio National from Constellation and its investor group beyond the $500 million committed investment could potentially place upward pressure on Ohio National's ratings.

The following factors could result in a downgrade of Ohio National's ratings: 1) The announced transaction is terminated or delayed, 2) Statutory capital declining or anticipated to decline by more than 10%, 3) Adjusted financial leverage consistently at or above 30%, 4) Life sales declining by > 10%, 5) Actual / projected ROC < 4%; or 6) NAIC CAL RBC ratio anticipated to be < 350%.

Moody's has affirmed the following ratings:

Ohio National Financial Services, Inc. -- senior unsecured debt rating at Baa3

Ohio National Life Insurance Company -- insurance financial strength rating at A3, subordinate surplus notes at Baa2 (hyb);

Ohio National Life Assurance Corporation -- insurance financial strength rating at A3

Outlook actions:

..Ohio National Financial Services, Inc.

….Outlook, Remains Negative;

..Ohio National Life Insurance Company

….Outlook, Remains Negative;

..Ohio National Life Assurance Corporation

….Outlook, Remains Negative

Ohio National Life Insurance Company, the lead insurance subsidiary of Ohio National, is headquartered in Cincinnati, Ohio. At December 31, 2020, ONLIC reported total statutory assets of $28.4 billion and total adjusted capital of approximately $1.2 billion.

The principal methodology used in these ratings was Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406 .

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Bob Garofalo
VP-Sr 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, CFA
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

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