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Rating Action:

Moody’s rates Ohio National’s senior debt Baa3; outlook negative

08 January 2020

Approximately $400 million of securities rated.

New York , January 8, 2020 – Moody's Investors Service ("Moody's") has assigned a Baa3 rating to the anticipated issuance of 10-year senior unsecured notes by Ohio National Financial Services, Inc. (ONFS, senior debt at Baa3; negative outlook). Net proceeds from the offering are expected to be used to repay or redeem $400 million of outstanding principal amount on an ONFS existing term loan facility, which has a maturity date of April 5, 2022. The rating outlook for ONFS remains negative.

RATINGS RATIONALE

ONFS has indicated proceeds from the issuance will be used to paydown their 2022 term loan, a net credit positive as the refinancing increases the tenor of the company's debt ladder and reduces near-term liquidity risk. The ratings on ONFS reflect its inforce block of life insurance, diverse life insurance product portfolio and extensive variable cost distribution system -- which has been successfully expanded during the last several years; and strong product development capability. In addition, the company's lead insurance subsidiary, Ohio National Life Insurance Company (ONLIC, insurance financial strength rating at A3; negative outlook) has maintained excellent capital levels with an estimated NAIC company action level risk-based capital (RBC) ratio of approximately 560% at September 30, 2019. However, the company's term life, universal life, and variable annuity businesses extensively use onshore and offshore captives, which weaken the quality of capital on a consolidated basis.

The continued negative outlook reflects the uncertainty about the company's ability to materially improve net capital generation over the near term, and the ongoing execution risk of its strategic initiatives to reduce the potential impact of a downside scenario on its capital levels, restructure its significant variable annuity (VA) tail risk, and profitably grow its life insurance business. The resolution of the negative outlook will depend on the company's ability to sustain its ongoing execution of its initiatives to reduce the retained VA Guaranteed Minimum Income Benefit (GMIB) exposure, materially improve net capital generation, lower its operating and financial leverage and our assessment of potentially adverse, yet realistic, scenarios (including varying levels of interest rates, equity markets, policyholder behavior, credit losses and pandemic risk) on the company's capital.

Moody's continues to believe the company's profitability and net capital generation will be challenged in the near term from the competing demands to further support its growing life insurance business, manage the VA segment earnings volatility and the run-off of the closed block. Ohio National's future statutory net capital generation is also exposed to a scenario of low interest rates and a severe downturn in the equity markets.

Giving effect to the proposed issuance and the redemption of the term loan, ONFS' pro forma adjusted financial leverage (excl. AOCI) as of September 30, 2019 would remain unchanged at approximately 27%.

RATING DRIVERS

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) meaningful improvement in ONLIC's anticipated capital position post a stress scenario, 2) sustained improvement in statutory earnings, along with growing life insurance sales and a return on capital (ROC) > 6%, 3) earnings coverage > 6x; and 4) continued reduction of VA GMIB financial risk.

The following factors could result in a downgrade of Ohio National's ratings: 1) statutory capital declining or anticipated to decline by more than 10%, 2) adjusted financial leverage consistently at or above 30%, 3) life insurance sales declining by > 10%, 4) annual ROC consistently below 4%, 5) NAIC CAL RBC (RBC) ratio anticipated to be < 350%; or 6) lack of improvement in its anticipated capital position post a stress scenario.

The following rating has been assigned:

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

The rating outlook for ONFS and its rated subsidiaries is negative.

Ohio National Life Insurance Corporation, the lead insurance subsidiary of ONFS, is headquartered in Cincinnati, Ohio. At September 30, 2019, ONLIC reported total statutory assets of $27.6 billion and total adjusted capital of $1.2 billion.

The principal methodology used in these ratings was Life Insurers Methodology published in November 2019. 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, 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.

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.

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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