Rating Action: Moody’s downgrades Ohio National’s ratings; outlook remains negative

May 3, 2019 – Moody’s Investors Service (“Moody’s”) has downgraded the senior debt rating of Ohio National Financial Services, Inc. (Ohio National) to Baa3 from Baa2 as well as the insurance financial strength (IFS) ratings of its core subsidiaries, Ohio National Life Insurance Co. (ONLIC) and Ohio National Life Assurance Corporation (ONLAC) to A3 from A2. The outlook for Ohio National and its subsidiaries remains negative. Please see below for a complete list of rating actions.

RATINGS RATIONALE

The downgrade and continued negative outlook reflect 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.

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. Separately, the company’s term life and universal life insurance and variable annuity businesses extensively use onshore and offshore captives, which weaken the quality of reserves, asset quality, and regulatory capital on a consolidated basis. In addition, the company is projected to sustain a relatively higher level of operating and financial leverage compared to its similar-sized mutual company peers, which together with its concentration in VA and collateral demands in a severe downturn in the equity markets, present a relatively higher overall risk profile.

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 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.

On a positive note, Ohio National is proactively taking steps to improve its credit profile. The company has and continues to materially reduce its exposure in its retained VA GMIB block and actively manages its hedging strategy, which reduces its exposure to a downside scenario. In addition, Ohio National has proactively taken steps to manage its debt ladder by refinancing its $300 million April 2020 debt maturity, and continues to maintain a high level of capital adequacy as measured by the combined Company Action Level Risk Based Capital (CAL RBC) ratio of 463% at year-end 2018 to proactively manage the risk associated with its variable annuity block. Ohio National also maintains a large block of whole life business, a positive from a product risk perspective, an aligned variable cost distribution, and a consistent record of prudent underwriting that has contributed to a productive and growing life insurance business.

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 its 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 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 ratings were downgraded with a negative issuer outlook:

Ohio National Financial Services, Inc. — senior unsecured debt rating to Baa3 from Baa2;

Ohio National Life Insurance Co. — insurance financial strength rating to A3 from A2, subordinate surplus notes to Baa2 (hyb) from Baa1 (hyb);

Ohio National Life Assurance Corporation — insurance financial strength rating to A3 from A2.

Ohio National Life Insurance Corporation (ONLIC), the lead insurance subsidiary of Ohio National, is headquartered in Cincinnati, Ohio. At December 31, 2018, ONLIC reported total statutory assets of $29.1 billion and total adjusted capital 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.

**This article is directly from Moody’s Investor Service website**