Research: Moody's downgrades Ohio National's ratings; outlook stable – Moody's

New York , June 28, 2022 – Moody’s Investors Service, (“Moody’s”) has downgraded the senior unsecured debt rating of Ohio National Financial Services, Inc. (Ohio National) to Ba1 from Baa3, 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) to Baa1 from at A3. The outlook for the ratings have been changed to stable from negative.
Please see below for a complete list of ratings.
RATINGS RATIONALE
The ratings downgrade of Ohio National and its core life insurance subsidiaries reflects the company’s weakened market position, and challenges to improve organic net capital generation at the company from the competing demands to support growth plans in its businesses, acquire inforce blocks and manage the variable annuity (VA) segment earnings volatility and the run-off of the closed VA block. Ohio National’s market position has come under pressure and sales momentum has slowed in recent years. Following the recent closing of the acquisition of the company by Constellation Insurance, LP (Constellation), Moody’s believes that the new owners are committed to advancing Ohio National’s strategy, which includes growing life and annuity sales organically through multiple distribution channels beyond its career and PGA networks and inorganically through large transactions. However, Ohio National faces challenges to profitably grow its businesses in these competitive markets, which place downward pressure on profitability, at least in the short-term, tempered by expense reductions, and investments in growth initiatives that will take time to develop.
On a positive note, the acquisition by Constellation to advance Ohio National’s strategy of growing its protection business, proactively manage the risk associated with its inforce VA, and provide financial support vis-a-vis its planned $500 million capital commitment into ONLIC over a four-year period starting in 2023 are credit positive. Ohio National also prudently manages its investments and has improved its capital position, which has been aided by a recent reinsurance transaction resulting in a material increase in its NAIC RBC ratio.
The return to a stable outlook reflects the recently completed acquisition of Ohio National by Constellation, a nascent organization focused on growing and acquiring life and property & casualty lines of business with the financial backing by Caisse de dépôt et placement du Québec (CDPQ, Aaa stable) and Ontario Teachers’ Pension Plan Board (OTPP, Aa1 stable), management continuity, with the advancement of its strategy to grow its protection oriented business, and prudently reenter the retirement market by adding additional distribution channels. Capitalization has improved which supports the stable outlook, with consolidated NAIC CAL RBC ratio of 630% at year-end 2021 and around 1,142% at Q1 2022. The increase in regulatory capital adequacy is the result of a Q1 2022 coinsurance “funds withheld” transaction on its inforce whole life business with an affiliate of Hannover Re generating around $880 million of statutory capital and surplus, which Ohio National intends to retain to support its business plans.
While Ohio National has improved its reported regulatory capital adequacy of its entities, 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. The company is an active user of reinsurance solutions to support capitalization, however the growing reliance on reinsurance and the increased counterparty risk is a concern and reduces some of positive credit attributes of these transactions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
According to Moody’s, the following factors could lead to an upgrade of Ohio National’s ratings: 1) Improved organic net capital generation, 2) Successful execution of the business plan post acquisition, reflected by improving profitable commercial activity leading to increased sales and net inflows, and financial performance, 3) Continued reduction of VA GMIB financial risk with meaningful improvement in its anticipated capital position (including captives) post a stress scenario, 4) Adjusted financial leverage (excluding AOCI) consistently around 25% or less.
The following factors could result in a downgrade of Ohio National’s ratings: 1) Limited success in the implementation of its business plan post acquisition adversely affecting profitability, and commercial activity leading to declining or uneven sales growth, 2) Adjusted financial leverage (excluding AOCI) consistently over 35%, 3) Changes in financial policies that result in excessive stockholder dividends or intercompany arrangements from ONFS or its operating companies, 4) The company experiences a significant deterioration in its capital or liquidity levels, or demonstrates a marked increase in its risk appetite, or 5) Inability to materially reduce exposure in its VA GMIB exposure.
AFFECTED RATINGS:
The following ratings have been downgraded:
Ohio National Financial Services, Inc. — senior unsecured debt rating to Ba1 from Baa3;
Ohio National Life Insurance Company — insurance financial strength rating to Baa1 from A3, subordinate surplus notes to Baa3 (hyb) from Baa2 (hyb);
Ohio National Life Assurance Corporation — insurance financial strength rating to Baa1 from A3;
Outlook actions:
..Ohio National Financial Services, Inc.
….Outlook, Changed to Stable from Negative
..Ohio National Life Insurance Company
….Outlook, Changed to Stable from Negative
..Ohio National Life Assurance Corporation
….Outlook, Changed to Stable from Negative
Ohio National Life Insurance Company, the lead insurance subsidiary of Ohio National, is headquartered in Cincinnati, Ohio. At March 31, 2022, ONLIC reported total statutory assets of $27.3 billion and total capital and surplus of approximately $2.3 billion.
The principal methodology used in these ratings was Life Insurers Methodology published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74857 . Alternatively, please see the Rating Methodologies page on https://ratings.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 on https://ratings.moodys.com/rating-definitions .
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 issuer/deal page for the respective issuer on https://ratings.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 entity or its 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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235 .
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 https://ratings.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 https://ratings.moodys.com .

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.


Please see https://ratings.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 issuer/deal page on https://ratings.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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