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Ohio National Financial Services Inc. has been trying to address concerns about its exposure to variable annuity guarantee risk by getting out of the VA market and cutting 300 VA-related jobs.

The Cincinnati-based company says it will focus more on sales of two traditional products that rating analysts still say they like: life insurance and disability insurance.

But rating analysts at S&P Gobal and Moody’s Investors Service have said that they aren’t sure whether what Ohio National is doing is enough, and analysts at both firms have a negative outlook on the company.

(Related: Proposal Could Ease Variable Annuity Hedging Rules)

Ohio National was founded in 1908. The parent company is a mutual holding company. The ultimate owners of the company are the participating policyholders, not investors at large.

The company reported $71 million in statutory net income for 2017 on $2.9 billion in revenue.

The company announced in September that it is ending VA sales, and focusing on U.S. life and disability markets, and on operations in Latin America, because of the “continuously changing regulatory landscape, the sustained low interest rate environment, and the increasing cost of doing business, as well as growth opportunities and the company’s competitive strengths.”

Robert Garofalo and other Moody’s analysts write in a commentary issued last week that Ohio National is well-capitalized, and that the company has invested its assets in a conservative way. ”Under a stress scenario, the investment portfolio is expected to perform well relative to peer companies in terms of its impact on capitalization,” the Moody’s analysts write.

Ohio National managers have traditionally taken a careful approach to running the business. The company was not regarded as being in the “middle of the living benefits arms race” before the 2007-2009 Great Recession, according to a consultant ThinkAdvisor quoted in 2012. The consultant suggested that Ohio National was well-positioned to increase VA sales because of its caution.

But Ohio National VA sales have been strong since then, and the value of the VA guarantees promised amounts to about 60% of the company’s total statutory reserves, according to the Moody’s analysts.

Life insurers often try to limit their investment-market-related guarantee risk by using “hedging,” or purchases of contracts that help them share investment risk with other parties. A life insurer might use stock options, futures contracts or similar arrangements to generate some or all of the cash that would be used to make good on product guarantees.

For Ohio National, the Moody’s analysts say, one challenge is that the high cost of hedging market-sensitive liabilities may cut down on how much cash the company can add to statutory net capital.

Another challenge, the analysts say, is the likelihood that Ohio National may soon have to cope with the new capital and reserve accounting rules being developed by the National Association of Insurance Commissioners (NAIC). Drafters of the rules want life insurers to give more information about how hedging is really doing now.

One complicated debate is over what insurers should do when the hedging strategies they are using appear not to be effective, and how to decide whether a hedging strategy is not effective.

Ohio National’s hedging activities and other risk-management efforts reduce some of the company’s exposure to a severe market meltdown, but “Moody’s believes that the hedging program is not comprehensive,” the analysts say.

The hedging and other risk-management efforts may not work as expected under high-stress conditions, the analysts say.

S&P does not refer directly to the NAIC hedge accounting efforts in the publicly available summary of its views on Ohio National. But Anika Getubig and other S&P analysts say one potential problem they will watch for at Ohio National is “unanticipated volatility of statutory capital and earnings under its hedging strategy.”

The S&P analysts point out that the steps Ohio National is taking to reduce risk could create new forms of risk. Ohio National may now be depending too heavily on the sale of life insurance, and the new business strategy could also lead to disruption in distribution relationships and branding, the analysts say.

Christopher Carlson, who became president of Ohio National in August, has said in statements that the company believes that the steps it is taking will enhance the company’s unique value proposition, and support Ohio National’s long-term growth and financial strength.

“As a mutual company, Ohio National is committed to maintaining a sound capital base in support of our obligations to policyholders, as we have been for more than a century,” Carlson said.

One question for financial professionals and others interested in the individual annuity market is whether Ohio National’s approach to VA guarantee risk has been much different from the strategies other companies have been using, or whether Ohio National is simply the first of many companies that have started to think harder about how their benefits guarantee hedging will look if and when new hedge accounting rules take effect.

— Read Ohio National Executive to Lead MIBon ThinkAdvisor.

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