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.
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.