Best s Rating Report

Transcription

1 THE OHIO NATIONAL LIFE INSURANCE COMPANY A+ OHIO NATIONAL LIFE ASSURANCE CORPORATION A+ Cincinnati, Ohio Printed December 21, Page 1 of 22

2 Ultimate Parent: Ohio National Mutual Holdings Inc THE OHIO NATIONAL LIFE INSURANCE COMPANY One Financial Way Cincinnati, OH Mailing Address: P.O. Box 237, Cincinnati, OH Web: Tel.: Fax: AMB#: NAIC#: Ultimate Parent#: FEIN#: BEST S CREDIT RATING Best s Financial Strength Rating: A+ Outlook: Stable Best s Financial Size Category: XII RATING RATIONALE Rating Rationale: The ratings for the Ohio National Life Insurance Company (ONLIC) and its wholly owned subsidiary, Ohio National Life Assurance Corporation (together referred to as Ohio National), reflect the increased diversification of its business profile, growth in life insurance sales, a favorable trend in total ordinary life premiums and positive statutory and GAAP results coupled with strong levels of risk-adjusted capitalization. Partially offsetting rating factors include a relatively high percentage of separate account business subject to equity, interest rate and market volatility risk; higher than average financial leverage when measured on a tangible capital basis; and the intense level of competition within the retirement, life and annuity marketplaces. Ohio National offers a diverse portfolio of life, annuity, retirement and disability products and is strategically emphasizing expansion into the highly competitive U.S. retirement services marketplace. Within its core life insurance and variable annuity product lines the group continues to enjoy mid-level market positions with a demonstrated track record of increasing life sales over the last twenty-seven years. Statutory and GAAP management operating earnings trends (MOE), which reflect adjustments for the mark-to-market impact of hedging variable annuities and reinsurance, are positive, although GAAP MOE results have remained relatively flat over the five-year period. Risk management practices, particularly within the front end of variable annuity product design, are viewed as strong, although there is moderate retention (net of hedging and reinsurance) of equity market, interest rate and volatility risk. Despite some progress in diversifying Ohio National s business profile, about two-thirds of its liabilities are related to separate account business, well above the life industry average. Consequently, this elevated exposure contributes to potential operating and balance sheet volatility. While risk-adjusted capital remains strong, the quality of capital has been reduced through the use of captive insurers to support XXX and AXXX redundant reserves and issuance of surplus notes. Financial leverage, when measured on a tangible capital basis is high, although leverage on a total capital basis remains within the higher range of A.M. Best s guidelines. A.M. Best also notes that interest coverage on a GAAP MOE basis has historically been somewhat low relative to the expectations for this rating level. A sustained decline in net operating performance could lead to a ratings downgrade. A decline in risk-adjusted capitalization could also result in a negative rating action. Additionally, a meaningful increase in financial leverage or a decline in interest coverage could lead to a negative rating action. FIVE YEAR RATING HISTORY Date Best s FSR Date Best s FSR 08/02/17 A+ 06/12/14 A+ 07/29/16 A+ 06/07/13 A+ 07/22/15 A+ KEY FINANCIAL INDICATORS ($000) Total Capital Capital Asset Net Net Surplus Valuation Premiums Invest Funds Reserve Written Income Net Income Year Assets ,631,247 1,048,316 25,244 3,259, , , ,381,811 1,002,744 22,183 2,830, ,054 61, ,449,337 1,097,074 23,641 2,758, ,218 90, ,589,840 1,087,220 33,539 2,538, ,224 62, ,061,741 1,082,091 32,507 2,180, ,305 36,427 (*) Within several financial tables of this report, this company is compared against the Individual Annuity Composite. (*) Data reflected within all tables of this report has been compiled from the company-filed statutory statement. BUSINESS PROFILE The Ohio National Life group of companies offers a diversified array of individual life and annuity products serving the middle market as well as the small business and professional markets. The lead company, Ohio National Life Insurance Company (ONLIC) and its wholly owned subsidiaries, Ohio National Life Assurance Corporation (ONLAC) and National Security Life and Annuity Company (NSLAC), are among the leaders in life sales, ranking #19 and, in variable annuity sales, #16 (Per LIMRA ). Assets under management total about $40 billion in Also, nearly two-thirds of Ohio National s business is separate accounts related. A major strength of Ohio National lies in the strong ties of the distribution force to the group, which have been cultivated over time through excellent service and a strongly Printed December 21, Page 2 of 22

3 integrated compensation structure that rewards loyalty and quality business. As a result of this structure, these channels have historically enjoyed strong persistency, strong channel growth and sales growth when compared to industry averages. ONLIC is wholly owned by Ohio National Financial Services, Inc. (ONFS), an intermediate holding company, which, in turn, is wholly owned by its ultimate parent, Ohio National Mutual Holdings, Inc. (ONMH). Life premiums have increased for 27 consecutive years, which is a source of pride for the group. ONLIC is the lead company in the Ohio National Life group and markets several participating whole life insurance products, and various individual and group annuities. Fixed annuities have not been promoted since 2009, and a considerable amount of the company s fixed annuity business has been reinsured. ONLIC s annuity product line includes individual and group variable annuities, individual deferred annuities, immediate annuities, guaranteed investment contracts (GIC), fixed index annuities, and structured lottery settlements. GIC contracts and structured settlement products are typically sold on an opportunistic basis, and these products have been de-emphasized over the past several years. Both the individual and group variable annuities include a fixed income option as well as over two hundred account options, which provide consumers the opportunity to diversify among a variety of investments, managers and styles. Additionally, the company offers pension administration servicing capabilities. ONLAC markets universal life insurance, term life insurance and individual disability income insurance. ONLAC has three universal life products: one focused on young insureds, term conversions and small policies, another focused on longer-term cash accumulation, and a third that is used exclusively for BOLI (Bank-Owned Life Insurance). Variable universal life products include a fixed income option as well as over sixty account options, which provide consumers the opportunity to diversify among a variety of investments, managers and styles. There are three level term products with varying guaranteed payment durations and riders from which to choose. All are fully priced for Regulation XXX statutory reserves. These reserves are funded with long term debt and stop loss reinsurance. All term products are available with accelerated death benefit and waiver of premium. Ohio National has experienced favorable mortality and persistency in its individual life lines, and continues to enjoy a significant competitive advantage as a low unit cost provider in its core life and annuity lines. The group organizes its lines of business along five business segments: life insurance, retirement plans, annuities, disability income insurance and international. Life Insurance The life product portfolio is diversified and has recorded strong sales growth that has outpaced the industry. The size of the average life policy is more than double the industry average which management believes gives them a cost advantage. Ohio National continues to build its distribution through a variable cost system focused on life insurance. Employee regional officers also facilitate the relationships between the group and the independent producers/general agents. The life business mix has shifted somewhat in recent years. Whole Life insurance, which A.M. Best considers very creditworthy and less risky, has increased significantly since Universal life sales have decreased significantly since Term life sales have decreased since Life sales are through two distribution channels: producer general agents (PGA) and career agency systems. The PGA channel is comprised of 32 regions covering 33 states. The strategy for future sales in this channel includes a heavy focus on writing permanent insurance. The career agency channel is an entrepreneurial general agency system, where the agency owns its business plan along with a variable expense structure. It is also Ohio National s oldest distribution system which includes a high degree of loyalty from its agents. The traditional agency channel model leverages the group s focus on the traditional buyer of individual life insurance, annuity and disability income products and secondly on the small business and professional markets. Target consumer markets within the traditional life market include affluent and emerging affluent individuals and small to medium business owners with estate planning or tax-deferred capital accumulation and traditional income preservation needs. Retirement Plans Currently retirement plans represent a modest percentage of total sales, but management views this as a strategically important line of business and is planning on significant growth in the near to mid-term. Distribution through both institutional and traditional channel producers sold $165.9 million in 2016, up from $20 million in Plans are in place to increase the distribution network and build up its infrastructure. Annuities Ohio National is among the market leaders in the variable annuity market and is well positioned to take advantage of market trends. The target market is baby boomers that need guaranteed lifetime income, and have shown an aversion to risk. Specific products are targeted to younger accumulation clients and older income clients. In the absence of defined pension plans, which are increasingly rare, management feels that their variable annuity products are well suited to this demographic, especially if these products have living benefits which offer guaranteed lifetime income. Ten variable annuity products are offered, with each offering flexible payments with different combinations of fund choices, death benefit options, liquidity features and various expense charge levels. Variable annuities are underwritten by ONLIC, which offers living benefit features including GMIB, GLWB and GMAB in the form of policy riders. Ohio National uses both first dollar and stop-loss reinsurance to reduce its GMDB exposure and has prudent risk management practices (a combination of hedging, reinsurance and use of managed volatility funds) to mitigate risks associated with its living benefit riders. Distribution is through security brokerages, such as wirehouses and regional firms, and independent broker-dealers and financial institutions. The security brokerage channel consists of 18 wholesalers and 2 divisional sales managers. The independent broker-dealer and financial institutions channel have 18 wholesalers and 2 divisional sales managers. In an effort to manage risk in its products, Ohio National introduced Managed Volatility Portfolios (MVP) in Currently, there are 21 MVP funds from 12 fund managers. As of 2012, all new living benefit riders require 100% usage of MVPs, which represents about 30% of the group s retained inforce business. In 2013, Ohio National introduced a rider with an Printed December 21, Page 3 of 22

4 interest-sensitive component. It hedges the low interest rate risk, and if the contract value is reduced to zero, lifetime income is determined by current 10 year U.S. Treasury rates with a floor of 3% and a cap of 9%. In September of 2016, Ohio National entered the fixed indexed annuity market. While sales were relatively modest in 2016, sales are expected to account for roughly 25% of the annuity segment s sales in Disability Income The Disability Income line of business is an opportunity by Ohio National to take advantage of what it believes is an underserved market. They are in the process of building out the sales and marketing teams and expect it to add some earnings diversity through recurring premium. While sales were modest in 2016, management is projecting strong sales growth in the near to mid-term. International The international segment s objective is to augment U.S. life sales growth with life insurance sales in higher growth markets such as Latin America. This segment also maintains a book of fixed annuity business in Chile. Scope of Operations: The Ohio National life companies are licensed throughout the U.S. except for the state of New York. TOTAL PREMIUM COMPOSITION & GROWTH ANALYSIS Reinsurance Period DPW Prem Assumed Ending ($000) (% Chg) ($000) (% Chg) ,263, , ,834, , ,847, , ,670, , ,365, , Yr CAGR Reinsurance Period Prem Ceded NPW & Deposits Ending ($000) (% Chg) ($000) (% Chg) , ,572, , ,905, , ,986, , ,729, , ,352, Yr CAGR Territory: The company is licensed in the District of Columbia, Puerto Rico, AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI and WY BY-LINE BUSINESS ($000) Reinsurance Prem Assumed DPW Product Line ($000) (%) ($000) (%) Ordinary life 569, , Individual annuities 1,363, , Group annuities 418, Individual A&H 13, Total 2,365, , Reinsurance Prem Ceded NPW Product Line ($000) (%) ($000) (%) Ordinary life 120, , Individual annuities 230, ,136, Group annuities 418, Individual A&H 6, , Total 357, ,180, BY-LINE RESERVES ($000) Product Line Ordinary life 3,439,545 3,006,514 2,595,988 2,216,705 1,875,971 Group life 2,856 3,168 3,550 3,934 4,767 Supplementary contr 3,952 4,785 3,966 3,513 3,835 Individual annuities 2,237,429 2,158,596 2,280,586 2,453,638 2,623,693 Group annuities 185, , , , ,238 Deposit type contracts 718, , , , ,967 Individual A&H 29,242 27,332 26,187 81,903 84,190 Total 6,617,318 6,122,280 5,815,516 5,536,318 5,401,661 LIFE POLICIES STATISTICS -Ordinary Policies- -Group Policies- -Group Certificates- Year Issued In Force Issued In Force Issued In Force , , , , , , , , , , Whole Life Endow. & LIFE INSURANCE IN FORCE ($000) Total Insurance In Force Year Adds Term Credit Group Industrial ,749,819 52,223,860 12,007 64,985, ,454,790 71,129,648 9,826 85,594, ,102,330 78,668,682 8,532 95,779, ,004,338 84,456,409 7, ,468, ,538,949 90,012,372 7, ,558,365 Printed December 21, Page 4 of 22

5 NEW LIFE BUSINESS ISSUED ($000) Year Whole Life & Endow. Term Credit Group Industrial Total Insurance Issued Non- Par (%) Par (%) ,722,053 99,876 1,821, ,761, ,458 1,966, ,164, ,148 2,405, ,548, ,209 2,786, ,107, ,798 3,319, ORDINARY LIFE STATISTICS Ord. Renew Average 1st Yr 1st Yr Gen. Lapse Premium Ord. Policy Avg Prem / Comm / Exp. / Ratio Persist (in dollars) Prem Total 1st Yr Policies Year % % Issued In Force ($/M) Prem Prem In Force , , , , , , , , , , First Year Gen l Exp/ Return on Number of Policies Premium Reserves Reserves Year Issued In Force (000) (%) (%) , ,791 48, , ,827 45, , ,188 69, , ,096 81, , , , INDIVIDUAL ANNUITY STATISTICS Comm & Exp to Res Exp to NPW (000) Res(%) (%) Benefits & Wdrwls to NPW (%) Benefits & Wdrwls to Res (%) NPW Year (000) ,677,886 2,627, ,150,214 2,457, ,007,500 2,284, ,718,748 2,163, ,136,804 2,241, GROUP ANNUITY STATISTICS Comm & Exp to Res Exp to NPW (000) Res (%) (%) Benefits & Wdrwls to NPW (%) Benefits & Wdrwls to Res (%) NPW Year (000) , , , , , , , , , , TOTAL ANNUITY ACTUARIAL RESERVES BY WITHDRAWAL CHARACTERISTICS With Min or No Surrender Surrender Charge 5% With Charge (%) or more (%) MVA (%) No Surrender Allowed (%) Total Annuity Year Res (000) ,832, ,664, ,494, ,372, ,427, SEPARATE ACCOUNT DATA Sep Acct Assets 20,795,232 19,864,746 20,071,414 18,394,289 14,816,672 % Growth S/A Assets/Adm Assets Sep Acct Reserves 20,510,932 19,542,635 19,799,555 18,122,795 14,575,904 % Individual Annuities % Group Annuities Other Liabilities 284, , , , ,768 Sep Acct Surplus 1 1 S/A Prems & Deposits 1,288,965 1,786,324 1,976,824 1,949,964 2,333,590 % Individual Annuities % Group Annuities Sep Acct Fees & Charges 258, , , , ,248 % Individual Annuities % Group Annuities Fees & Chgs to Assets% Sep Acct Ben & Wdrwls 1,634,993 1,442,968 1,329,553 1,090, ,215 % Individual Annuities % Group Annuities Ben & Wdrwl to Assets% Market Share/Market Presence: Ohio National s market position (per LIMRA) ranked #16 for variable annuity sales and #19 for life sales as of year-end In recent years, Ohio National s variable annuity sales have declined, although this is generally consistent with the industry as a whole. Conversely, its U.S. life insurance sales have grown at a rate well in excess of the industry over the last several years. Additionally, Ohio National has recently entered the fixed indexed annuity market, although 2016 sales were not material. It has also announced its plans to expand further into the U.S. retirement market which will require significant scale to build market share. Printed December 21, Page 5 of 22

6 GEOGRAPHIC BREAKDOWN BY DIRECT PREMIUM WRITINGS ($000) Ohio 367, , , , ,485 Florida 224, , , , ,060 California 143, , , , ,496 Pennsylvania 139, , , , ,459 Michigan 109, , , , ,392 Virginia 100, , , , ,657 Illinois 100, , , , ,980 Connecticut 98,872 61,438 52,276 53, ,968 Texas 96, , , , ,688 North Carolina 85, , , , ,965 All Other 969,095 1,183,220 1,227,566 1,287,699 1,487,190 Total 2,434,676 2,777,324 3,000,868 2,853,928 3,515,340 RISK MANAGEMENT Ohio National s risk management capabilities are supportive of its risk profile, and are headed by the Chief Risk Officer (CRO) who is responsible for the enterprise risk management program. The Enterprise Risk Oversight Committee is chaired by the CRO, and the other members on this committee include the CEO, all of the CEO s direct reports, and the heads of the strategic business units (SBUs) and Internal Audit functions. The standing committees that address specific activities and risks include the Investment Management, Hedge Oversight, Underwriting Review, Business Continuation, Business Process Review, Compliance, Interest Rate, Enterprise Product Management and Model Assumption Governance. Internal Audit ensures that the ERM processes are appropriate for their objectives, information produced is of good quality, and that process controls are operating as designed. Ohio National s mutual structure allows the enterprise to adopt a longer term perspective and be more deliberate in its planning and actions, which is also embedded in the group s risk culture. The leaders are responsible for identifying risk in their respective areas, and risk priorities are arranged according to their strategic importance. Risks are separated into sixteen categories and according to board and audit committee participation. Risks which are monitored by the full board are: Strategic, Life Insurance, Disability Income, Annuity, Retirement Plans, International and Non-Insurance Subsidiaries risks. The Investment Review Committee monitors Credit, Interest Rate, Liquidity and Hedging risks. The Audit Committee monitors Operational, Financial, Legal/Regulatory, Compliance and Reputation risks. For each risk, key risks are identified, along with risk appetite, commentary and mitigation plans. Several key metrics are also used to monitor performance. GAAP MOE is a key profitability measure which takes out the market value changes in derivatives used in hedging living benefits on its variable annuity products. Risk-based capital and the Best Capital Adequacy Ratio are used to assess risk-adjusted capitalization. The life group is experienced at developing or enhancing products in which actual results are within pricing. Reserves are also adequate and within pricing, as verified by the actuarial memorandums and cash flow testing program. XXX/AXXX reserving issues are mitigated through the use of captive reinsurers. Regulatory developments are monitored closely, and an Ohio captive reinsurer was established in 2015 to address term reserves issues associated with Actuarial Guideline 48 (AG-48). Ohio National uses reinsurance extensively to mitigate exposure to risk through highly rated external reinsurers or captives. To enhance financial flexibility, lines of credit are arranged in addition to FHLB financing. Investment analysis is done regularly, in which bond allocations, durations and purchases are reviewed. General account assets and liabilities are well matched. The Company has brought its hedging program in house. The Company manages its variable annuity risks through a combination of reinsurance, current product design, which limits interest rate risk, managed volatility funds and delta hedging. Vega risk is partially mitigated through external reinsurance on older product designs along with managed volatility funds for newer products. These funds reduce overall risk through the fund design. Net rho, or interest rate risk, on variable annuity guarantees is limited by a portfolio of options ($2B+ notional) that hedge against low rates. In addition, current product designs significantly reduce the Company s exposure to interest rate risk. The Company estimates that the newer design reduces interest rate risk on a variable annuity to roughly 20% of a traditionally designed product. Additionally, roughly 36% of rho risk for the older block has been mitigated through reinsurance. The Company s current product plans are geared towards responding to the current evolving regulatory environment, as well as assessing alternate product lines that provide risk diversification, income diversification and potentially improve overall capital efficiency. Operations are well managed. Policies and procedures are reviewed on a regular basis, and training programs are in place for home office staff and field force. Succession plans are in place. Also, there are strong backup plans in regards to disaster recovery. OPERATING PERFORMANCE Operating Results: Ohio National s combined statutory net income in 2016 was almost $23 million, down from $56 million in Variable annuity sales continued to decline, as did yields and net investment income results decreased from $79 million in 2014, as premiums decreased modestly primarily due to a decrease in variable annuity sales. In addition, results were impacted by higher annuity and surrender benefits and higher general expenses, which were partially offset by higher investment income and lower federal taxes incurred. The company manages to a GAAP MOE metric which adjusts for the impact of changes in the value of an external reinsurance agreement and the market impact of hedging variable annuities. GAAP MOE results have been relatively flat over the last five years. The group benefits from a variable cost structure and prudent expense management. Printed December 21, Page 6 of 22

7 Ohio National s combined statutory net income in 2014 was $79 million, an increase from $50 million in Premiums increased modestly in 2014, as an increase in life premiums offset a decrease in variable annuity sales. Partially offsetting revenues are higher annuity and surrender benefits and higher general expenses partially offset by transfers from separate accounts, lower federal taxes incurred and a decrease in change in reserves due to the recapture of disability income and less variable annuity sales. GAAP net income improved mainly due to higher premiums, lower derivative related capital losses, a decrease in benefits and claims partially offset by higher deferred acquisition costs, other operating costs and higher deferred income taxes. Ohio National s combined statutory net income for 2013 was $50 million, down from $105 million in Net income includes new business strain from the sale of ordinary life insurance, strain from guaranteed investment contracts, increases in policyholder dividends, lower portfolio yields and higher general insurance expenses. Growth in variable annuity sales, while still strong, contracted somewhat in 2013 in response to ongoing product de-risking. Ordinary life premium was strong, with a five year compound annual growth rate well in excess of the industry average. PROFITABILITY ANALYSIS ($000) Company Pre-tax Net Period Net Oper Operating Net Total Ending Income Gain Income Return , , ,615 70, , ,130 61,608-46, , ,011 90,391 71, ,890 78,329 62,664 51, ,275 60,777 36,427 27,719 5-Yr Total 525, , , ,354 Company Industry Composite Period Operating Operating Operating Operating Ending ROR (%) ROE (%) ROR (%) ROE (%) Yr Avg PROFITABILITY TESTS Comm & Pre-tax Ben Paid Exp to NOG Operating Invest to NPW NPW to Tot NOG to Return on Net Total Year & Dep & Dep Assets Tot Rev Equity Yield Return Year Avg (*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - see Calculation Specifications NET OPERATING GAIN ($000) Product Line Ordinary life 6,830 4,211 5,994-11,863 8,256 Group life Supplementary contr Individual annuities 54,031 65,179 98, , ,498 Group annuities 98 8, ,203 19,307 Individual A&H ,800 Other -5,200 Total 60,777 78, , , ,532 ACCIDENT & HEALTH STATISTICS ($000) Net Premiums Net Premiums Loss Exp. Underwriting Year Written Earned Ratio Ratio Results ,750 11, ,036 10, , ,361-47, ,871 6, , ,623 6, Current Year Experience: Non-can. 6,091 6, Guarant renew INVESTMENT GAINS ($000) Company Net Realized Unrealized Inv Capital Capital Year Income Gains Gains ,818-37,918-37, ,054-40, , ,218-13,619-18, ,224-15,664-10, ,305-24,349-8,708 5-Year Total 1,657, , ,352 Printed December 21, Page 7 of 22

8 Company -Industry Composite- Pre-tax Invest Inv Inc Inv Return on Total Inv Inc Inv Growth Yield Inv Assets Return Growth Yield Year (%) (%) (%) (%) (%) (%) Yr Avg (*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - see Calculation Specifications BALANCE SHEET STRENGTH Capitalization: The Ohio National Life Group s risk-adjusted capitalization is more than sufficient to support its insurance, investment and business risks. Surplus remained relatively flat from 2014 to 2016, despite dividends to its parent. Surplus increased to $1.1 billion in 2014 from $1.0 billion in 2013 mainly due to net income, partially offset by a change in unrealized losses in subsidiaries and increased dividends to its parent. Surplus decreased to $1.0 billion in 2013 from $1.05 billion in 2012, mainly due to the payment of dividends to its parent, the payment of the Montgomery Re surplus note, and the impact of derivative losses related to its hedging program. Partially offsetting these losses were net income and a capital contribution from its parent. On a qualitative basis, the assets of ONFS and ONMH (the intermediate and top-tier holding company entities of the mutual holding company structure) are available to support policyholder claims in the unlikely event that ONLIC needs funds to meet its liabilities. ONLIC s and ONLAC s statutory capital benefits by its use of surplus notes which represents nearly 30% of total capital and surplus. In addition, Ohio National extensively uses reinsurance to help mitigate its risk exposures, which includes the use of captive reinsurers for its XXX and AXXX reserves and living benefit guarantees associated with its variable annuities. ONLIC s statutory capitalization includes three surplus notes. Two surplus notes, which were used to purchase all of the ownership of NSLAC, were issued to Security Mutual Life Insurance of New York. One is for $4.5 million due December 15, The other is for $6.0 million due April 1, A $250 million surplus note was issued in 2012 and used to retire debt at the holding company and support XXX reserves at Montgomery Re. Current BCAR: 219 CAPITAL GENERATION ANALYSIS ($000) Source of Surplus Growth Pre-Tax Net Realized Unrealized Adjusted Capital Income Capital Year Gain Gains Taxes Gains ,808-37,918 14,276-37, ,262-40,522 13, , ,758-13,619 17,747-18, ,890-15,664 4,561-10, ,275-24,349-14,502-8,708 5-Yr Total 525, ,073 35, ,352 Source of Surplus Growth Change Change % Chg in Other in in Year AVR Changes C&S C&S ,209 78, , ,061-2,576-45, ,459 23,939 94, ,008-59,674-9, ,469-5, Yr Total -3,994 8, , QUALITY OF SURPLUS ($000) Surplus Other Contributed Unassigned Year Notes Debt Capital Surplus , , , , , , , , , , , , , , ,248 Year-End Asset Valuation Adjusted Year C&S Reserve C&S ,048,316 25,244 1,073, ,002,744 22,183 1,024, ,097,074 23,641 1,120, ,087,220 33,539 1,120, ,082,091 32,507 1,114,598 LEVERAGE ANALYSIS Company -Industry Composite- C&S NPW & Dep Change C&S to Surplus to Total in NPW to Surplus Year Liab(%) Relief(%) Capital & Dep(%) Liab(%) Relief(%) Printed December 21, Page 8 of 22

9 CEDED REINSURANCE ANALYSIS Company -Industry Composite- Face Affil Unaffil Total Total Amount Reins Reins Reins Surplus Reins Reins Reins Year Reins Ceded Rec/C&S Rec/C&S Rec/C&S Relief Leverage Rec/C&S Leverage ,183, ,540, ,817, ,426, ,833, Liquidity: Ohio National holds sufficient liquidity to meet sudden, unplanned needs for cash. Short-term and long term liquidity ratios are strong, and current and overall liquidity ratios are comparable to industry averages. At year-end 2016, cash and short-term assets comprise 3.1% of general account invested assets.. In April 2016, ONFS entered into a senior unsecured, syndicated letter of credit facility with a capacity of $525 million at December 31, This facility replaced two facilities ONFS had previously had in place with capacities of $150 million and $170 million. At December 31, 2016, ONFS used $365 million of the new facility to secure a letter of credit for Sycamore Re, a subsidiary of ONFS, and $15 million is outstanding related to initial transactions in the Latin American corporate structure that were carried forward from the prior two facilities. In addition, Ohio National is a member of the Federal Home Loan Bank of Cincinnati. Other liquidity resources include access to securities lending programs for both ONLIC and ONLAC. Financial leverage for ONFS is elevated when measured on a tangible capital basis, but within the guidelines for its ratings on a traditional debt to capital basis, although interest coverage is below guidelines. However, interest coverage is supported by some holding company liquidity and no near term debt maturities. The company does not have a minimum holding company liquidity threshold but does try to maintain a minimum of 2 times interest coverage at the holding company level. LIQUIDITY ANALYSIS Company Operating Non-Inv Delnq & Cash Quick Current Grade Bonds Foreclsd Year Flow ($000) Liquidity Liquidity to Capital Mtg to Capital , , , , , Company Industry Composite Mortgage Affil & RE Invest Quick Current Year to Capital to Capital Liquidity Liquidity Investments: Ohio National s invested assets as of year-end 2016 are $11 billion, up from $10.2 billion in Total invested assets are comprised of 76% bonds, 10.6% mortgages, 3.6% other invested assets, 3.1% cash & short-term with the balance in stocks, real estate and contract loans. Separate account assets as of December 2016 are $21.4 billion, up from $20.5 billion in 2015 and up significantly from $11.9 billion in The primary drivers of growth include variable annuity sales and deposits and continued favorable equity market performance. In recent years, Ohio National has taken measures to reduce its investment risk profile. One of the main initiatives involved the use of managed volatility portfolios (MVPs), which was first introduced in MVP s are part of its separate account assets and used to reduce the overall risk profile of its variable annuities. MVPs offer 21 funds from 12 product managers, and management plans to offer additional funds going forward. For all new living benefit riders introduced since January 2012, Ohio National mandates 100% usage of MVPs, which now comprise over 30% of retained in-force. INVESTMENT YIELDS Cash & Invest. Net Short- Real Estate Exp. Year Yield Bonds Stocks Mortgages Term Gross Net Ratio Investments - Bond Portfolio: At year-end 2016, bonds comprise about 76% of general account invested assets. Holdings are primarily invested in corporate bonds, and are well diversified among various industry sectors including utilities, energy, financial services, asset-backed and mortgage-backed securities. Almost 95% of bonds are investment grade. About 38% of bonds are private placements, as the life group increased its holdings in this asset type to increase yield while trading some liquidity. Structured securities represent a typical portion of holdings and are highly rated and performing well. Ohio National employs a buy and hold strategy, where bond turnover is less than the industry average. Printed December 21, Page 9 of 22

10 While bond yields have been steadily decreasing in recent years, due to low interest rates, they are above the life industry average. Unrealized gains continue to be strong at about $310 million. However, A.M. Best notes that the group s unrealized gain position will be compromised if there is a rapid rise in interest rates. INVESTMENTS - SECURITIES Current Year Distribution of Bonds By Maturity Years Yrs-Avg Maturity Government Gov t Agencies & Muni Industrial & Misc Hybrid Securities Total Bonds (000) 5,477,140 5,041,825 4,750,475 4,543,336 4,214,962 US Government Foreign Government State/Special Revenue - US Industrial & Misc - US Private Issues Public Issues Bond Quality (%) Class Class Class Class Class Class INVESTMENTS - EQUITIES Stocks (000) 411, , , , ,949 Unaffiliated Common Affiliated Common Unaffiliated Preferred Investments - Mortgage Loans and Real Estate: Commercial mortgages represented 10.6% of invested assets at year-end 2016, and have been declining in recent years. While management likes this asset class, they also feel that increased competition for mortgages may not result in the desired yields and have moderated the issuance of mortgages. The mortgage portfolio is well diversified by both state and property type. Mortgages are issued in 42 states, with the highest exposure in the East North Central and South Atlantic regions. Holdings by property type are Office (21%), Retail (29%), Other (20%) and the balance in Industrial and Apartments. The average loan to value is relatively low and debt service coverage ratios are strong. Overall performance of the mortgages is strong, with no foreclosures in While the allocation to mortgages is close to the industry average, Ohio National does not buy investment real estate and has limited CMBS exposure. In addition, both the mortgage and private placement portfolios contain make-whole provisions which protect against reinvestment risk. INVESTMENTS - MORTGAGE LOANS & REAL ESTATE Mortgages (000) 782, , , , ,364 Commercial Mortgage Quality (%) 90 Days Delinquent 0.1 In Process of Foreclosure 0.5 Total Delinquencies Real Estate (000) 25,604 26,938 23,982 24,212 3,450 Property Occupied by Co 14.8 Property Held for Inc Property Held for Sale INVESTMENTS - OTHER INVESTED ASSETS Other Inv Assets (000) 1,116,665 1,069, , , ,234 Cash Short-Term Schedule BA Assets All Other HISTORY Date Incorporated: 09/09/1909 Date Commenced: 10/10/1910 Domicile: OH Originally incorporated as a stock company in 1909, the company completed the process of mutualization in On August 1, 1998, the company reorganized under Ohio s Mutual Insurance Holding Company Act. The Ohio National Life Insurance Company is now a stock life insurance company whose shares are owned entirely by Ohio National Financial Services, Inc., an intermediate holding company whose shares of stock are entirely owned by Ohio National Mutual Holdings, Inc., a mutual insurance holding company whose members are exclusively the life insurance and annuity policyholders of The Ohio National Life Insurance Company. MANAGEMENT Officers: Chairman, President and Chief Executive Officer, Gary T. Huffman; Vice Chairman, Christopher A. Carlson (Strategic Businesses); Executive Vice President and Chief Administrative Officer, Barbara A. Turner; Executive Vice President and Chief Officer, H. Douglas. Cooke, III Printed December 21, Page 10 of 22

11 (Distribution); Senior Vice President and Chief Financial Officer, Arthur J. Roberts; Senior Vice President and Chief Investment Officer, Paul J. Gerard; Senior Vice President and Chief Actuary, Kush V. Kotecha; Senior Vice President, General Counsel and Chief Compliance Officer, Dennis L. Schoff; Senior Vice President and Chief Human Resource Officer, Anthony G. Esposito; Vice President and Secretary, Therese S. McDonough; Vice President and Treasurer, Doris L. Paul; Executive Vice President and Chief Risk Officer, Kristal E. Hambrick. Directors: Jack E. Brown, Christopher A. Carlson, Victoria B. Gluckman, John W. Hayden, Gary T. Huffman, Julie S. Janson, James F. Orr, John R. Phillips, J. Michael Schlotman, James C. Votruba, Gary E. Wendlandt. REGULATORY An examination of the financial condition was made as of December 31, 2015, by the insurance department of Ohio. The 2016 annual independent audit of the company was conducted by KPMG, LLP. The annual statement of actuarial opinion is provided by Kush V. Kotecha, Senior Vice President & Chief Corporate Actuary. Reserve basis: (Current ordinary business): 2001 CSO 3% 3.5%; CRVM. (Current annuity business): IAR %-4% REINSURANCE Ohio National Life maintains a number of reinsurance agreements with professional carriers. Reinsurance has been used judiciously during the last several years. Maximum net retention on any one life was increased from $1,000,000 to $2,000,000 effective January 1, Since the new retention went into effect, Ohio National Life has ceded approximately twenty percent of its total in-force life insurance business. For individual disability income policies, the company has an 80/20 coinsurance agreement with Munich American Re and General Reinsurance, whereby ONLIC retains 20% of the risk. ONLAC reinsures some of its XXX reserves and universal life secondary guarantee AXXX reserves through Montgomery Re, which is a special purpose financial captive reinsurance company wholly owned by ONLIC. ONLAC also reinsures some of its XXX reserves through Kenwood Re, a Vermont domiciled special purpose financial captive reinsurer, and Camargo Captive Re, an Ohio domiciled special purpose financial captive reinsurer. ONLIC mitigates a material portion its variable annuity guaranteed benefits risk via reinsurance solutions through non-affiliated and affiliated reinsurers. Non-affiliated reinsurance is through Ace Tempest Life Reinsurance and CGT Wells Fargo, and affiliated reinsurance is through Sycamore Re, Ltd, a Cayman Islands domiciled captive. FINANCIAL INFORMATION BALANCE SHEET ($000) - YE 2016 Assets Liabilities Total bonds 5,477,140 +Net policy reserves 5,898,944 Total preferred stocks 29,297 Policy claims 16,217 Total common stocks 382,491 Deposit type contracts 718,374 Mortgage loans 782,244 Interest maint reserve 38,413 Real estate 25,604 Comm taxes expenses 39,741 Contract loans 465,938 Asset val reserve 32,507 Cash & short-term inv 337,089 Payable for securities lending 189,816 Securities-colltrl assts 189,816 Other liabilities 250,405 Prems and consids due 62,172 Accrued invest income 54,514 Tot liab w/o sep accts 7,184,418 Other assets 460,203 Separate account bus 20,795,232 Tot assets w/o sep accts 8,266,509 Total liabilities 27,979,650 Separate account bus 20,795,232 Common stock 10,000 Surplus notes 309,546 Paid in & contrib surpl 283,297 Unassigned surplus 487,536 Other surplus -8,289 Assets 29,061,741 Total 29,061,741 +Analysis of reserves; Life $3,418,721; annuities $2,320,320; supplementary contracts with life contingencies $3,952; accidental death benefits $87; disability active lives $17,467; disability disabled lives $6,125; miscellaneous reserves $103,030; accident & health $29,242. Printed December 21, Page 11 of 22

12 SUMMARY OF OPERATIONS ($000) Premiums: Death benefits 82,436 Ordinary life 618,521 Matured endowments 655 Individual annuities 1,136,804 Annuity benefits 619,603 Group annuities 418,857 Disability benefits 715 Acc & health other 6,655 Surrender benefits 1,340,473 Total premiums 2,180,838 Acc & health benefits 1,370 Supplementary contracts 227 Int on policy funds 14,574 Net investment income 332,305 Supplementary contracts 1,371 Amort interest maint res 6,626 Other benefits 1,051 Comm & exp reins ceded 43,696 Incr life reserves 502,324 Res adj on reins ceded 40,093 Incr a & h reserves 1,910 Other income 257,832 Commissions 297,743 Mgt and/or service fee 302,829 Comm exp reins assumed 9,519 Insur taxes lic & fees 15,911 General ins expenses 156,213 Net transf to sep acct -19,646 Total 3,164,446 Total 3,026,224 Gain from operations before FIT & div to policyholders ,222 Dividends to policyholders: life... 89,704 Dividends to policyholders: accident & health... 2,243 Gains from operations after dividends to policyholders... 46,275 Federal income taxes incurred ,502 Net gain from operations after FIT and dividends... 60,777 CASH FLOW ANALYSIS ($000) Funds Provided Funds Applied Gross cash from oper 2,831,510 Benefits paid 1,753,175 Long-term bond proceeds 536,970 Comm, taxes, expenses 432,409 Mortgage loan proceeds 134,296 Long-term bonds acquired 978,253 Other cash provided 62,863 Other cash applied 504,041 Decr cash & short-term 102,239 Total 3,667,878 Total 3,667,878 Ultimate Parent: Ohio National Mutual Holdings Inc OHIO NATIONAL LIFE ASSURANCE CORPORATION One Financial Way Cincinnati, OH Mailing Address: P.O. Box 237, Cincinnati, OH Tel.: Fax: AMB#: NAIC#: Ultimate Parent#: FEIN#: BEST S CREDIT RATING Best s Financial Strength Rating: A+ Outlook: Stable Best s Financial Size Category: XII RATING RATIONALE Rating Rationale: The ratings of Ohio National Life Insurance Company (ONLIC) have been extended to Ohio National Life Assurance Corporation (ONLAC) due to its importance to the group s business mix, well integrated into the group s strategic plan, readily identified with its parent company, and the diversity provided since ONLAC markets mainly term and universal life for the enterprise. Even though different products are sold through ONLAC, the two companies are operated for most purposes as if they were one organization. All the officers and other personnel perform the same functions for both companies, and both companies have the same underwriting, investment and pricing standards. The ratings for the Ohio National Life Insurance Company (ONLIC) and its wholly owned subsidiary, Ohio National Life Assurance Corporation (together referred to as Ohio National), reflect the increased diversification of its business profile, growth in life insurance sales, a favorable trend in total ordinary life premiums and positive statutory and GAAP results coupled with strong levels of risk-adjusted capitalization. Partially offsetting rating factors include a relatively high percentage of separate account business subject to equity, interest rate and market volatility risk; higher than average financial leverage when measured on a tangible capital basis; and the intense level of competition within the retirement, life and annuity marketplaces. Ohio National offers a diverse portfolio of life, annuity, retirement and disability products and is strategically emphasizing expansion into the highly competitive U.S. retirement services marketplace. Within its core life insurance and variable annuity product lines the group continues to enjoy mid-level market positions with a demonstrated track record of increasing life sales over the last twenty-seven years. Statutory and GAAP management operating earnings trends (MOE), which reflect adjustments for the mark-to-market impact of hedging variable annuities and reinsurance, are Printed December 21, Page 12 of 22

13 positive, although GAAP MOE results have remained relatively flat over the five-year period. Risk management practices, particularly within the front end of variable annuity product design, are viewed as strong, although there is moderate retention (net of hedging and reinsurance) of equity market, interest rate and volatility risk. Despite some progress in diversifying Ohio National s business profile, about two-thirds of its liabilities are related to separate account business, well above the life industry average. Consequently, this elevated exposure contributes to potential operating and balance sheet volatility. While risk-adjusted capital remains strong, the quality of capital has been reduced through the use of captive insurers to support XXX and AXXX redundant reserves and issuance of surplus notes. Financial leverage, when measured on a tangible capital basis is high, although leverage on a total capital basis remains within the higher range of A.M. Best s guidelines. A.M. Best also notes that interest coverage on a GAAP MOE basis has historically been somewhat low relative to the expectations for this rating level. A sustained decline in net operating performance could lead to a ratings downgrade. A decline in risk-adjusted capitalization could also result in a negative rating action. Additionally, a meaningful increase in financial leverage or a decline in interest coverage could lead to a negative rating action. FIVE YEAR RATING HISTORY Date Best s FSR Date Best s FSR 08/02/17 A+ 06/12/14 A+ 07/29/16 A+ 06/07/13 A+ 07/22/15 A+ KEY FINANCIAL INDICATORS ($000) Total Capital Capital Asset Net Net Surplus Valuation Premiums Invest Funds Reserve Written Income Net Income Year Assets ,315, ,400 20, , ,963 30, ,408, ,776 25, , ,757 13, ,605, ,020 30, , ,885 18, ,688, ,508 29, , ,226 20, ,956, ,951 32, , ,362 14,116 (*) Within several financial tables of this report, this company is compared against the Individual Life Composite. (*) Data reflected within all tables of this report has been compiled from the company-filed statutory statement. BUSINESS PROFILE The Ohio National Life group of companies offers a diversified array of individual life and annuity products serving the middle market as well as the small business and professional markets. The lead company, Ohio National Life Insurance Company (ONLIC) and its wholly owned subsidiaries, Ohio National Life Assurance Corporation (ONLAC) and National Security Life and Annuity Company (NSLAC), are among the leaders in life sales, ranking #19 and, in variable annuity sales, #16 (Per LIMRA ). Assets under management total about $40 billion in Also, nearly two-thirds of Ohio National s business is separate accounts related. A major strength of Ohio National lies in the strong ties of the distribution force to the group, which have been cultivated over time through excellent service and a strongly integrated compensation structure that rewards loyalty and quality business. As a result of this structure, these channels have historically enjoyed strong persistency, strong channel growth and sales growth when compared to industry averages. ONLIC is wholly owned by Ohio National Financial Services, Inc. (ONFS), an intermediate holding company, which, in turn, is wholly owned by its ultimate parent, Ohio National Mutual Holdings, Inc. (ONMH). Life premiums have increased for 27 consecutive years, which is a source of pride for the group. ONLIC is the lead company in the Ohio National Life group and markets several participating whole life insurance products, and various individual and group annuities. Fixed annuities have not been promoted since 2009, and a considerable amount of the company s fixed annuity business has been reinsured. ONLIC s annuity product line includes individual and group variable annuities, individual deferred annuities, immediate annuities, guaranteed investment contracts (GIC), fixed index annuities, and structured lottery settlements. GIC contracts and structured settlement products are typically sold on an opportunistic basis, and these products have been de-emphasized over the past several years. Both the individual and group variable annuities include a fixed income option as well as over two hundred account options, which provide consumers the opportunity to diversify among a variety of investments, managers and styles. Additionally, the company offers pension administration servicing capabilities. ONLAC markets universal life insurance, term life insurance and individual disability income insurance. ONLAC has three universal life products: one focused on young insureds, term conversions and small policies, another focused on longer-term cash accumulation, and a third that is used exclusively for BOLI (Bank-Owned Life Insurance). Variable universal life products include a fixed income option as well as over sixty account options, which provide consumers the opportunity to diversify among a variety of investments, managers and styles. There are three level term products with varying guaranteed payment durations and riders from which to choose. All are fully priced for Regulation XXX statutory reserves. These reserves are funded with long term debt and stop loss reinsurance. All term products are available with accelerated death benefit and waiver of premium. Ohio National has experienced favorable mortality and persistency in its individual life lines, and continues to enjoy a significant competitive advantage as a low unit cost provider in its core life and annuity lines. The group organizes its lines of business along five business segments: life insurance, retirement plans, annuities, disability income insurance and international. Life Insurance The life product portfolio is diversified and has recorded strong sales growth that has outpaced the industry. The size of the average life policy is Printed December 21, Page 13 of 22