Fitch Affirms Western & Southern's IFS Ratings at 'AA'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Western & Southern Financial Group (W&SFG) at 'AA-' and the Insurer Financial Strength (IFS) ratings for W&SFG's wholly owned life insurance subsidiaries at 'AA'. A detailed list of ratings follows at the end of this release. The Rating Outlook is Stable.

KEY RATING DRIVERS

Today's rating actions reflect Fitch's view that W&SFG's results remain stable and in line with expectations for the current ratings. Risk-adjusted capitalization remains very strong, leverage is low and interest coverage is strong.

Fitch views the statutory capitalization of W&SFG's insurance subsidiaries as very strong. The combined risk-based capital (RBC) ratio of Western & Southern Life Ins. Co. (WSLIC) and Lafayette Life Ins. Co. (Lafayette) was 498% as of Dec. 31, 2013, and Fitch expects the RBC to remain above 450% over the medium term. Consolidated operating leverage (excluding separate accounts) was 5.3x, among the lowest in the Fitch universe.

W&SFG's financial leverage of 7% at Dec. 31, 2013 is very low and in line with rating expectations. Relatively low leverage continues to be Fitch's primary rationale for the narrow notching between the holding company IDR and the insurance company IFS rating. Outstanding debt is concentrated at the holding company and consists of senior debt issues that mature in 2033 and 2034. The group's total financing and commitments ratio (TFC) remains low in the 0.4x-0.5x range.

Fitch views W&SFG's debt service capabilities and overall liquidity as very strong. Both GAAP and statutory coverage of interest expense increased in 2013 and is considered very strong. Statutory dividend capacity of $440 million in 2014 is a $51 million increase over 2013.

Fitch's primary concern continues to be the group's exposure to interest rate risk given the predominance of fixed annuities (currently about two-thirds) in its liability structure. Interest margins on fixed annuities are the primary driver of the group's earnings, and margins have been relatively flat. If low rates continue, Fitch believes there is declining flexibility to further reduce aggregate crediting rates.

Conversely, if interest rates spike up the company's general account annuities would be subject to disintermediation risk, as over 40% of reserves are surrenderable at book value without adjustment or with a minimal charge. However, Fitch believes W&SFG mitigates this situation with its high degree of persistency, close monitoring and management of this risk, and ample liquidity available to meet potential outflows.

Fitch also notes that new business being sold by W&SFG is increasingly more balanced between annuities and life insurance, and that is expected to improve the inforce balance over time. In addition, the asset management business is growing and contributing to a more diversified business profile.

Fitch views W&SFG's overall exposure to equity market volatility as manageable in the context of its very strong balance sheet fundamentals. The group has above-average exposure to unaffiliated common stock in its investment portfolio but only modest exposure to equity market volatility through variable annuity living and death benefit guarantees.

RATING SENSITIVITIES

Key rating triggers that could result in an upgrade include:

--The expansion of W&SFG's market position and size/scale;
--Continued reduction in the company's concentration in spread-based fixed annuity products;
--Risky asset ratio at or below 60%;
--No deterioration in the group's very strong capitalization profile, including operating leverage maintained below 8x.

Key rating triggers that could result in a widening of the holding company notching are:

--Financial leverage maintained above 15%;
--GAAP EBIT coverage below 7x.

Key rating triggers that could result in a downgrade of the IFS rating include:

--RBC falls below 400% on a sustained basis;
--TFC ratio increases to above 0.8x.

Fitch affirms the following ratings with a Stable Outlook:

Western & Southern Financial Group:
--IDR at 'AA-';
--5.75% senior notes due 2033 at 'A+';
--5.75% senior notes due 2034 at 'A+'.

Western and Southern Life Insurance Company;
Western-Southern Life Assurance Company;
Columbus Life Insurance Company;
Integrity Life Insurance Company;
National Integrity Life Insurance Company;
Lafayette Life Insurance Company.
--IFS at 'AA'.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (November 2013).

Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827207
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Contacts

Fitch Ratings
Primary Analyst:
Bruce E. Cox, +1-312-606-2316
Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst:
Douglas L. Meyer, CFA, +1-312-368-2061
Managing Director
or
Committee Chairperson:
Douglas M. Pawlowski, CFA, +1-312-368-2054
Senior Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Bruce E. Cox, +1-312-606-2316
Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst:
Douglas L. Meyer, CFA, +1-312-368-2061
Managing Director
or
Committee Chairperson:
Douglas M. Pawlowski, CFA, +1-312-368-2054
Senior Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com