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

The affirmation of W&SFG's ratings reflects the company's extremely strong risk-adjusted capitalization, low financial leverage, solid debt servicing capabilities and stable operating performance. The ratings also reflect the risks associated with the company's interest-sensitive product profile and relatively high allocation to equity securities.

Fitch's primary rationale for the narrow notching between the holding company IDR and the insurance company IFS rating continues to be W&SFG's low financial leverage of 6.9% as of Dec. 31, 2014. 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 at 0.4x.

Fitch views the statutory capitalization of W&SFG's insurance subsidiaries as extremely strong. The combined risk-based capital (RBC) ratio of Western & Southern Life Ins. Co. (WSLIC) and Lafayette Life Ins. Co. (Lafayette) was 493% of the company action level as of Dec. 31, 2014. Consolidated operating leverage remains among the lowest in Fitch's universe at 5.4x.

Fitch views W&SFG's debt service capabilities and overall liquidity as very strong. GAAP and statutory interest coverage were solid at 13.8x and 18.7x, respectively, in 2014.

Fitch's primary concern continues to be W&SFG's exposure to interest rate risk. Although its exposure has declined modestly over the past several years, interest-sensitive annuities make up more than half of the company's reserves. Despite a difficult operating environment, W&SFG has maintained relatively stable interest spreads due to actively managed crediting rates. However, Fitch believes there is diminished 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 37% of reserves are surrenderable at book value. However, Fitch believes W&SFG has ample liquidity available to meet potential outflows under a base-case stress scenario. The company has also demonstrated effective management of this risk along with a history of strong persistency.

New business is increasingly more balanced between annuities and life insurance. In addition, the asset management business continues to grow and contributes to a more diversified operating profile.

Fitch views W&SFG's overall exposure to equity market volatility as manageable in the context of its extremely strong balance sheet fundamentals. W&SFG 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.

W&SFG reported solid pretax operating earnings in 2014, which includes a release of reserves for unclaimed property liability. Fitch expects continued earnings stability in 2015.

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%;

--Cash interest coverage below 15x.

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

--RBC falls below 400%;

--TFC ratio increases 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' (September 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984067

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Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA
Director
+1-312-368-3136
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Douglas L. Meyer, CFA
Managing Director
+1-312-368-2061
or
Committee Chairperson
Douglas M. Pawlowski, CFA
Senior Director
+1-312-368-2054
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA
Director
+1-312-368-3136
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Douglas L. Meyer, CFA
Managing Director
+1-312-368-2061
or
Committee Chairperson
Douglas M. Pawlowski, CFA
Senior Director
+1-312-368-2054
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com