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

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

KEY RATING DRIVERS

The affirmation of W&SFG's ratings reflects the company's extremely strong risk-adjusted capitalization, low financial leverage, extremely strong 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 and exceptionally strong interest coverage. Outstanding debt is concentrated at the holding company and consists of $500 million of senior notes that mature in 2033 and 2034. W&SFG's financial leverage and total financing and commitments ratios (TFC) were 7% and 0.5x, respectively, as of Dec. 31, 2015.

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 Insurance Co. (WSLIC) and Lafayette Life Insurance Co. (Lafayette) was 526% of the company action level as of Dec. 31, 2015. Consolidated operating leverage remains among the lowest in Fitch's rated universe at 5.3x.

Fitch views W&SFG's debt service capabilities as very strong demonstrated by its cash interest coverage ratio of 30x at year-end 2015. The holding company continues to retain significant amounts of cash and liquid assets, which totaled approximately $600 million as of Mar. 31, 2016.

W&SFG reported 14% growth in pretax operating earnings during 2015, which was primarily driven by increased earnings from limited partnerships, greater fee income and favorable mortality, which were somewhat offset by modest spread compression. Return on assets improved to 0.98% in 2015, compared with 0.88% in 2014.

The company reported lower earnings in the first quarter of 2016, primarily driven by unfavorable mortality compared with favorable mortality in the prior-year period. Lower hedge fund and private equity results along with fewer bond pre-payments also contributed to the deterioration.

Fitch's primary concern continues to be W&SFG's exposure to interest rate risk. Although its exposure continues to gradually decline, interest-sensitive annuities make up approximately half of the company's reserves. Despite a difficult operating environment, W&SFG has maintained relatively stable interest spreads. However, diminished flexibility to further reduce aggregate crediting rates led to modest spread compression in 2015, which is expected to continue in 2016.

Conversely, if interest rates spike up, the company's general account annuities would be subject to disintermediation risk, as 53% of reserves are surrenderable at book value as of Dec. 31, 2015. 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 customer retention.

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 business profile.

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. Fitch views W&SFG's overall exposure to risky assets, which make up 92% of total adjusted capital, as manageable in the context of its extremely strong balance sheet fundamentals.

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:

--Risk-based capital falls below 400%;

--Total financing and commitments ratio increases above 0.8x.

Fitch affirms the following ratings with a Stable Outlook:

Western & Southern Financial Group:

--Long-term 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 on www.fitchratings.com.

Applicable Criteria

Insurance Rating Methodology (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008629

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008629

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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:
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@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:
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@fitchratings.com