Ohio National Decides to Demutualize

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Earlier last week, Ohio National Life announced that its board of directors approved an acquisition transaction.  If approved, the company will demutualize and become a stock owned-subsidiary of Constellation Insurance Holdings, Inc. out of Canada.  Ohio National announced that this transaction will strengthen the company’s financial position, enhance its market position, and give it the necessary resources to facilitate future growth.

Constellation will purchase Ohio National Life in its entirety for $1 billion (USD).  $500 million will go to Ohio National participating policyholders to buy out their ownership interest in the company.  The remaining $500 million will go to the newly demutualized Ohio National to use for its strategic business purposes.

This news comes with a number of questions.  Some, but certainly not all, the company addresses with a special web site it created to discuss the demutualization.

Here’s the video announcement from CEO Barbara Turner:

How Did We Get Here?

Rumors about Ohio National’s instability have circulated for a number of years.  The first major public sign of a problem appeared in 2018 when the company announced that it would cease paying trail commissions on certain variable annuity contracts.  This led to several lawsuits and contempt among a wide range of industry professionals and partner firms who conducted business with Ohio National.

The company did successfully defend itself in a number of those lawsuits so far.  It also managed to broker a deal that jettisoned the majority of its exposure to taxing annuity contract liabilities that posed a threat to its capital stability.

But those victories do not appear to leave ONL completely in the clear.  Analyzing operational data from the past seven years shows us a company that faced mostly ever-decreasing results.  Cash flow declined by steady double-digits both in terms of top-line revenue as well as operating cash flow down 11.49% and 17.16% respectively from 2013 to year-end 2019 (source: SAP filings).

Revenue (in 1,000’s)

2013  $              4,132,068

2014  $              4,147,805

2015  $              3,930,823

2016  $              3,636,190

2017  $              3,298,591

2018  $              2,962,375

2019  $              1,862,034

Net Cash from Ops (in 1,000’s)

2013  $                 189,385

2014  $                 234,291

2015  $                 189,186

2016  $                 166,616

2017  $                 240,541

2018  $                 119,266

2019  $                   12,629

Ohio National also experienced a decline in overall new life insurance policies issued over the same time period.  The reduction appears to accelerate around the time the company announced its termination of paying annuity trail commissions.  We can only speculate on the trend, but it appears as though this decision impacted other lines of business (Source: SAP Filings).

Policies Issued

2013                       29,324

2014                       29,901

2015                       27,983

2016                       27,913

2017                       25,905

2018                       22,123

2019                       18,764

Suspension of Whole Life Insurance Sales

Ohio National contemporaneously announced a suspension on whole life sales as it “updates its illustration software” to adjust the company’s “rate setting methodology” to a way that “more commensurate with the net earned rate of the supporting portfolio less charges.”  You can read the field announcement Ohio National released to its sales force here:

Download (PDF, Unknown)

I can only speculate on the underlying motivation for this move, but my thoughts are this is a transition many demutualized companies make as they seek to partition profits and pay dividends to whole life blocks based solely on the surplus specifically generated from that business.  This contrasts with mutual insurers who often use profits from all lines of business to pay whole life policy owner dividends.

The net impact will be a lower dividend in the short term and very likely a lower dividend forever for Ohio National whole life policyholders.

What’s Next for Ohio National?

The demutualization and acquisition by Constellation Insurance Holdings needs regulatory approval as well as ONL member (i.e. policyholder) approval.  It’s unlikely either of these hurdles will prevent the corporate shift to a stock company and Constellation buy-out.  Once the transaction completes, the company will likely go through a dramatic shift.  The Ohio National we once knew is likely in for an overhaul.

I wouldn’t be surprised to see the company end up on the IMO platform.  I also wouldn’t be shocked if whole life insurance faded away as a product offering.  These transitions normally result in a company’s taking a dramatic shift in business direction.  That doesn’t mean Ohio National will do this.  But if it doesn’t, it will the first company that doesn’t.


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