Ohio National Decides to Demutualize

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.

 

10 thoughts on “Ohio National Decides to Demutualize”

  1. Do you see any other mutuals doing this in the near future? Has the reverse ever happened, where a stock co. transitions to a mutual co?

    Reply
    • Hi Gary, there aren’t any mutuals other than ONL that I would consider highly likely to make this move. No I’m not aware of anyone who has transitioned to a mutual, at least not in the last several decades and I wouldn’t anticipate it occurring.

      Reply
      • Interestingly, both MetLife and Equitable went from stock to mutual companies in the early 1900’s only to de-mutualize about 90 years later

        Reply
    • I think so. There’s no reason at this point to doubt that annuity policyholders need to worry about contract guarantees being maintained. They may end up providing little more than the guarantee. But at this time, there is no evidence I’m aware of to make me suggest they won’t meet the guarantees promised in those contracts.

      Reply
  2. This aweful selling to a Canadian Company owned by 2 large Pension Plans that dont have the assets to meet all liabilites is not a responcible action

    Reply
  3. Just wondering Brandon (3 months later since your article) if you still feel the same way as to whether they will honor annuity policyholders contracts? Do you know of any other Company that de-mutualized & honored their annuity contracts? Thanks

    Reply
    • Hi Michele,

      Feelings haven’t changed regarding ONL and their willingness/ability to satisfy the obligations they have to policyholders. I’m aware of no insurer that has demutualized and not fulfilled promises made on any contract issued prior to demutualization.

      Reply
    • Hi Mark,

      There’s no way I or anyone should tell you definitively if you should keep or cancel that policy without knowing a lot more about why you bought it and what your plans for it are. If you’d like to contact us here, we can discuss it in more detail and give you a well-thought-out approach on what to do.

      Reply

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