Last year, Ohio National Life announced that it was looking to demutualize and be acquired by a Canadian Private Equity-created insurance holdings company named Constellation Insurance Holdings. While we didn't predict demutualization was on the table for Ohio National, we weren't surprised by the announcement. The company struggled for a few years, and those struggles accelerated after it took the unthinkable action of breaking its promise to pay renewal commissions to brokers who some of its annuity products.
At the same time as the demutualization announcement, Ohio National also announced that it was effectively temporarily suspending whole life insurance activity including calculating in force illustrations while it took time to re-configure its methodology for dividend payments that would be more in line with its current reality. We took this to mean they were planning a big drop in dividend payments, and sadly, we were correct.
Later in the year, Ohio National also announced its dividend scale for 2022–this included further reductions in payable dividends to policyholders.
On March 31, 2022, a little over a year after it made the announcement, Ohio National finalized the transaction, demutualized, and became a wholly-owned stock subsidiary of Constellation Insurance Holdings.
Now that the deal is done, we have a few final thoughts on the situation and what it means for policyholders. We also have a few observations to share regarding ONL, its policyholders, how we got here, and who might be next in line for the same fate.
How Did We Get Here?
Years ago, we're talking 10+ years ago. Ohio National Financial Services appeared to be a reasonably strong player in the mutual life insurance space offering a reasonably diverse mix of whole life insurance products. The company was also pretty intently focused on selling variable annuities, which were enjoying a darling moment in the spotlight as investors clamored to get in on their guaranteed accumulation and income benefits.
At the time, the industry was starting to pump the brakes on these variable annuities. Many companies were starting to worry about the risk they presented, and if they had adequately charged and hedged for the guarantees they offered their clients. Some even started offering to buy out the benefits from existing policyholders.
But not Ohio National. It charged forward determined to grow its assets managed through variable annuities bucking the trend of its fellow insurers and gobbling up–theoretically–as much business as it could get its hands on.
This, it appears, was a grave error. The company faced major stresses from this action and even took the somewhat unprecedented move of abruptly ending payments of renewal commissions to brokers who sold these annuity products. This, not surprisingly, resulted in litigation. ONL successfully defended itself in much of this litigation. In fact, I'm not aware of anyone who successfully brought suit against Ohio National over non-payment of renewal commissions and has won that case against the company.
It turns out that when you make a bold move, other players in the industry also make bold moves. We noticed a sharp decline in reported life insurance sales from Ohio National in years immediately following the annuity renewal commission announcement. To be clear, Ohio National never changed its policy on paying renewal commission on life insurance, or any other product besides some of its variable annuities. But it looks like this action spooked a number of would-be Ohio National agents/brokers who decided they'd do business elsewhere.
Around the same time, the accounting at Ohio National appeared to be headed sideways. We had noticed the company looked much less well off vs. earlier reviews of its income statements and balance sheet. We moved the company internally from a “back-up” option to a “do not sell” category at this time.
We didn't feel it was necessary to instigate replacements. Our assessment was that the company wasn't as well off as many other insurers competing for the same business, but we didn't think this absolutely meant people who owned Ohio National insurance policies needed to get rid of them.
Where are We Now?
With new information in hand, we sadly have to say that we not only can no longer recommend Ohio National for cash-focused life insurance sales, we think it's going to be necessary for a majority of people who bought life insurance from the company for this purpose to start entertaining alternative options.
We've been cautiously monitoring the situation since the demutualization announcement; trying to get a handle on what specifically the change was going to mean for policyholders. We were dubious that the new Ohio National would have much of a focus on cash accumulation products–at least in the whole life space–as this tends to be a product whose success for the policyholder is in conflict with the business model for which ONL's new ownership structure exists to benefit.
We've received a lot of inquiries lately from current Ohio National policyholders, and this has given us a wide-ranging look at how policies project to perform in the future. For those focused on cash value…it's not great.
If Guaranteed Death Benefit is your Game
I want to be very explicit in noting that people who own Ohio National life insurance policies focused entirely or primarily on the death benefit it provides, there's likely little to no reason to worry about the policy. Paying the required premium in exchange for the guaranteed death benefit will still work out as promised.
This is true for any whole life, universal life, or term life insurance policy issued by the company. You should note that guaranteed death benefits are probably not associated with Ohio National universal life policies, so there could be some area of further exploration for people owning these policies.
It's also theoretically possible that those who own disability income insurance issued by Ohio National can breathe a sight of relief as they too fall into this category of people who likely have little to worry about. You should know that some Ohio National disability insurance policies did project a dividend that would lower the overall premium of the policy, and I would suspect this dividend payment might go down or be non-existent in the future.
There are also several annuity contracts that are probably fine, so long as you are happy with the minimum guarantees the contract offers.
If You Bought your Life Insurance for Cash Value
If cash value build-up of your policy was a primary reason for choosing your Ohio National policy, you need to seriously consider other options. This is the first time we have ever announced publicly a recommendation to not keep a specific company's product, and I do hope it will be the only time we ever do it. Let me explain my concern for ONL policyholders who are looking to build wealth, create retirement income, or whatever cash-focused motivator made them buy an Ohio National policy.
The revised dividend calculation, as well as the most recent dividend announcement from ONL, show a dramatic change in dividends moving forward. Dividends are the key engine behind the cash accumulation associated with whole life insurance policies purchased for retirement income planning, self-banking strategies, and any other intentional use of building wealth through owning whole life insurance.
The significantly revised dividend at Ohio National is no longer conducive to this strategy. It simply isn't. And those who keep their policies will almost certainly recognize extremely poor rates of return on the premiums they paid into these policies. It's getting close to the results one would get if buying non-dividend-paying whole life insurance, which is a terrible idea if trying to build cash value as efficiently as possible through whole life insurance.
Also note that while you may not think of your purchase as specifically focused on cash value, you might have purchased a policy for some non-guaranteed feature that is highly dependent on dividends. If, for example, you are planning to use dividends to pay premiums or using the cash value build-up to pay future premiums, the reduction in projected dividend payments will make this goal much harder to achieve–if not impossible. Here's a video we did recently explaining why some whole life policyholders are struggling with this reality (not an exclusive problem for Ohio National):
But there's an additional problem that will likely ensure dividends remain low, possibly even drive them lower…
The Unhealthy Pool
Now that Ohio National's block of whole life policies face a dramatically altered dividend future, policyholders will begin to seek out alternative options–and they'll find plenty of better options in this pursuit.
But some of the current policyholders cannot. Some of the people who bought life insurance from Ohio National with a plan to use the policy for its cash accumulation have experienced a change in health status since the purchase. This change could be significant enough to make them uninsurable elsewhere. They are effectively trapped.
This less-healthy crowd will most likely stick with their policy and also most likely die sooner than the mix of people who remain free of health issues.
Those who remain in good health will shop their options and most likely leave. This means the old block of life insurance at Ohio National will increasingly shift in a direction that accelerates claims. This increase in claims activity will drive dividends down further as the pool of life insurance owners becomes less profitable.
Why we Don't Hold Dividend Recognition as a Buying Decision – A Case Study
We have long held the position that dividend recognition is a tertiary-at-best factor when selecting a life insurance contract. We do know that for a long time Ohio National was happy to market itself as a non-direct recognition company, and several agents sold them largely because they were a non-direct recognition company.
I'd like to point out that there are several direct-recognition whole life policyholders out there who aren't currently scrambling to figure out what they are going to do with the policy they bought that is no longer going to do what they were seriously hoping it was going to do.
It's also interesting to note that with several Ohio National policyholders currently contacting us looking for help finding an alternative solution, none of them have told us that it must be a non-direct recognition contract that they go to next. Also interesting is the fact that all of them have expressed interest in looking at indexed universal life insurance.
Who Will Fall Next?
It's not surprising that some people are asking how we know that some other mutual life insurance company will not face the same reality Ohio National is going through. In a long-term sense, we don't. Ultimately, anything is possible. No one would have predicted in 1980 that one day MetLife, Prudential, John Hancock, etc. would demutualize and become public stock companies. Thankfully for those policyholders, they were paid company stock that brought additional value versus a buy-out cash offer because the insurance company they “owned” would be slid into a non-public holdings company's portfolio with the intention of using its profits to benefit its pension fund clients.
But I can also tell you that Ohio National's demutualization was not a sudden event. It was a series of events that unfolded over many years. As I mentioned already, we had made the internal decision to not sell them period several years ago, after putting them on a list of insurers we were cautious about due to developing problems we noted.
Truthfully, any agents who sold on Ohio National policy within the last 3-5 years have some serious explaining to do when it comes to selecting the “best” option. This is less true where death benefit was the primary concern. It's absolutely the case if selling the policy as part of a cash accumulation strategy.
Looking at the pool of remaining mutual life insurers, I can say that none of them display the same questionable activity that made us originally cautious about Ohio National. There are a couple that teeter on the edge of entering that space, but they've been in that position for some time.
It's reassuring to see that, despite ONL's effectively getting away with its renewal commission policy on variable annuities, no other mutual insurer has made a similar move–I'm sure there are some who would like to.
There are several well-capitalized and profitable mutual life insurers. And they've always held better balance sheets and reported stronger income figures than Ohio National did. They also don't appear to be partaking in a brow-raising activity like rushing into a market that everyone else wants out of.