TL;DR:  Ohio National Financial Services seeks to demutualize, become a stock company wholly owned by a Canadian holding company, in exchange for a 4-year $500 million capital infusion.

First, some backstory:  I used to be a producing general agent for Ohio National, which is a big player in the life insurance and disability insurance world.  Very innovative company with innovative products.  I still have two permanent life insurance policies on my kids through them.  Ohio National is more than just life insurance.  They also have their disability income insurance company, a broker/dealer for mutual funds etc., an RIA, and other financial services.  

Ohio National is 111 years old and since 1959 has been a mutual company, meaning their insurance policy holders are the owners of the company instead of stock shareholders.  This means that their excess profits go into the dividends paid into accumulated cash values in permanent life insurance policies instead of going into the hands of stockholders on the stock market.  Thus, the cash flow benefits current policyholders.

US life insurance companies are heavily regulated by the states, who require a VERY substantial portion of the companies' investment portfolios to be in safe, non-volatile, interest-bearing investments like bonds, CDs, etc.    Thus, the zero-interest rate and near-zero interest rate policies by the Federal Reserve have been hurting any companies who are required to have a substantial portion of their investments in bonds, CDs, and interest-bearing investments -- like pensions and insurance companies.

3 or so years ago, Ohio National sent shockwaves thru the industry by jettisoning their 401k and variable annuity lines of business, supposedly to focus on their core business.

Today, as a policyholder, I got a letter in the mail stating that Ohio National's Board of Directors has unanimously voted to convert from a mutual company owned by the policy holders into a stock company.  Ohio National will then be completely owned by Constellation, a holding company owned by two Canadian businesses, one of which is the Ontario Teachers Retirement Pension.   The terms of the deal are that Constellation will (1) pay $500M out across all current policyholders to buy out their ownership interest, and (2) inject another $500M into Ohio National over 4 years once the policyholders vote to approve the demutualization and sale.  This is all contingent upon the current owners, i.e. the policy holders, voting to approve this.

Thus, Constellation's owners will reap the future cash flow/profits from Ohio National.  Which makes sense given that one owner is a pension fund that needs cash flow.

The cover letter paints this in rosy, glowing terms, and mentions the half-billion that's being used to buy out me and the other policy holders.

However, the cover letter did NOT mention the other half-billion that's being injected into Ohio National over 4 years.  It's merely an oh-by-the-way comment in the glossy 2-page FAQ brochure.  I find this very telling.

Here's my take-away from this:

1.  Ohio National must be in SERIOUSLY BAD financial shape, or predicting such in the very near future, due to low US interest rates, in order to consider a move like this.  This is a fairly huge development in the life/disability insurance world.  They are effectively saying they need hundreds of millions of dollars to survive, and are willing to sell the company for it.

2.  Ohio National is now going to be much less attractive to new policy holders because the excess profits will be skimmed off to the new external owners instead of being returned to policy holders, used to reduce rates, etc.

3.  Ohio National may become much less innovative in its products because the Board of Directors will now answer to external owners who want cash flow to pay Ontario's retired teachers' current benefits.

4.  Ohio National may have a number of their current non-captive insurance agents drop them in favor of other companies such as Penn Mutual, Pacific Life, etc.

5.  Pension funds are looking for innovative ways to get cash flow and ROI because interest rates suck so badly.

Ohio National may be the canary in the coal mine not just for the life/disability insurance industry but for EVERY industry that depends on having returns much higher than current interest rates yet 40%+ of their portfolio is required to be in investments whose returns are based on current interest rates.  Like pension funds...

@midcap
@exponentialpi

As you know, a mutual structure is very limiting with respect to raising capital. Many mutual companies have demutualized for many reasons. Ohio National’s financials are posted on their site. I haven’t reviewed them, but I wouldn’t automatically jump to the conclusion that they are in very bad financial condition. Take a look. As a policyholder you should have been provided with financial information each year.

It is true that insurers are limited with respect to their investment options. They also have to maintain large reserves for purposes of risk based capital. However, I don’t believe they are the canary in the coal mine. Many insurers are doing very well, despite the extended, low interest rate environment.