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

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 6.6% and 0.5x, respectively as of Sept. 30, 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 508% of the company action level as of Sept. 30, 2015. Consolidated operating leverage remains among the lowest in Fitch's universe at 5.4x.

Fitch views W&SFG's debt service capabilities as very strong demonstrated by its cash interest coverage ratio of 35.9x at year-end 2014. The holding company continues to retain significant amounts of cash and liquid assets, which totaled approximately $600 million as of Sept. 30, 2015.

W&SFG reported 21% growth in pretax operating earnings during the first nine months of 2015 compared with the prior year period. The improvement 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 1.08% as of Sept. 30, 2015, compared with 0.91% in the prior-year period.

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 has led to modest spread compression in 2015.

Conversely, if interest rates spike up, the company's general account annuities would be subject to disintermediation risk, as 44% of reserves are surrenderable at book value. 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 persistency.

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.

Fitch views W&SFG's overall exposure to equity market volatility as manageable in the context of its extremely strong balance sheet fundamentals. 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.

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:

--RBC falls below 400%;
--TFC ratio increases above 0.8x.

Fitch affirms the following rating 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'.