[October 30, 2014]

Fitch Affirms Western & Southern's IFS Ratings at 'AA'; Outlook Stable

Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Western & Southern Financial Group (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, solid 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 views the statutory capitalization of W&SFG's insurance subsidiaries as extremely strong. The combined risk-based capital (RBC) ratio of Western & Southern Life Ins. Co. (WSLIC) and Lafayette Life Ins. Co. (Lafayette) was 484% of the company action level as of June 30, 2014. Fitch expects the RBC ratio to remain above 450% over the medium term. Consolidated operating leverage remains among the lowest in Fitch's universe at 5.2x.

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 of 7.1% as of Sept. 30, 2014. Outstanding debt is concentrated at the holding company and consists of senior debt issues that mature in 2033 and 2034. The group's total financing and commitments ratio (TFC) remains low at 0.4x.

Fitch views W&SFG's debt service capabilities and overall liquidity as very strong. GAAP and statutory interest coverage are solid at 14x and 13x, respectively, as of Sept. 30, 2014.

Fitch's primary concern continues to be W&SFG's exposure to interest rate risk. Although its exposure has declined modestly over the past several years, interest-sensitive annuities make up more than half of the company's reserves at approximately 54%. Despite a difficult operating environment, W&SFG has maintained relatively stable interest spreads due to actively managed crediting rates. However, Fitch believes there is diminishing flexibility to further reduce aggregate crediting rates.

Conversely, if interest rates spike up, the company's general account annuities would be subject to disintermediation risk, as 35% 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 incrasingly 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.

W&SFG reported solid pretax operating earnings in 2013 and through the first nine months of 2014. The improvement was driven by favorable mortality, modest spread expansion and increased fee income. The company benefited from higher account values caused by improved equity markets and strong sales in its asset management business. Fitch expects earnings stability to persist.

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 ratings with a Stable Outlook:

Western & Southern Financial Group:

-- 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'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Insurance Rating Methodology' (September 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=911894

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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