A.M. Best Affirms Ratings of Security Benefit Life Insurance Company and Its Affiliate
August 8, 2014 by Best's News Service
Oldwick – A.M. Best has affirmed the financial strength rating of B++ (Good) and the issuer credit ratings of “bbb+” of Security Benefit Life Insurance Company (Topeka, KS) and its affiliate, First Security Benefit Life Insurance and Annuity Company of New York (Rye Brook, NY) (collectively known as Security Benefit Life). Both companies are subsidiaries of Security Benefit Corporation, which is controlled by Guggenheim SBC Holdings, LLC. In addition, A.M. Best has affirmed the debt ratings of “bbb-” on the existing surplus notes issued by Security Benefit Life Insurance Company. The outlook for all ratings is stable. (See below for a detailed listing of the debt ratings.)
The rating affirmations of Security Benefit Life reflect its market leadership in the fixed indexed annuity and education retirement marketplaces, diversification in its distribution channels, stable trends of net income despite statutory strain associated with rapid growth, adequate risk-adjusted capitalization and effective spread management in the current low interest rate environment. The ratings also recognize the implicit and explicit support Security Benefit Life receives from Guggenheim Partners, particularly in its access to financial resources and investment management services.
In recent years, Security Benefit Life has expanded its business profile from the core education retirement market into the fixed indexed annuity (FIA) market, where it has quickly become a market leader. As growth of spread business has been significant, a higher than expected portion of its investment portfolio is in floating rate securities that offer protection against disintermediation risk under rising interest rate scenarios. Security Benefit Life also employs effective hedging programs to support its FIA business.
Offsetting rating factors include the level of investment transactions with related party and affiliated entities, high interest rate sensitivity, as nearly all of the general account reserves are in interest-sensitive products, an increased level of intangible assets that is in excess of year-end GAAP equity and the level of reinsurance, including one relationship with an unrated reinsurer. Statutory capital is viewed as adequate, but qualitatively is somewhat diminished given reinsurance leverage and moderate utilization of acceptable principle-based reserving methods by its state of domicile for a portion of its FIA block.
In addition, Security Benefit’s investment strategy is somewhat differentiated in the U.S. life insurance industry with lower exposure to the corporate bond sector and higher exposure to asset-backed securities (ABS) and a moderate allocation to non-traditional and higher yielding short-term assets. Additionally, the group maintains an exposure to Schedule BA assets that is slightly higher than the industry average. However, the asset-backed and collateral loan portfolio is currently performing well, although there is concentration within its ABS in collateralized debt obligations and the financial and transport sectors. Security Benefit’s reported investment yield is below the U.S. life insurance industry average; however, this is expected to improve over time as its large cash position is deployed. Finally, financial leverage is within A.M. Best guidelines although interest coverage using an EBIT measure is modest.
Factors that could lead to a positive rating action include a reduction of affiliated and related party assets, continued reduction in cost of funds, lower exposure to ABS, short-term and other invested assets, and material growth in risk-adjusted capital generated by organic earnings. Additionally, continued diversification in product mix, coupled with more balanced sustainable growth, resulting in a better balance between fee-based earnings and investment spreads could result in upward rating movement. Factors that could cause downward rating pressure include increased utilization of affiliate and related party sourced investments, increased exposure to high-risk assets, aggressive premium growth and a significant decrease in risk-adjusted and absolute capitalization.
The following debt ratings have been affirmed:
Security Benefit Life Insurance Company—
— “bbb-” on $50 million, 8.75% surplus notes, due 2016
— “bbb-” on $100 million, 7.45% surplus notes, due 2033
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
