DBRS Morningstar Assigns an Issuer Rating of BBB (high) to SBL Holdings, Inc. and Financial Strength Rating of “A” to its Operating Companies; Stable Trends

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of BBB (high) to SBL Holdings, Inc. (Security Benefit or the Company) and a Financial Strength Rating of “A” to Security Benefit Life Insurance Company and First Security Benefit Life Insurance & Annuity Company of New York. DBRS Morningstar also assigned ratings to various debt issuances of Security Benefit and Security Benefit Life Insurance Company. A full list of assigned ratings is included at the end of this press release. All rating trends are Stable.

KEY RATING CONSIDERATIONS
The ratings and trends reflect Security Benefit's market position in the large and fragmented U.S. retirement market as well as its strong financial performance and capital position. Security Benefit’s main product offering is annuities, which expose the Company to market risk through the contract guarantees. This exposure is effectively hedged and the Company mostly assumes risk through its own investment portfolio which, although diversified, has a high exposure to structured finance products and securities rated BBB or lower relative to most peers. Nonetheless, the Company’s earnings performance has been strong, especially in the recent period. Security Benefit also maintains a strong risk-based capital ratio and has demonstrated access to external equity and debt capital to fund growth, which support the ratings.

RATING DRIVERS
DBRS Morningstar views Security Benefit’s ratings as well placed within its current rating category. A ratings upgrade would occur if the Company materially improves the credit quality of its investment portfolio while maintaining similar profitability. In addition, further enhancements in the corporate governance and risk management infrastructure would also have positive ratings implications. Conversely, investment losses large enough to cause a significant deterioration in earnings and capital levels would result in a ratings downgrade. Furthermore, a ratings downgrade would occur if the Company lost access to debt capital markets or substantially extracted capital without support from earnings.

RATING RATIONALE
Despite having numerous competitors, including larger players, in the fragmented U.S. retirement and annuity markets, Security Benefit has demonstrated the power of its franchise, producing strong profitability and growth through a distinct distribution strategy and superior investment returns. The Company’s product offering is mainly composed of annuities, but it also offers mutual fund-based retirement plans and IRA accounts and, as of 2021, universal life policies that could provide diversification over time. Security Benefit also launched a funding agreement-backed notes (FABN) program in 2021, which it can use as an additional source of funds to generate spread income and manage asset-liability matching.

Security Benefit offers prudent guarantees on its annuity contracts and hedges the market risk arising from these guarantees. The Company has some control over the adjustments to the rates credited on its annuity portfolio, positioning it to benefit from rising interest rates without being substantially exposed to rate declines. The Company can also adjust the sale of new products between fee-based and spread-based products depending on market conditions. Security Benefit’s strategy highly depends on earning sufficient spread on its assets. Its investment portfolio has a high exposure to structured finance products, which can have higher credit risk than traditional high-quality government and corporate bonds. The Company also increasingly uses alternative investments, mainly private equity, as part of its portfolio.

Security Benefit has had good financial results throughout the Coronavirus Disease (COVID-19) pandemic, including record earnings in 2021 driven by strong investment performance. The Company’s three-year weighted-average return on equity is very strong, and DBRS Morningstar expects higher interest rates to further support Security Benefit’s profitability in the future. However, lower fixed income and equity market valuations will likely hinder earnings.

Security Benefit has high-quality assets available for its liquidity needs and maintains access to external financing. Its FABN program creates a higher liquidity need than traditional annuity products as market conditions may not be favourable at renewal periods, which would create a large liquidity requirement.

The Company maintains an adequate capital buffer and a strong regulatory capital ratio. Its strong profitability in recent years has generated substantial capital, which is complemented by Security Benefit’s access to external capital to fund its growth. The Company’s leverage is appropriate, and interest payments remain highly manageable, especially considering its current profitability.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Security Benefit are as follows: Franchise Strength – Good/Moderate; Risk Profile – Moderate; Earnings Ability – Strong/Good; Liquidity – Strong/Good; Capitalization – Strong/Good.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (https://www.dbrsmorningstar.com/research/381667; July 16, 2021). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (https://www.dbrsmorningstar.com/research/373262; February 3, 2021).

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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