A.M. Best Downgrades Ratings of Security Benefit Life Insurance Company and Its Subsidiary; Places Ratings Under Review

Business Wire, Oct 13, 2008

OLDWICK, N.J. -- A.M. Best Co. has downgraded the financial strength rating (FSR) to B++ (Good) from A- (Excellent) and issuer credit ratings (ICR) to "bbb+" from "a-" of Security Benefit Life Insurance Company (SBL) (Topeka, KS) and its wholly owned subsidiary, First Security Benefit Life Insurance and Annuity Company of New York (FSBL) (White Plains, NY). Concurrently, A.M. Best has downgraded to "bbb-" from "bbb" the existing surplus notes of SBL. All ratings have been placed under review with negative implications. SBL and FSBL are operating insurance companies of Security Benefit Corporation, (SBC Group), an intermediate parent company, which is ultimately owned by Security Benefit Mutual Holding Company (Topeka, KS). (See below for a detailed listing of the debt ratings.)

These rating actions reflect the continuing decline in SBC Group's consolidated equity position, the significant unrealized losses in its fixed income portfolio--primarily associated with its relatively high exposure to collateralized debt obligations (CDOs). The CDOs represent exposure to subprime residential mortgages and other structured credits. Also impacting its consolidated balance sheet is a high level of intangible assets resulting from the 2008 acquisition of an asset management company, Rydex Investments (Rydex) and the potential negative impact on the operating performance from the group's variable annuity businesses as a result of significant decline in equity markets.

A.M. Best notes that SBC Group carries a large exposure to CDOs with substantial unrealized losses recorded relative to SBC Group's equity position. While these CDOs are currently performing, SBC Group has impaired some of these CDOs in 2008. A.M. Best believes that the possibility of future impairment is likely, given that the remaining CDOs fair value continues to remain depressed due to high volatility in the financial markets and weak economic conditions.

Following the 2008 acquisition of Rydex, SBC Group incurred a significant increase in its intangible assets. A.M. Best notes the large amount of intangibles and goodwill is significant in contrast to the current net worth of SBC Group, although the full economic value of its non-insurance subsidiaries may not have been fully recognized. The potential for future write-downs exists should the profitability of Rydex not materialize as expected, especially given the significant erosion in financial markets.

SBC Group's earnings were already highly correlated to the performance of the equity markets, and this acquisition has increased this exposure. A.M. Best notes that SBC Group's earnings have been declining in recent years and will likely face continuing pressure as a result of lower fee income from its asset management businesses and increased impairments. SBC Group has ameliorated some of the volatility to earnings through a proactive corporate hedge program, a practice adopted several years ago. However, given SBC Group's weakened balance sheet position and declining earnings performance, SBL may face further pressure to support the group's financial obligations.

The ratings will remain under review pending A.M. Best's evaluation of a planned capital initiative by SBC Group. Given the historic levels of disruption in the financial markets, A.M. Best is concerned that SBC Group may encounter challenges in its efforts to raise new capital. A.M. Best will continue to monitor SBC Group's investment portfolio and performance, balance sheet position and operating trends. Any further deterioration in SBC Group's balance sheet strength, absent a firm capital raising commitment, would lead to a further downgrading of its ratings.

Partially offsetting these factors are SBC Group's historically good market position in the 403(b) market, its adequate asset liability matching, generally stable fixed annuity liabilities with surrender protection, including non-surrenderable funding agreement liabilities, strong third-party administration operation and a large base of assets under management and administration.

The following debt ratings have been downgraded and placed under review with negative implications:

Security Benefit Life Insurance Company--

-- to "bbb-" from "bbb" on $50 million 8.75% surplus notes, due 2016

-- to "bbb-" from "bbb" on $100 million 7.45% surplus notes, due 2033

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.