DBRS Morningstar Confirms the Issuer Rating of SBL Holdings, Inc. at BBB (high) and the Financial Strength Rating of Its Operating Companies at “A;” Stable Trends

DBRS Limited (DBRS Morningstar) confirmed all ratings of SBL Holdings, Inc. (Security Benefit or the Company) and its related entities, including Security Benefit’s Issuer Rating at BBB (high) and the Financial Strength Rating of Security Benefit Life Insurance Company at “A.” The trend on all ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The ratings and trends reflect the Company’s established position in the large but fragmented U.S. retirement market, where it has grown profitably in recent years through multiple distribution channels. DBRS Morningstar views Security Benefit’s annuity-focused product portfolio as low-to-medium risk since the market risk exposure it generates is mostly hedged. The Company’s investment portfolio has delivered strong fixed-income returns despite uncertain credit conditions—a key factor to its good financial performance. The Company is exposed to substantial credit risk as it holds a large portfolio of structured finance products and securities rated BBB or lower. Security Benefit maintains adequate liquidity and a substantial capital buffer above regulatory target levels. DBRS Morningstar expects the Company to benefit from higher investment yields without having to commensurately increase the credited rates on its annuity liabilities, boosting earnings and capital generation in the medium term. However, should economic conditions worsen materially, the benefits of higher yields may be diminished by potentially elevated credit losses in the future.

CREDIT RATING DRIVERS
DBRS Morningstar would upgrade the Company if it shows a material improvement in the credit quality of its investment portfolio while maintaining strong profitability and capitalization metrics. In addition, further enhancements in the corporate governance and risk management infrastructure would also have positive ratings implications. Conversely, a significant and sustained deterioration in earnings and capital levels would result in a ratings downgrade.

CREDIT RATING RATIONALE
Despite operating in the highly competitive but fragmented U.S. retirement and annuity market, Security Benefit has demonstrated the quality of its franchise, producing strong profitability and growth using a unique distribution strategy. The Company mainly offers annuities, but it also offers mutual fund-based retirement plans and individual retirement accounts. In addition, it has recently launched a universal life insurance product that could increase diversification over time. Security Benefit also issues funding agreements, which it can use to raise additional funds on the institutional market.

Security Benefit offers conservative guarantees on its annuity contracts and hedges the market risk arising from these guarantees. The Company has some control over adjusting the rates credited on its annuity portfolio, positioning it to benefit from rising interest rates while limiting the downside risk of lower interest rates. Depending on market conditions, the Company can also direct sales toward fee-based or spread-based products. Security Benefit’s strategy highly depends on earning sufficient spread on its invested assets. Its investment portfolio is highly exposed to structured finance products, which can have higher credit risk than traditional high-quality government and corporate bonds and could lead to rapidly accumulating losses if credit conditions deteriorate significantly. The Company also has a small exposure to alternative investments, mainly private equity, which are less liquid.

Security Benefit has had strong recent financial results despite increased market volatility and weaker economic conditions. The Company’s credit portfolio remains resilient, with no evidence of material credit deterioration. The short duration of the portfolio has allowed the Company to avoid the significant losses, even if unrealized, that some of its peers experienced in a rising interest rate environment. The Company’s three-year weighted-average return on equity remains very strong, and DBRS Morningstar expects higher interest rates to further support Security Benefit’s profitability in the future.

Security Benefit has high-quality assets available to meet its liquidity needs and maintains access to reliable external financing. However, a large portion of the Company’s portfolio is invested in asset-backed securities and collateralized loan obligations, which have lower liquidity profiles. Most of the Company’s annuity products have surrender penalties, which reduce the risk of mass policyholder withdrawals. The Company’s use of funding agreements introduces some liquidity risk because they may not be renewed at maturity, but DBRS Morningstar considers the risk manageable given the fixed maturity schedules. The Company maintains an adequate capital buffer and a strong regulatory capital ratio. Its strong profitability in recent years has generated substantial capital, complemented by Security Benefit’s access to external capital to fund its growth. The Company’s leverage is appropriate, and interest payments remain manageable, especially considering its strong profitability.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Governance (G) Factors
DBRS Morningstar deemed Security Benefit’s governance structure as relevant to the ratings analysis, but it had no impact on the ratings or trends assigned to the Company. Given the size and complexity of Security Benefit’s operations, DBRS Morningstar would expect the Company to have a more developed independent risk oversight function including a larger and more independent board composition. There is also potential governance risk arising from the business relationships between Security Benefit and other companies in Eldridge Industries, LLC’s (Eldridge) portfolio, which warrants additional independent oversight. However, there is no evidence that this structure has resulted in governance issues, and given that Security Benefit is privately owned, the ultimate responsibility for control and oversight of Security Benefit’s operations remains with its parent company, Eldridge.

There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

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

Notes:
The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 14, 2023; https://www.dbrsmorningstar.com/research/417109). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at:
https://www.dbrsmorningstar.com/about/methodologies.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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