Morningstar DBRS Confirms SBL Holdings, Inc.'s Issuer Rating at BBB (high) and the Financial Strength Rating of Its Operating Companies at "A," Stable Trend

DBRS Limited (Morningstar DBRS) confirmed all credit ratings on 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 on Security Benefit Life Insurance Company at "A." The trends on all credit ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings and trends reflect the Company's established position in the large but fragmented U.S. annuity market, where it has grown profitably in recent years through multiple distribution channels. Morningstar DBRS 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 is exposed to substantial credit risk as it holds a large portfolio of structured finance products and securities rated BBB or lower. However, the Company's investment portfolio has delivered strong fixed income returns amid resilient credit conditions¿a key factor in its good financial performance. Security Benefit maintains adequate liquidity and a substantial capital buffer above regulatory target levels. Morningstar DBRS expects the Company to continue to generate good spreads over the credited rates on its annuity liabilities, contributing to earnings and capital generation. 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
Morningstar DBRS would upgrade the Company's credit ratings 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 credit ratings implications. Conversely, a significant and sustained deterioration in earnings and capital levels would result in a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Building Block Assessment: Good/Moderate
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 diversified 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 and has access to Federal Home Loan Bank financing, which provides additional funding and liquidity sources.

Risk Building Block Assessment: Moderate
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 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.

Earnings Building Block Assessment: Strong
Security Benefit has reported steady financial results in recent years, with its credit strategy, shorter duration asset portfolio and strong premium growth all contributing to growing profitability. The Company's credit portfolio remains resilient, with no evidence of material deterioration. The Company's three-year weighted-average return on equity remains very strong, although it has declined slightly to 15.4% as the Company's capital base is growing without large distributions.

Funding and Liquidity Building Block Assessment: Good
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. Still, in a distress scenario, liquidity issues could arise if Security Benefit's policyholders chose to take their funds out at all costs.

Capitalization Building Block Assessment: Strong/Good
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, AND GOVERNANCE CONSIDERATIONS

Governance (G) Factors
Morningstar DBRS deemed Security Benefit's governance structure as relevant to the credit ratings analysis, but it had no impact on the credit ratings or trends assigned to the Company. Given the size and complexity of Security Benefit's operations, Morningstar DBRS would expect the Company to have a more developed independent risk oversight function including a larger and more independent board composition. There is also a 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (April 15, 2024), https://dbrs.morningstar.com/research/431180. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.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 dbrs.morningstar.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.

Morningstar DBRS 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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