Monday brought some bad news for Rydex's parent. Fitch Ratings opted to downgrade the financial strength of Security Benefit Corporation's primary operating arm, Security Benefit Life Insurance Company (SBLIC), from a 'BB' rating to a 'CCC.' Fitch cited a weakened risk-adjusted capital position at the Topeka, Kansas-based firm.
The ratings change underscores SBLIC's difficulties in meeting the challenges of the down economy, which includes an untimely acquisition of Rydex Investments last year (see MFWire, 01/18/2008 and another story , 01/18/2008). The company had sold and replaced a large portion of their liquid investments, including borrowing an illiquid $250 million note from its parent company to secure the acquisition. This resulted in a 60 percent illiquid ownership interest in the leveraged index fund specialists.
In Fitch's eyes, that acquisition left the rest of Security Benefit's investment portfolio exposed to worsening capital market conditions. Its reliance on risky assets, particularly those linked to subprime mortgages, also contributed to the downgrade.
Security Benefit recently combined its investing arm, Security Global Investors, with Rydex, while keeping the Rydex brand alive in the advisor channel (see MFWire, 5/27/2009).
Company Press Release
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the Insurer Financial Strength (IFS) ratings of Security Benefit Life Insurance Company (SBLIC) and its affiliate, First Security Benefit Life Insurance and Annuity Company of New York (FSBLIANY), collectively referred to as Security Benefit, to 'CCC' from 'BB'. The short-term IFS of SBLIC has been downgraded to 'C'. The Rating Outlook is Negative.
Today's rating action primarily reflects Fitch's increasing concern about the quality of SBLIC's reported capital position, as well as the company's weakened liquidity and operating profile, all of which have been adversely affected by poor capital market conditions. Also, during 2008, SBLIC's risk-adjusted capital position was adversely impacted by its acquisition of an asset management company, Rydex Investments (Rydex), as well as substantial investment losses, which have continued into 2009. Fitch considers SBLIC's risk-adjusted capital position to be weak.
Although SBLIC impaired a large portion of the securities that account for its most risky asset exposure, specifically asset-backed securities backed by subprime mortgages, Fitch expects further significant losses to materialize in this and other segments of the company's investment portfolio in the coming quarters.
Fitch's ratings on SBLIC have historically been heavily supported by the company's strong capital position, the foundation of which was a diversified, highly liquid investment portfolio. In funding its acquisition of Rydex early last year, a large portion of these liquid investments were sold and replaced by a highly illiquid 60.5% ownership interest in an asset management firm and an unsecured, illiquid $250 million note from its parent, Security Benefit Corp. (SBC), the proceeds of which were used by SBC to buy the remaining 39.5% ownership interest in Rydex. This series of transactions left the company's remaining investment portfolio heavily exposed to worsening capital market conditions, particularly in the market for structured securities backed by subprime collateral.
Over the course of 2008, SBLIC paid SBC $22.8 million in dividends. During the month of December 2008, SBLIC received capital infusions from SBC totaling $39.5 million, consisting of $10 million in cash, $12.7 million in mortgage loans made to officers of the company, and the common stock of an affiliated distribution operation valued at $16.8 million. On Dec. 31, 2008, SBLIC transferred its ownership interest in Rydex and two smaller subsidiaries to SBC in exchange for a $450 million collateralized inter-company loan and pledge agreement. As a result of these intercompany transactions, at March 31, 2009, SBLIC reported capital and surplus of $241 million, with $740 million of its investment portfolio composed of loans made to its parent company, which Fitch considers to be highly illiquid. In addition, Fitch views the collateral backing the $450 million inter-company loan and pledge agreement, in particular Rydex, to have declined in value since its acquisition date. Positively, from a liquidity perspective, SBLIC has no near-term refinance risk associated with its outstanding debt, which consists of $150 million of surplus notes.
The Negative Outlook status of the ratings reflects Fitch's concerns regarding near-term operating performance and business persistency, as well as the potential for further deterioration in the company's investment portfolio.
Topeka, Kansas-based Security Benefit Corporation is a financial services organization marketing fixed and variable annuities, mutual funds, various retirement programs and administrative services. The primary operating company, SBLIC, reported statutory admitted assets of $8.7 billion and capital and surplus of $241.4 million at March 31, 2009.
Fitch has downgraded the following ratings:
Security Benefit Life Insurance Company
--IFS to 'CCC' from 'BB'.
--Short-term IFS to 'C' from 'B'.
First Security Benefit Life Insurance and Annuity Company of New York
--IFS to 'CCC' from 'BB'.
The Rating Outlook is Negative.