Rydex Parent Takes a Ratings Hit
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Thursday, June 26, 2008

Rydex Parent Takes a Ratings Hit

Security BenefitRydex Investments. The Kansas-based company was downgraded by ratings agency A.M. Best from "a" to "a-" on Tuesday and the outlook for all ratings has been changed from stable to negative. A.M. said its rationale for the downgrade was in part due to the significant increase in its intangible assets following the purchase of Rydex. A.M said that should the expected profitability of Rydex fail to materialize, Security Benefit has the potential for writedowns.

Company Press Release

OLDWICK, N.J., JUNE 24, 2008 A.M. Best Co. has downgraded the financial strength rating (FSR) to A- (Excellent) from A (Excellent) and issuer credit ratings (ICR) to "a-" 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. The outlook for all ratings has been revised to negative from stable. SBL and FSBL are operating insurance companies of Security Benefit Corporation (SBC Group), an intermediate parent company that is ultimately owned by Security Benefit Mutual Holding Company (Topeka, KS). (See below for a detailed listing of the debt ratings.)

These rating actions are based on SBC Group's weakened consolidated balance sheet strength and realized losses through first quarter 2008; increased level of intangible assets resulting from its recently acquired asset management company, Rydex Investments (Rydex); relatively high exposure to collateralized debt obligations (CDOs) and the potential for unrealized investment losses on these securities; and the potential negative impact on the performance of SBC Group's fixed and variable annuity businesses from the weak credit and volatile equity markets.

A.M. Best notes that the SBC Group carries a large exposure to CDOs, with substantial unrealized losses recorded relative to SBC Group's capital and surplus funds. In addition, nearly one-half of these structured CDOs are supported by subprime mortgages. While these CDOs are currently performing, A.M. Best believes that the possibility of future impairment is likely if their fair values continue to remain depressed.

Following the recently closed acquisition of Rydex, SBC Group incurred a significant increase in its intangible assets. A.M. Best notes that the large amount of intangibles and goodwill is significant in contrast to the current net worth of SBC Group and the potential for future write-downs exists should the profitability of Rydex not materialize as expected.

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

Partially offsetting these factors are SBC Group's very good market position in the 403(b) market, its adequate asset liability matching, generally stable fixed annuity liabilities with surrender protection, strong third-party administration operation and a large base of assets (in aggregate $35 billion) under management and administration. 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 could lead to further negative action on its ratings.

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