A.M. Best Downgrades Ratings of Security Benefit; Revises Outlook to Stable.

OLDWICK, N.J. -- A.M. Best Co. has downgraded the financial strength rating (FSR) to A (Excellent) from A+ (Superior) of Security Benefit Life Insurance Company (SBL) (Topeka, KS) and its affiliate, First Security Benefit Life Insurance and Annuity Company of New York (together known as Security Benefit) (White Plains, NY). Concurrently, A.M. Best has downgraded the issuer credit rating (ICR) and the existing surplus notes of SBL to "a+" from "aa-" and to "a-" from "a", respectively. The outlook for all ratings has been revised to stable from negative.

These actions reflect A.M. Best's opinion that Security Benefit's business profile and operating performance is more reflective of an Excellent-rated company. Security Benefit maintains a somewhat narrow business mix, which is concentrated primarily in flexible premium deferred (FPDA) variable annuities and mutual funds sold into the retirement and wealth accumulation market place. Because of this product mix and the markets served, Security Benefit's historic operating income has been highly correlated to the equity and fixed income markets, and past results reflect the associated volatility. Additionally, the company has experienced flat overall annuity sales trends within its core 403(b) market. A.M. Best views the variable annuity business as largely scale dependent and subject to increasingly complex product features. The 403(b) market continues to be highly fragmented with modest growth and has faced increasing levels of competition from banks, mutual funds and other insurance entities striving to garner additional retirement assets, as well as a changing IRS regulatory landscape.

In order to reduce earnings volatility associated with the equity markets, Security Benefit adopted an earnings-related hedging program, which hedges equity-related earnings drivers (fees, DAC amortization and mark-to-market assets) related to changes in the equity markets. The program has resulted in more consistency in Security Benefit's fee-based earnings. While A.M. Best views the hedging program favorably from a risk management perspective, it notes that there are opportunity costs to the program, specifically; foregoing a portion of the upside to earnings associated with strong equity markets. Conversely, the well-defined hedging program also reduces the risk of significant earnings declines caused by an equity market downturn. A.M. Best believes Security Benefit's operating returns will likely reside in the mid-to-high single-digit range over the near to medium term.

The current ratings reflect Security Benefit's strong levels of absolute and risk-adjusted capitalization, improved risk management practices, high quality balance sheet and efficient administrative and service platforms. A.M. Best views positively Security Benefit's solid market position in the employer sponsored plan arena, particularly 403(b) programs, and its strategy to enhance diversification of sales and earnings by providing annuities and mutual funds to individual investors and institutions. Also, the company's service end-to-end business unit continues to expand its third-party administrative service platform to the annuity marketplace, which leverages the strong technological capabilities of Security Benefit and could ultimately generate material non-market related earnings.

Security Benefit's operating performance has been dampened by ongoing spread compression, moderately elevated surrender levels, enhanced bonus crediting rates, flat variable annuity sales and low reinvestment yields--although partially mitigated by recent interest rate increases. Additionally, the industry remains subject to proposed IRS changes such as adopting ERISA-like fiduciary standards required of 401(k) providers to the 403(b) market. These changes will likely increase the competitive landscape for qualified plan providers, which may impact market share rankings. A.M. Best believes that Security Benefit, along with its peers, will be challenged to improve trends in 403(b) assets under management due to increased competition within its core market, despite solid sales of mutual funds within employer plans or to individuals.

The following debt ratings have been downgraded:

Security Benefit Life Insurance Company--

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

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

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.