AM Best

A.M. Best Downgrades Ratings of SBLI USA Mutual Life Insurance Company, Inc. and Its Subsidiary

Steven Faulks
(908) 439-2200, ext. 5035

Thomas Rosendale
(908) 439-2200, ext. 5201
Public Relations
Rachelle Morrow
(908) 439-2200, ext. 5378

Jim Peavy
(908) 439-2200, ext. 5644


OLDWICK, N.J. - JUNE 08, 2010 12:00 AM (EDT)
A.M. Best Co. has downgraded the financial strength rating to B+ (Good) from B++ (Good) and issuer credit ratings to "bbb-" from "bbb" of SBLI USA Mutual Life Insurance Company, Inc. (SBLI USA) (New York, NY) and its wholly owned subsidiary, S.USA Life Insurance Company, Inc. (Phoenix, AZ). The two companies are collectively referred to as the SBLI USA Group. The outlook for all ratings is negative.

These rating actions primarily reflect the recent significant change in the group's business profile. The group's management recently announced that effective June 30, 2010 SBLI USA Group would no longer be accepting new business. However, management plans to continue administering the existing in-force businesses with no changes in contractual guarantees anticipated. Additionally, management's focus going forward will concentrate on further reducing the group's expense structure, while managing total adjusted capital comfortably above minimum regulatory capital requirements targeting amounts as high as 10% of its consolidated total liabilities. Any excess above maximum surplus levels is expected to be distributed in the form of dividends to SBLI USA Group's existing policyholders.

These rating actions also reflect the large declines in the group's consolidated absolute adjusted capital and surplus levels and the corresponding reduction in risk-adjusted capitalization on Best's Capital Adequacy Ratio (BCAR) model. SBLI USA Group's large declines were primarily driven by investment losses. While its consolidated risk-adjusted capitalization currently remains sufficient relative to its current business and investment risks, the decline in absolute capital and surplus has left the group with substantially less excess capital and reduced its financial flexibility.

These rating actions further consider A.M. Best's view that SBLI USA Group's absolute and risk-adjusted capital positions remain at risk for additional impairments should the general economic conditions deteriorate. Although improved, SBLI USA Group's fixed income portfolio remains in a net unrealized loss position that still exceeds total capital and surplus as of March 31, 2010. This unrealized loss position is concentrated primarily in its sizeable portfolio of mortgage-backed securities—both commercial and residential with some subprime and Alt-A exposure—as well as investments in financial sector corporate bonds. A.M. Best notes that SBLI USA has invested in highly rated tranches and has conducted extensive stress-testing of its mortgage-backed securities under various economic scenarios. All mortgage-backed structured securities are currently paying interest and principal. However, A.M. Best believes these holdings, along with SBLI USA's direct investments in real estate in the form of limited real estate partnerships and real estate held for sale, represent a significant investment concentration. A.M. Best continues to expect rising defaults industry-wide as the United States navigates through the current economic climate.

Offsetting these negative factors is the group's current adequate levels of risk-adjusted capital and overall profitable net operating performance. A.M. Best believes that SBLI USA Group's consolidated statutory earnings should improve going forward from expected reductions in its expense structure and the lack of expense strains associated with new business production.

For Best's Credit Ratings, an overview of the rating process and rating methodologies, please visit Best's Ratings & Analysis.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at Best's Credit Rating Methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers.

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