Reaching New Heights - The Rise of Security Benefit
Photo by Rachel Lock
Security Benefit was on death’s door during the Global Financial Crisis of 2008-09, but today is coming off its best year ever.
Sales at Security Benefit have grown from about $1 billion in 2010 to a record $7 billion in 2013. Operating income for 2013 is estimated at $265 million -- a record. Jobs at Security Benefit have grown from 550 in 2010 to 860 today.
A Guggenheim Partners-led investor group purchased Security Benefit in 2010. New leadership, including Chief Executive Officer Michael Kiley, re-engineered the company to focus on product innovation and developing new distribution channels. Kiley partnered with independent marketing organizations such as Advisors Excel in Topeka to distribute fixed index annuities.
“He’s built a foundation for the future of the company that is rock solid,” said Cody Foster, co-founder of Advisors Excel in Topeka. “They were at death’s door. Now they have a very bright future.”
Security Benefit has been through many ups and downs since it was founded in 1892, but probably none more trying than the financial crisis of 2008-09.
Former CEO Kris Robbins sought to diversify the company with the purchase of mutual fund company Rydex Funds in 2007. Security Benefit took out a $700 million loan from its General Account to buy Rydex during the top of the stock market and arguably paid too much for the company. Interest on the note was to be paid by income from Rydex, but income dropped dramatically when the stock market crashed in 2008-09. To make matters worse, Security Benefit’s General Account held collateralized debt obligations that lost significant value. Security Benefit cut staff to reduce expenses, but needed more capital; however the credit markets had dried up. Ratings agencies downgraded Security Benefit’s financial strength and sales slowed. Guggenheim was brought in as an advisor to help with the General Account.
Guggenheim viewed Security Benefit as a good business with great potential. Guggenheim worked with management and the Kansas Insurance Department in late 2009, which led to capital infusions starting in early 2010. A Guggenheim-led investor group bought Security Benefit in summer 2010 for $400 million. Security Benefit paid off the loan for the Rydex acquisition with the help of capital from the Guggenheim investor group.
Broadening the Market
Kiley said Security Benefit was an early entrant into the retirement business in the 1960s, but was narrowly focused on serving public employees and teachers. He looked for ways to broaden the business by focusing on retirement products for Baby Boomers. He said Baby Boomers saw their retirement funds take a hit in the stock market crash of 2000-01 and again in 2008-09. Security Benefit created several fixed index annuities that provide steady income for life and possible upside if the stock market is positive. Now Security Benefit has two of the top selling annuity products in this space nationwide.
“The intersection of demographics, investor experience and low interest rates have combined to make these products as appropriate as anything in the financial landscape today,” Kiley said.
Doug Kinsinger, president and CEO of the Greater Topeka Chamber of Commerce, said, “Security Benefit and its executive leadership have not only been a star in our community for creating so many new jobs, they have also garnered the attention of the financial services industry across our nation. They strategically developed new products that were innovative in their industry and then set up significant new channels for distribution and sales. Their growth in sales and employment in our community has been phenomenal!”
A Key Partnership
Kiley said he was impressed with Advisors Excel’s business model and its three founders. “They are the most creative and naturally talented marketers I’ve ever known,” Kiley said.
Advisors Excel and Security Benefit worked together to launch a proprietary product called Secure Income Annuity. Security Benefit’s subsidiary se2 would handle administration. Foster, who was involved in the pitch to Kiley, said this was a revolutionary idea.
“He immediately got it,” Foster recalled. “Mike said, ‘this makes perfect sense.’”
When they launched Secure Income Annuity, Advisors Excel had hoped to sell $150 million through its 700-advisor network in 12 months.
In the first nine months they sold $1 billion -- at record speed. Since then a total of about $4.5 billion has been sold. Security Benefit followed that success with the introduction of the Total Value Annuity, partnering with Advisors Excel and three other independent marketing organizations. The Total Value Annuity has been the No. 1 selling annuity for most of the past two years.
Security Benefit’s relationship with Advisors Excel has been great for both companies. Advisors Excel has grown to 230 employees and is one of the fastest growing IMOs in the country. Advisors Excel moved last summer into the former Marling’s Furniture building to accommodate growth.
“They made a bet on us at the same time Guggeheim was making a bet on Security Benefit,” Kiley said.
Kiley said the Guggeheim-led investors that purchased Security Benefit are “savvy long-term investors with a value orientation. They were the ones who put up the capital to right this ship.”
“In fact the first day we began putting capital in, a significant investment bank called and said they wanted to buy se2 from us at a pretty good price,” Kiley said. “We had the wisdom to say no. Since then other companies have called to buy it from us. We view it as a real market leader for process outsourcing, and their growth over the last three years is a testament to that.”
Outsourcing Giant: se2
Security Benefit launched se2 in the early 2000s. David Keith has been se2 CEO since 2006. se2 has about 480 employees, most located in the main Security Benefit building in Topeka. The company’s clients include about 35 insurance companies, including Security Benefit Life. When an insurer brings out a new product, the insurer hires se2 to handle administration of the product. This way, the insurance company can cut costs up to 30 to 40 percent. Cost savings allows insurance companies to achieve greater returns.
se2 management recently moved into the former Advisors Excel building at 1300 S.W. Arrowhead. Fifty employees are located there, but se2 expects that number to grow to 150 by year-end.
Kiley said the retirement business is ratings sensitive. Ratings agencies are battling to get their credibility back because they had rated many mortgage back securities as A credit during the housing run-up, but later issued downgrades after discovering they were really subprime. Ratings agencies are slow to give upgrades, but ratings agencies have issued multiple upgrades to Security Benefit in recent years, due in part to assets doubling in three years to $26.4 billion at year-end 2013. Capital and surplus stand at an all-time record of nearly $1 billion. Security Benefit Life’s credit ratings were upgraded to bbb from bb+ in August 2013 by A.M. Best Co. Standard & Poors upgraded Security Benefit to A-.
“I think Guggenheim and our investment team in our General Account get us better returns than the average insurance company,” Kiley said. “I know we have built highly differentiated products. We also built a new distribution model that is leaner and lower cost, less manpower intensive. I know by having se2 doing my administration, I am 30 to 40 percent lower cost administration.”
Jackie Fox, Security Benefit vice president and chief administrative officer, said she expects 2014 to be another good year for Security Benefit.
“We’re expecting continued success across all of our distribution channels,” Fox said.