A.M. Best Affirms Ratings of Massachusetts Mutual Life Insurance Company and Its Subsidiaries

A.M. Best has affirmed the financial strength rating of A++ (Superior) and issuer credit ratings of “aa+” of Massachusetts Mutual Life Insurance Company (MassMutual) and its life/health subsidiaries, C.M. Life Insurance Company and MML Bay State Life Insurance Company.

Concurrently, A.M. Best has affirmed the debt ratings of “aa-” on the existing surplus notes of MassMutual and the “aa+” on notes issued under funding agreement-backed securities programs of MassMutual Global Funding, LLC and MassMutual Global Funding II. The outlook for all ratings is stable. The above companies are headquartered in Springfield, MA. (See below for a detailed listing of the debt ratings.)

The rating affirmations for MassMutual are based upon its strong financial results for 2013 with double-digit growth and record sales in key businesses. The ratings also consider the organization’s continued strong capitalization.

Offsetting these positive rating factors, however, is MassMutual’s recorded statutory net income of a loss of $113 million for full year 2013, compared to a gain of $872 million for full year 2012. The significant decrease is due primarily to a number of one-time items including the acquisition of The Retirement Products Group from The Hartford. MassMutual’s 2013 absolute capitalization reached a record level as its total-adjusted capital (TAC) increased to almost $14.5 billion, representing a compound annual growth rate greater than 8% over the past five years. MassMutual’s investment impairment losses have improved significantly, and A.M. Best believes additional near-term impairments will continue to be moderate and statutory earnings will reach normalized levels and expectations.

MassMutual’s ratings continue to recognize its favorable business mix, diversified operating profile and strong position in the domestic life insurance market. MassMutual is one of the leading writers of whole life insurance in the United States and offers a broad portfolio of insurance products and asset management services to individuals across diverse demographics and the corporate marketplace. The enterprise benefits from a sizable participating whole life block, supplemented by term and universal life policies that primarily are sold through a career agency force. As a result, MassMutual possesses a stable liability structure that facilitates long-term financial strength. Additionally, A.M. Best notes that MassMutual possesses some statutory flexibility to maintain its capital position through the management of its policyholder dividend scale and/or by securitizing or reinsuring redundant reserves. Moreover, MassMutual’s statutory balance sheet values its subsidiary holdings very conservatively; the fair market value of its subsidiary holdings is considerably higher than what is recognized for statutory purposes. While MassMutual’s investment management capabilities are strong, A.M. Best remains cautious about its exposure to the real estate market. This exposure is approximately 1.5 times TAC when residential and commercial mortgage-backed securities (excluding agency issued securities), whole commercial mortgage loans, equity real estate holdings and limited partnership equity holdings with underlying assets in real estate are combined. In particular, MassMutual reported approximately $15.3 billion of whole commercial mortgage loans at year-end 2013, and while the commercial mortgage portfolio is well diversified by both property type and geographic location, A.M. Best notes that the sluggish economic recovery suggests the potential for additional impairments. However, over the past few years, A.M. Best acknowledges that the portfolio has exhibited considerable improvement in its loan-to-value and debt service coverage ratios, along with a substantial decline in watch list loans.

Although MassMutual’s TAC has substantially increased in recent years, A.M. Best notes that the company benefits from a U.S. GAAP guideline (effective January 1, 2009), which reclassifies non-controlling interests as part of equity. While this change has resulted in a roughly $2.2 billion increase to the statutory carrying value of MassMutual’s asset management and international operations, A.M. Best recognizes that the higher statutory carrying amount still remains significantly below the estimated fair value of these operations. Also contributing to the increase in MassMutual’s TAC was the issuance of nearly $1.2 billion in surplus notes since 2008, bringing the total outstanding amount to $1.74 billion. A.M. Best views surplus notes as a lower quality of capital than retained earnings or paid-in capital as surplus notes are debt instruments that have the expectation of repayment. Therefore, A.M. Best notes that MassMutual’s quality of capital has declined as a result of the surplus note issuance, which represents about 12% of 2013 TAC as compared to 6% as of year-end 2008. Additionally, A.M. Best believes MassMutual’s overall financial flexibility is somewhat more limited given its increased financial leverage. With a $400 million surplus note issuance in early 2012, MassMutual’s statutory financial leverage is approximately 13.7%, which is still well within the tolerance range for its current rating level.

A.M. Best notes the significant accomplishment of completing the acquisition of The Hartford Retirement Products Group business, which should support continued growth in MassMutual’s retirement business, as well as adding complementary markets and distribution capabilities.

A.M. Best believes upward rating movement is unlikely at this time. Downward rating pressures may occur should MassMutual experience an unfavorable earnings trends, a precipitous decline in its risk-adjusted capitalization or significant deterioration in its investment performance.

The following debt rating has been affirmed:

Massachusetts Mutual Life Insurance Company—

-- AMB-1+ on commercial paper program

The following debt ratings have been affirmed with a stable outlook:

Massachusetts Mutual Life Insurance Company—

-- “aa-” on $250 million 7.625% surplus notes, due 2023

-- “aa-” on $100 million 7.500% surplus notes, due 2024

-- “aa-” on $250 million 5.625% surplus notes, due 2033

-- “aa-” on $750 million 8.875% surplus notes, due 2039

-- “aa-” on $400 million 5.375% surplus notes, due 2041

MassMutual Global Funding, LLC—“aa+” program rating

- “aa+” on all outstanding notes issued under the program

MassMutual Global Funding II—“aa+” program rating

- “aa+” on all outstanding notes issued under the program

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.