The rating agency made the announcement on April 11, 2014
A.M. Best has reaffirmed its ratings for the Massachusetts Mutual Life Insurance Company largely based upon the company’s strong financial results for 2013 and the insurer’s strong capitalization. The life insurance company, based in Springfield, experienced double-digit growth and record sales last year in its key businesses. As a result, both MassMutual’s financial strength rating of A++ (Superior) and issuer credit ratings of “aa+” have been affirmed by the rating agency.
Best noted, however, that offsetting the positive ratings factors was the fact that MassMutual’s recorded statutory net income for full year 2013 was a loss of $113 million as opposed to full year 2012 which was a fain of $872 million. While noting the majority of the loss was due in part to the insurer’s acquisition of The Hartford’s Retirement Products Group, the rating agency said it believes that the company’s “…near-term impairments will continue to be moderate and statutory earnings will reach normalized levels and expectations.”
Here is what else A.M. Best had to say about the 162-year old company:
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.