Fitch Affirms MassMutual Ratings; Outlook Stable
KEY RATING DRIVERS
Fitch's ratings reflect MassMutual's strong competitive position in several major business lines, strong capital levels, and broadly diversified product offerings. The ratings also consider the ongoing impact of the low interest rate environment and potential financial market volatility.
MassMutual's strong market position in life insurance is driven by sales of its core participating whole life product. MassMutual's large and stable block of traditional cash value life insurance provides favorable credit characteristics including long duration participating liabilities, relatively predictable cash flows, limited disintermediation risk, and limited guarantee provisions. Fitch believes that the company's strong brand name, productive career distribution system, and diversification of earnings and cash flows provided by its asset management capabilities provide significant competitive advantages.
Fitch views MassMutual's statutory capital as very strong and in line with rating expectations. At Sept. 30, 2014, MassMutual's total adjusted statutory capital (TAC) was \$16 billion, and the RBC ratio was estimated at 476%, which is on the higher end of the target range of 425% to 475%. Fitch's view of statutory also considers the value of the company's asset management subsidiaries, which are not fully reflected in reported statutory capital.
TAC increased \$1.5 billion or 10% in the first nine months of 2014 due to positive contributions from statutory operating earnings and higher unrealized gains from derivatives and investments. As of Sept. 30, 2014, MassMutual reported low operating leverage of 7.5x TAC and improved financial leverage, measured as surplus notes to TAC, of 11% from 12% as of year-end (YE) 2013.
Fitch considers MassMutual's profitability as moderate on an absolute basis, though measures are within range of peers. Statutory results for the first nine months 2014 were higher compared to the same period 2013 and were driven by a one-time gain from a real estate sale transaction, stable mortality results, and higher fee income driven by higher assets under management.
MassMutual manages a diversified and liquid investment portfolio that has performed well in the last few years. Realized credit impairments have trended lower, from \$306 million in 2011, \$289 million in 2012, \$126 million in 2013, and \$78 million as of the third quarter of 2014 (3Q'14), primarily as a result of lower losses from commercial mortgage loans and structured finance. MassMutual's risky asset ratio of 93% as of Sept. 30, 2014, which includes below investment grade bonds, troubled real estate, unaffiliated common stock and Schedule BA assets, is on par with that of industry.
The ratings on C.M. Life Insurance Company (CM Life) and MML Bay State Life Insurance Company (MML Bay State), which are wholly owned subsidiaries of MassMutual, are based on Fitch's view that these entities are core operating companies within the MassMutual organization.
MassMutual Global Funding, LLC is a limited liability company domiciled in the Cayman Islands. MassMutual Global Funding II is a statutory trust domiciled in the state of Delaware. The company and trust were established for the sole purpose of issuing debt instruments secured by funding agreements issued by MassMutual.
Key rating triggers that could lead to an upgrade include:
--Sustained improvement in quality and stability of operating results, investment performance and capital generation.
Key rating triggers that could lead to a downgrade include:
--Increased volatility in capital and earnings due to higher than expected credit-related losses, adverse outcome to litigation or other unexpected developments.
--NAIC risk-based capital ratio below 400%.
--Surplus notes to TAC ratio above 15%.
--A change in MassMutual's legal organizational structure (which Fitch considers unlikely) or a significant change in the macro environment.
Fitch affirmed the following ratings with a Stable Outlook:
Massachusetts Mutual Life Insurance Company
--Insurer Financial Strength (IFS) at 'AA+';
--Issuer Default Rating (IDR) at 'AA';
--\$250 million 7.625% surplus notes due Nov. 15, 2023 at 'AA-';
--\$100 million 7.5% surplus notes due March 1, 2024 at 'AA-';
--\$250 million 5.625% surplus notes due May 15, 2033 at 'AA-';
--\$750 million 8.875% surplus notes due June 1, 2039 at 'AA-';
--\$400 million 5.375% surplus notes due Dec. 1, 2041 at 'AA-';
--Short-term IDR at 'F1+';
--Commercial paper program at 'F1+'.
C.M. Life Insurance Company
MML Bay State Life Insurance Company
--IFS at 'AA+'.
MassMutual Global Funding, LLC
MassMutual Global Funding II
--Secured notes program at 'AA+'.