The keys to investment management An Educational Guide
Oct 19, 2014
| insure | invest | retire |
The keys to investment management
An Educational Guide
Contents
1 | MassMutual: the company
2 | Investment philosophy
3 | Portfolio management and asset/liability management
4 | Portfolio diversification
10 | Asset quality
11 | Liquidity
12 | Additional information
1
Massachusetts Mutual Life Insurance Company and its
domestic life insurance subsidiaries (collectively,
MassMutual or the Company) provide financial protection
against life- and health-related risks and manage financial
assets. Established in 1851, MassMutual is recognized as a
high quality and financially secure provider of insurance
and financial products. The Company serves millions of
policyholders and clients with a broad product line of life
insurance, annuities, long term care insurance, disability
income insurance, investment products,* investment advi-
sory services,* and retirement plan services.
Our continued financial strength is a critical attribute
supporting the value of our products and services. Our
clients trust us with their long-term financial protection and
investment management is an essential factor supporting
that trust. As recent history has confirmed, investment
markets can be volatile, and it is reassuring for our policy-
holders and clients to know that they can depend on
MassMutual products to provide for their financial security.
As a mutual insurance company, we do not have sharehold-
ers. We operate for the benefit of our policyholders and
members. This allows us to take a long-term view when
investing and not to worry unnecessarily about short-term
fluctuations in asset values. We are long-term investors
concerned with meeting commitments that stretch far into
the future.
Our investment management expertise, which is integral to
the success of our company and our products, is drawn from
our investment subsidiaries: Babson Capital Management
LLC, which manages fixed income, commercial mortgage,
and equity assets; Cornerstone Real Estate Advisers LLC, a
manager and adviser of commercial real estate;
OppenheimerFunds, Inc., one of the largest asset manage-
ment companies in the United States; and Baring Asset
Management Limited, an equity and fixed income manager
whose global investment expertise and reach complement
those of MassMutual’s other investment entities.
You should be confident that the company providing you
with financial services is strong and will be there to help
you, not just now but well into the future. MassMutual
offers that confidence so you can worry less about the future
and spend more time enjoying the present. A key reason you
can trust MassMutual is our approach to investing.
MassMutual: the company
*Securities, investment advisory and financial planning services areoffered through qualified registered representatives of MML InvestorsServices, Inc., a subsidiary of MassMutual.
MassMutual is judged to be among the strongestand safest life insurance companies in the world. Ourreputation for financial stability is confirmed byfinancial strength ratings (which are subject tochange) that are among the best in any industry. Asof April 1, 2010, these ratings for MassachusettsMutual Life Insurance Company, C.M. Life InsuranceCompany and MML Bay State Life InsuranceCompany were:
• A.M. Best Company, A++ (Superior)
• Fitch Ratings, AA+ (Very Strong)
• Moody’s Investors Service, Aa2 (Excellent)
• Standard & Poor’s, AA+ (Very Strong)
2
Our investment philosophy is the set of key beliefs that
guides investment decision-making for the General
Investment Account (GIA) asset portfolio, which supports
many of our insurance and investment products.
We believe that one cannot consistently predict market
direction. We try instead to determine where value exists
across and within various asset classes based on fundamen-
tal, bottom-up analysis of individual investments and how
they compare with alternatives in a risk/reward framework.
A value approach to investing means acquiring assets
believed to be undervalued with less downside risk than
comparable investments. In selecting investments for
purchase or sale, we rely on the credit, loan structuring,
valuation, and quantitative expertise of our seasoned invest-
ment staff to compare the tradeoff between the risks and
potential rewards for different investments. We look for
margins of safety by capitalizing on market inefficiencies
that may affect individual investments, sectors, or asset
classes. In this way, we seek to provide more consistent
results over the long term.
We believe that MassMutual should be adequately paid for
the investment risks in the portfolio. If, in our judgment,
investments with reasonable value are scarce in the market-
place, we are willing to hold more liquid high quality instru-
ments like U.S. Treasury securities temporarily until more
attractive investments become available. While the tempo-
rary holdings may have a lower yield, the rewards from
putting money to work in more reasonably priced “perma-
nent” investments should provide greater long-term benefits
to policyholders and clients.
We rely on our own analysis and experience rather than
following the investment crowd: our long-term perspective
enables us to pursue the opportunities which may arise due
to short-term market fluctuations while many investors stay
on the sidelines.
We believe that broad diversification within and across vari-
ous asset types is a key to successful investing and an
important safeguard against many investment risks. We
believe that diversification adds both strength and safety to
the portfolio. Strength comes from choosing the most
attractive investments from the very broad array of opportu-
nities available, while safety is enhanced by being less
vulnerable to bad news that might affect a particular sector
or issuer. Our largest credit risks are only a small fraction of
our assets.
Finally, we must always be able to meet our commitments to
policyholders and clients as they arise. This is, after all, the
reason the Company exists and a key purpose of investment
management. Therefore we always have cash and readily
saleable securities that are more than sufficient to meet our
obligations to you even if extreme circumstances arise.
Investment philosophy
3
At MassMutual, we manage the assets to be able to meet
liabilities with a high degree of certainty while also provid-
ing competitive products. While all of the assets in the GIA
support all of the liabilities, the GIA is divided into a
number of portfolios which are managed separately to
support particular product liabilities.
Managing a specific portfolio requires an understanding of
the products supported by that portfolio and how those
liabilities might change in different economic and financial
market conditions. Understanding this dynamic enables us
to assess the risk tolerance of the portfolio and set invest-
ment limits which help ensure that the liabilities will be
met. The asset portfolio is then structured to be optimal
relative to the liabilities while adhering to these limits. We
project liability cash flows for the products supported by
each portfolio, then construct an asset portfolio consisting
primarily of higher quality fixed income investments that is
tailored to the liabilities.
Investment risk management is a high priority. Investment
risks include credit risk, interest rate risk, prepayment risk,
and liquidity risk. Credit risk is the risk of loss due to
default or late payment. Interest rate risk is the possibility of
economic loss due to changes in interest rates. Prepayment
risk is closely related to interest rate risk and occurs when
borrowers repay or refinance their debts unexpectedly, forc-
ing investors to reinvest at lower interest rates. Liquidity
risk is simply the risk that cash can’t be made available to
meet obligations as they arise. We use sophisticated quanti-
tative tools to help monitor and manage the various risks.
Risk assessment occurs in a number of ways to gain differ-
ent perspectives on how economic and financial market
changes may affect assets and liabilities. While history can
be a useful guide, we also do extensive scenario analysis of
assets and liabilities to see the potential effects of severe
stress events.
We then take prudent steps to protect the portfolio from
those possibilities at a reasonable cost. Credit risk is
managed primarily through diversification across asset
types, industries and issuers. Interest rate risk is managed by
keeping the sensitivity of the assets and liabilities to
changes in rates closely aligned with one another, an
approach generally referred to as “asset/liability manage-
ment” or ALM. Prepayment risk is managed within accept-
able ranges and may be offset through various types of
interest rate options. Liquidity risk is managed by maintain-
ing liquid holdings sufficient to meet needs even in stress
liquidity scenarios.
At MassMutual, derivatives are used in the normal course of
our investment activities, primarily to manage risks related
to interest rates. Derivatives are instruments whose returns
are based on, or “derived” from, the performance of other
securities or a market index. They include such widely used
financial tools as futures, options, and swaps which are inte-
gral elements of a comprehensive investment risk manage-
ment program. Derivatives may provide additional return,
offset asset or liability risks, or both. Some derivatives are
particularly useful for managing interest rate risk and
MassMutual uses derivatives extensively for that purpose.
Some derivatives may be combined with other investments
to mirror the economics of conventional bonds while also
providing additional return. Thus derivative use is a natural
outgrowth of both our risk-averse investment philosophy
and our value-driven approach. MassMutual does not use
derivatives for speculative purposes.
Portfolio management and asset/liability management
4
Our belief in the value of diversification leads us to consider
a broad range of investments for potential purchase. Most of
the portfolio consists of public and private bonds, bank
loans, commercial mortgages, residential mortgages,
securitized investments, and short-term instruments. There
are also public common stock, private equity, real estate,
and other investments which have higher long-term
expected returns. Thus MassMutual’s portfolio achieves a
balance across major asset types (as shown in the chart
below) and it is also very well diversified within those types.
Bonds and Bank Loans
Credit risk is the major risk managed through diversification
and there are several ways to look at how that risk is
managed in the fixed income sectors of the portfolio. Some
major sectors have very little credit risk as well as good
liquidity, such as U. S. Treasury and agency debt. Municipal
and sovereign debt is supported by other domestic and
foreign governmental entities where the borrower often has
taxing power or revenue from a specific project which
supports the debt.
For corporate issuers, the credit risk is closely tied to the
financial strength of the borrower and to its industry. Since
competitors in the same industry are subject to many of the
same risks, we try to diversify across many industries and
avoid too much concentration in an industry (as shown in
the table on page 5) or individual issuer. For example, only
0.5% of GIA assets was invested in fixed income securities
of banks at the end of 2008 and only an additional 3.2%
was in other financial entities such as brokers, finance
companies, leasing companies and other insurers. Our
internal limits for individual issuers vary based on issuer
credit quality and are much stricter than the limits set by
regulators. Another way to assess diversification is to look
at the size of the largest corporate issuer exposures (shown
in the table on page 6), both individually and as a group.
The largest long-term corporate bond issuer represents only
0.1% of GIA assets. The ten largest long-term issuers
combined are less than 0.9% of GIA assets.
Portfolio diversification
GIA holdings by asset type – December 31, 2008
Statement Value % TotalAsset Type ($ Millions) GIA Assets
Short Terms and Cash1 $3,049 3.5%Public Bonds 31,928 36.0Private Bonds 16,712 18.9Preferred Stocks 135 0.2Unaffiliated Common Stocks2 275 0.3Partnerships and LLCs3 5,480 6.2Mortgage Loans4 13,048 14.7Real Estate Equities5 1,096 1.2Policy Loans 9,156 10.3Other Invested Assets6 5,339 6.0
Subtotal: Cash and Invested Assets $86,218 97.3%Other GIA Assets 2,391 2.7
Total GIA Assets $88,609 100.0%
1 Includes $203 million of cash2 Includes $202 million of public common equity and $73 million of private common equity/warrants
3 Schedule BA securities4 Includes $2,938 million of residential mortgage pools5 Includes $126 million of properties exclusively occupied by the company
6 Includes common stock of subsidiaries and affiliates, derivativesand receivables for securities
5
Diversification of GIA fixed income securities (including short-term investments) – December 31, 2008
Statement Value % GIA Fixed Sector ($ Millions) Income Securities % Total GIA Assets
U.S. Treasury $6,217 12.1% 7.0%U.S. Agency 3,152 6.1 3.6Municipal/Sovereign 1,166 2.2 1.3Mortgage-Backed Securities – Residential 10,783 20.9 12.2Mortgage-Backed Securities – Commercial 3,817 7.4 4.3Asset-Backed Securities 2,204 4.3 2.5Investment Funds 1,282 2.5 1.4Other* 1,493 2.9 1.7Corporate Credit (by Industry)
Banks 473 0.9 0.5Capital Goods/Construction 2,925 5.7 3.3Conglomerates 31 0.1 0.0Consumer Goods/Cyclical 1,012 2.0 1.1Consumer Staples/Services 3,328 6.5 3.8Financial 2,806 5.4 3.2Healthcare 822 1.6 0.9Media 856 1.7 1.0Natural Resources 2,231 4.3 2.5Real Estate/REITs 1,269 2.5 1.4Retail 594 1.1 0.7Technology 655 1.3 0.7Telecommunications 416 0.8 0.5Transportation 674 1.3 0.8Utilities 3,280 6.4 3.7
Total $51,486 100.0% 58.1%
The portfolio also has holdings in various types of securi-
tized assets. These represent interests in large diversified
pools of collateral whose cash flows support these obliga-
tions. Some securitized assets are straightforward and
simply pass the cash flows from the underlying collateral
directly to the investors in proportion to their ownership.
Others are more complicated and redirect cash flows from
the collateral to different classes of investors according to
complex rules. Thus the priority of an investor’s claim on
the cash flows as well as the credit risk in the underlying
collateral affects the payments an investor receives. We
believe that our ability to analyze the underlying collateral
and model the possible cash flows in various scenarios give
us advantages in evaluating such securities.
*Holding company debt
Collateral of the GIA’s securitized assets varies with
Residential Mortgage-Backed Securities (RMBS) being the
largest sector at $10.8 billion or 12.2% of total GIA assets at
year-end. Most of the RMBS collateral is “prime” residen-
tial mortgages, issued by Government-Sponsored
Enterprises (GSEs) or largely supported by GSE collateral.
“Alt-A” and subprime holdings, which have higher relative
risk, represented 3.8% and 1.8% of total GIA assets.
Commercial mortgage-backed securities (CMBS) are
supported by pools of commercial mortgages. Therefore
they generally provide more diversified collateral and better
liquidity than mortgage loans made directly (such as those
described in “Mortgage Loans” below). We take advantage
of our expertise in commercial mortgages and our ability to
analyze the underlying collateral to generate additional
value for the portfolio in this sector. At the end of 2008, in
addition to its direct commercial mortgage loans, the GIA
held $3.8 billion of CMBS of which 94% were rated AAA
by the major rating agencies. Many of the holdings with
lower ratings are those we chose to invest in based on our
detailed knowledge of the underlying collateral, which
increased our confidence that those properties would
continue to produce cash flow more than sufficient to serv-
ice the debt.
The remaining securitized holdings are Asset-Backed
Securities (ABS) which are supported by a variety of other
collateral. These include collateralized loan obligations
(CLOs) and collateralized debt obligations (CDOs) backed
by corporate bank loans and bonds which provide additional
credit diversification through those underlying holdings. We
can monitor this collateral closely using our own propri-
etary system. There are also small amounts invested in vari-
6
GIA’s ten largest long-term corporate bond obligors1 – December 31, 20082
Statement Value NAIC % GIA Fixed % TotalIssuer ($ Millions)3 Quality Rating4 Income Securities GIA Assets
Kayne Anderson MLP Investment Company $96 1 0.2% 0.1%Kayne Anderson Energy Return Fund 95 1 0.2 0.1Bank of America Corporation 76 1 0.1 0.1Wells Fargo & Company 75 1 0.1 0.1Anheuser-Busch InBev 74 2 0.1 0.1BNSF Railway Company 72 1 0.1 0.1IBM Corporation 64 1 0.1 0.1United Parcel Service, Inc. 64 1 0.1 0.1Procter & Gamble Company 59 1 0.1 0.1Union Pacific Corporation 58 1 0.1 0.1
1 Excludes loans to affiliated companies of MassMutual2 This is not a recommendation to buy, sell, or hold any security, and securities of these issuers may or may not be held in the portfolioat the time you receive this brochure
3 Exposure is net of credit default swap protection where applicable4 Average ratings where applicable
7
ous types of receivables. While it is true that market values
for many securitized assets have fallen due to greater-than-
usual uncertainty over their future cash flows in this difficult
economic environment, we believe that significant value
will be recovered over time.
Limiting risk to an industry or a single company in this way
makes good sense. It is not easy to achieve such broad
diversification and still remain selective in our investing, but
we believe the effort is worthwhile. We actively seek
smaller institutional borrowers, many of which might not
have the size to access the public markets. We also include
foreign borrowers and borrowers that use vehicles other
than conventional fixed rate debt. For example, our signifi-
cant presence in the U.S. and European bank loan markets
provides access to issuers and attractive investment opportu-
nities that we might not otherwise see. International fixed
income investments totaled approximately $5.8 billion, or
6.6% of GIA assets. Investments in Canada represented
$0.8 billion of this total. Our foreign bond holdings by
region are shown in the table below.
Statement Value % TotalRegion ($ Millions) GIA Assets
Continental Europe $2,317 2.6%United Kingdom 1,286 1.5Australia/New Zealand 952 1.1Canada 769 0.9Asia 180 0.2Latin America 15 0.0Other 289 0.3
GIA international bond diversification – By geographic region – December 31, 2008
Mortgage Loans
Approximately $10.1 billion of our $13.0 billion of direct
investments in Mortgage Loans are commercial mortgage
loans on buildings such as offices, apartments, shopping
malls, and hotels. There was a total of 445 loans at year-end
which are well diversified both by geographic region and by
property type to limit the impact of a regional economic
downturn or a broad slump in a particular type of property.
The ten largest loans were collateralized by portfolios of
properties rather than a single property. The ten largest
loans that were collateralized by a single property ranged in
size from $58 million to $85 million and totaled $686
million at year-end, or less than 0.8% of GIA assets.
The remaining $2.9 billion of Mortgage Loans is residential
mortgage loan pools which are similar to publicly traded
8
mortgage-backed pass-through securities, but are issued
privately rather than by a GSE. As a result, they have higher
yields which add value to the portfolio. Approximately 99%
of the loans in these pools have government support in the
form of either mortgage insurance from the Federal
Housing Administration or a guarantee from the
Department of Veterans Affairs.
Equities and Real Estate
Common equity is an asset class that can provide good
long-term returns to the portfolio as well as additional diver-
sification. MassMutual holds common equity in various
forms, including public common stock, private equity part-
nerships and LLCs, equity funds, and warrants. Private
equity, which makes up most of the equity portfolio, has
Commercial mortgage loan diversification* – December 31, 2008
Statement Value % Total CommercialProperty Type # Loans ($ Millions) Mortgage Loans % Total GIA Assets
Apartments 175 $2,841 28.2% 3.2%Hotels 25 701 6.9 0.8Industrial 55 1,484 14.7 1.7Office & Medical Office 144 4,007 39.6 4.5Shopping Centers & Retail 36 803 7.9 0.9Miscellaneous 10 274 2.7 0.3
Total 445 $10,110 100.0% 11.4%
Statement Value % Total CommercialGeographic Region # Loans ($ Millions) Mortgage Loans % Total GIA Assets
Northeast 52 $1,438 14.2% 1.6%Mid-Atlantic 46 957 9.5 1.1Southeast 42 677 6.7 0.8Midwest 79 1,405 13.9 1.6Southwest 90 1,729 17.1 1.9West 120 3,336 33.0 3.8Canada 16 568 5.6 0.6
Total 445 $10,110 100.0% 11.4%
* Excludes $2,938 million of residential mortgage pools
9
Real estate equity diversification* – December 31, 2008
Statement Value**Property Type # Properties ($ Millions) % Total Real Estate % Total GIA Assets
Apartments 28 $281 14.6% 0.3%Hotels & Motels 18 590 30.7 0.7Office 22 583 30.3 0.7Retail 11 155 8.0 0.2Miscellaneous 29 316 16.4 0.3
Total 108 $1,925 100.0% 2.2%
Statement Value**Geographic Region # Properties ($ Millions) % Total Real Estate % Total GIA Assets
Northeast 20 $325 16.9% 0.4%Mid-Atlantic 23 377 19.6 0.4Southeast 8 313 16.3 0.4Midwest 11 124 6.5 0.1Southwest 15 176 9.1 0.2West 31 610 31.6 0.7
Total 108 $1,925 100.0% 2.2%
provided significant benefits to the portfolio over the years,
both directly through ownership in growing companies and
indirectly through attractive lending opportunities that arise
from these business relationships. Private equity provides
exposure to a variety of primarily middle-market businesses
which may operate regionally, nationally, or outside the
United States.
The equity real estate portfolio, including some funds and
partnerships, totaled $1.9 billion at year-end, or 2.2% of
GIA assets. Real estate holdings are diversified geographi-
cally to insulate the portfolio from downturns in local or
regional economies. Currently most properties are offices
and hotels, but this composition may shift to other types
over time in response to value in the marketplace.
Commercial real estate provides certain tax advantages and
has historically produced good cash flow. In addition,
MassMutual has investments in real estate funds, partner-
ships, real estate investment trusts (REITs), and REIT funds
which add diversification and, in the case of REITs, liquid-
ity to the company’s real estate holdings. MassMutual’s real
estate investments are actively managed to add incremental
value by Cornerstone Real Estate Advisers. Cornerstone has
expertise in all major property types and regional offices
which provide considerable strength to the organization and
keep it well positioned to manage the Company’s real estate
equity investments. Real estate has produced significant
capital gains for MassMutual in the past and the actual
value of the current portfolio is significantly greater than the
accounting values in the accompanying tables.
* Schedule A real estate excluding Home Office properties of $126 million and including $955 million of Schedule BA assets** Statement value is net of reserves, depreciation and debt
10
Most of the GIA consists of fixed income securities. For these
holdings, the National Association of Insurance Commission-
ers (NAIC) has a six-tier quality rating system. Categories 1
and 2 are investment grade, Category 3 holdings are consid-
ered to be medium quality, and Categories 4 through 6 are
lower quality. The table below indicates how NAIC categories
compare with ratings similar to those used by public rating
agencies and shows how MassMutual’s GIA fixed income
securities (including short terms) were rated as of December
31, 2008. Clearly, the vast majority of these holdings are high
quality. Category 3 holdings are often very good middle-
market companies that historically we have financed very
successfully, but that have not achieved the size to be rated
Category 1 or 2. Our experienced fixed income analysts
carefully monitor developments that may affect portfolio
holdings and also utilize our own internal rating system rather
than relying solely on public ratings. The value of their
capabilities becomes even more apparent during periods of
economic stress, such as that we are now facing, when credit
problems are more likely to surface.
The quality of portfolio holdings is more than the financial
strength of the issuers; the quality of a bond may also rely on
the legal protections in the contract. For example, MassMutual
has significant private placement holdings which, in addition
to providing higher yields, generally offer some combination
of superior financial covenants and better call protection
features versus comparable public bonds. These provisions are
designed to protect MassMutual’s interests as an investor.
These holdings also provide additional diversification since
they are often from industries and issuers different from those
whose securities are available in the public markets.
Unlike for fixed income securities, there are no industry
standards for mortgage loan quality. We use an internally
developed, proprietary system to rate the quality of all
commercial mortgage loan investments. Each commercial
mortgage is reviewed at least annually under this comprehen-
sive system by experienced mortgage loan analysts from our
network of regional offices. This regional office organization
allows associates to keep close watch on local market
conditions and act quickly to conserve value in the portfolio by
working with troubled borrowers when required.
MassMutual’s commercial mortgage loan portfolio performed
well during 2008.
Asset quality
Quality of GIA fixed income securities (including short-term investments) – December 31, 2008
NAIC Rating Equivalent Rating Statement Value % GIA Fixed % TotalCategory Agency Designation ($ Millions) Income Securities GIA Assets
1 AAA, AA, A $35,207 68.4% 39.7%2 BAA 12,270 23.9 13.93 BA 1,666 3.2 1.94 B 1,547 3.0 1.75 Lower Quality 577 1.1 0.76 In or Near Default 219 0.4 0.2
Total $51,486 100.0% 58.1%
11
MassMutual maintains a strong liquidity position in keeping
with its commitment to clients to provide timely payment
without forcing the sale of assets at distressed levels. Cash
flow and liquidity needs are routinely addressed as part of
the investment management process. We also perform peri-
odic liquidity stress testing that goes beyond regulatory
requirements. That analysis of possible demands on port-
folio liquidity under adverse scenarios confirms that the
Company continues to have a strong liquidity position. The
portfolio maintains a large share of its assets in high quality
Liquidity
public bonds and short-term investments that can be sold
quickly and easily to satisfy policyholder and client needs if
necessary. However, such sales are unlikely as the Company
has enjoyed strong positive cash flow in recent years.
Moreover, MassMutual has a $1 billion commercial paper
program which permits it to borrow on a short-term basis
for various corporate needs. While we do not rely on the
ability to issue commercial paper in liquidity planning, it
adds to our financial flexibility.
12
MassMutual operates in an extremely competitive financial
services marketplace. Our primary objective continues to be
maintaining the financial strength to fulfill our commit-
ments to you, our policyholders and clients, over the long
term. In support of that goal, we will continue to pursue the
same value-driven investment philosophy that has served
you so well.
We hope you agree that MassMutual is a strong company.
We welcome your comments and questions. Please direct
any inquiries to your MassMutual representative or your
financial adviser, or feel free to submit them via our website
at www.massmutual.com, which you can also explore for
additional financial and investment information.
Additional information
MassMutual. We’ll help you get there.®
© 2010 Massachusetts Mutual Life Insurance Company, Springfield, MA. All rights reserved. www.massmutual.com. MassMutual Financial Groupis a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives.
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