Morningstar DBRS, a provider of credit ratings and risk analysis, reports that the ability to access capital continues to be one of the most important factors influencing the Financial Strength Ratings (FSRs) of US insurance companies.
According to Morningstar DBRS, capital flexibility directly affects how insurers finance growth, manage risk, and compete within a dynamic market environment.
Morningstar DBRS observes that the US insurance sector operates within a diverse and complex framework of corporate structures, regulatory systems, capital instruments, and reinsurance solutions.
The firm emphasises that while US capital markets provide deep liquidity and a wide range of financing options, insurers still face substantial competition for investor attention and funding.
Publicly traded insurers, Morningstar DBRS notes, have concentrated in recent years on returning capital to shareholders through buybacks and dividends, which the firm interprets as a signal that improved profitability will be required to attract new equity capital going forward.
At the same time, Morningstar DBRS highlights that private market investors have been channeling large volumes of capital into the insurance industry, particularly toward annuity-related business lines.
The firm points out that this inflow reflects investors’ continued appetite for spread-based returns. Morningstar DBRS also underscores that reinsurance remains a vital source of capital relief and balance sheet flexibility, even amid ongoing price fluctuations in global reinsurance markets.
According to Morningstar DBRS, the ability to secure stable and diversified funding is a defining strength for US insurers.
The firm notes that insurers make use of both conventional and insurance-specific financing tools, including funding agreements, funding agreement–backed notes (FABNs), surplus notes, and Federal Home Loan Bank (FHLB) advances.
Each of these instruments can enhance financial flexibility, but Morningstar DBRS stresses that they come with specific implications for credit ratings and overall leverage assessment.
Morningstar DBRS explains that debt capital and other forms of wholesale funding remain essential for insurers that seek to optimise their capital structures.
The firm emphasises that access to these markets depends heavily on regulatory oversight, investor sentiment, and existing credit ratings. Morningstar DBRS notes that US insurers have increasingly turned to specialised debt and quasi-debt instruments to manage liquidity and support long-term investment activity.
According to Morningstar DBRS, funding agreements continue to represent a central feature of US insurers’ capital strategies. These are fixed-term investment contracts issued by regulated insurance companies and sold to institutional investors or the FHLB.
Morningstar DBRS clarifies that these agreements are treated as insurance contracts rather than traditional debt, ranking equally with policyholder obligations. Although they do not qualify as regulatory capital, Morningstar DBRS observes that they are frequently used to strengthen liquidity management and to fund investment portfolios efficiently.
The firm assigns credit ratings to funding agreements and FABNs that are generally equivalent to the issuer’s FSR, reflecting their seniority and alignment with policyholder claims.
Morningstar DBRS does not classify these agreements as debt when calculating financial leverage ratios, but it explicitly considers the operational and liquidity risks associated with maintaining such programs as part of its overall credit assessment.
Morningstar DBRS points out that funding agreements often represent a cost-effective financing source, particularly for life insurers and annuity providers. They are typically issued opportunistically when market conditions offer favourable spreads relative to other liability sources.
Based on Morningstar DBRS data, the total amount of FABNs outstanding reached approximately USD 217 billion at year-end 2024, while FHLB financing totalled USD 161 billion.
The firm believes that the use of funding agreements could increase further as insurers look to deploy assets into private credit and alternative investments, particularly if retail annuity sales level off in a lower interest rate environment.
Morningstar DBRS cautions that although credit performance across large FABN issuers has been stable, the sector’s growing exposure to private credit introduces additional risk factors.
The firm highlights that the expansion of private credit markets may lead to weaker underwriting standards and reduced liquidity due to complex or novel lending structures. Morningstar DBRS also notes that while access to FABN programs and FHLB funding enhances liquidity, the rollover risk associated with upcoming maturities and the use of pledged assets can constrain insurers’ financial flexibility.
In its commentary, Morningstar DBRS also draws attention to the continued use of surplus notes as a strategic capital management tool.
These instruments, the firm explains, can qualify as regulatory capital under specific conditions and are particularly important for mutual insurers or those that lack access to equity markets. Surplus notes are subordinated obligations that require regulatory approval for principal and interest payments.
Morningstar DBRS highlights that this feature allows the notes to be recognised as equity for statutory accounting purposes while still providing tax-deductible interest payments, making them advantageous for issuers.
Data cited by Morningstar DBRS from the National Association of Insurance Commissioners show that total surplus notes outstanding stood at USD 51 billion at the end of 2024, with the majority issued by life and health insurers.
The firm notes that property and casualty insurers have also increased their use of surplus notes, sometimes employing them as a more cost-effective alternative to reinsurance when market conditions are less favourable.
Morningstar DBRS explains that surplus notes can be rated up to one notch below an insurer’s FSR if no senior debt exists, but the differential widens when other forms of debt are outstanding.
The firm considers surplus notes as contributing to an insurer’s financial leverage and fixed-charge obligations while recognising that the conditional nature of their payments introduces regulatory and timing risk, particularly for weaker insurers.
Morningstar DBRS also applies similar analytical considerations to surplus notes as it does to hybrid debt instruments when leverage levels are high or when financial conditions weaken.
Overall, Morningstar DBRS concludes that insurers with stronger and more diverse access to capital markets are better positioned to maintain stable ratings and withstand competitive and market pressures.
The firm emphasises that the ability to draw upon a mix of funding sources, ranging from public markets and private placements to specialised insurance instruments, is a major competitive advantage.
Morningstar DBRS believes that insurers combining disciplined capital management, prudent risk oversight, and solid investor confidence are best equipped to sustain robust credit profiles in the years ahead.
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