US insurers’ ability to access diverse sources of capital is increasingly defining their financial strength and competitive edge, according to a new report by Morningstar DBRS released Thursday.
The report, Access to Capital Is a Key Differentiator Among US Insurers, highlights that insurers with optimized capital structures are better positioned to navigate regulatory demands, market volatility, and evolving investment opportunities.
“An optimized capital structure provides significant benefits to insurers, which must compete for access to capital,” the report stated. Despite the depth of the US capital markets, competition for capital remains intense, with many publicly traded insurers prioritising shareholder returns to attract future equity investment.
Meanwhile, private market investors continue to inject substantial funds into the insurance industry, particularly in the annuity segment. Reinsurance also remains a vital source of capital relief, even as pricing volatility challenges market stability.
Morningstar DBRS observed that insurance-specific instruments, such as funding agreement-backed notes (FABNs) and surplus notes, have become significant to the sector’s financing strategies. At the end of 2024, US insurers held $217 billion in outstanding FABNs, marking a record high, alongside $161 billion in Federal Home Loan Bank (FHLB) financing.
“Funding agreements can be a relatively low-cost source of financing and are often issued by insurers with spread-based business models such as annuity providers,” the report noted. The report explained that “the cost of funding agreements is typically compared against the cost of raising other forms of policyholder liabilities,” adding that issuance tends to increase “when rates and spreads are favourable relative to alternatives.”
However, the report cautioned that “the growth of private credit as an asset class raises questions concerning lending standards,” particularly as insurers expand into higher-yielding investments. It warned that “upcoming FABN maturities carry rollover risk and assets pledged to the FHLB reduce the availability of liquid assets.”
On surplus notes, Morningstar DBRS stated that these “can be issued by operating insurance companies, potentially at a higher credit rating category than holding company debt, and still count as regulatory capital because of the contingencies on the repayment of principal and interest.” The total amount of surplus notes outstanding was $51 billion at year-end 2024, most of which was issued by life and health insurers.
“Surplus notes benefit from being recognized as equity capital for statutory accounting and regulatory capital purposes,” the report said, noting that interest on these notes “can still be tax-deductible, making them even more favourable for issuers.”
Morningstar DBRS noted that while these funding instruments enhance insurers’ flexibility, they must be managed carefully. “Funding instruments unique to the US insurance sector can expand an insurer’s access to capital, but they come with a particular set of credit rating considerations,” it said.
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