Infrastructure Investment Package Expected to Boost Surety Market: AM Best

The recently enacted $1.2 trillion U.S. infrastructure package is expected to result in more business opportunities for surety companies given the new and sizable investments that the transportation and energy sectors will see, according to a new AM Best report.

The new law includes $550 billion in new spending on infrastructure over the next five years and billions more to promote environmental and social investments, such as clean energy technologies. The infrastructure bill also calls for expanded broadband internet access and other investments to protect against droughts, floods and other weather-related challenges.

The law is one reason the ratings agency said it has it has revised its market segment outlook on the U.S. surety segment to stable from negative.

The Best’s Special Report, “New Infrastructure Law Expected to Boost US Surety Market,” notes that the surety segment saw a slowdown in premiums as the pandemic led to reduced construction spending during the 2020 recession. The downturn particularly affected projects with greater exposure to those sectors most severely impacted by COVID-19, including retail, hospitality and travel, according to the report.

The report notes that surety historically has been a very profitable line of business for most property/casualty insurance carriers, as net losses have been low the past decade with combined ratios that were 78.1 or below in each year. According to AM Best analysts, this reflects “surety companies’ ongoing focus on underwriting fundamentals and effective risk selection to keep losses in check.”

Surety underwriting results in 2020 declined moderately compared with 2019 due to an uptick in losses as contractors adjusted to mandatory government shutdowns and supply chain disruptions. However, despite the moderate decline in 2020, underwriting income for surety writers has been on an upward trend over the past five years, reaching a peak of $1.68 billion in 2019.

Volatility in lumber prices and a shortage of skilled workers continue to impact the construction industry, the report notes.

“Implementation of projects under the new infrastructure law will largely determine the health and prospects for the U.S. construction industry for years to come and have a substantial impact on the surety insurance market,” said David Blades, associate director, industry research and analytics, AM Best. “At the same time, labor pressures could delay expected construction growth, and as a result, the impact of the infrastructure bill could be muted in the near term.”

AM Best said that given the strong operating performance despite pandemic conditions, as well as the strengthening economy and construction industry, it has revised its market segment outlook on the U.S. surety segment to stable from negative. The expected benefits of the Infrastructure Investment and Jobs Act further reinforce the outlook change.

Source: AM Best

Topics AM Best