Analysts at AM Best are expecting a recently enacted $1.2 trillion US infrastructure to result in more business opportunities for surety companies due to new investments in the transportation and energy sectors.
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.
AM Best 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 rating agency, surety has historically has been a very profitable line of business for most property and casualty insurance carriers, as net losses have been low the past decade with combined ratios that were 78.1 or below in each year.
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.
“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 for Industry Research and Analytics at 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.”
Given the strong operating performance despite pandemic conditions, as well as the strengthening economy and construction industry, AM Best has revised its market segment outlook on the US surety segment to stable from negative.