A.M. Best: Surety Boom Propels US Growth and Profitability

The demand for surety bonds in the United States continues to increase, particularly for performance bonds, leading to consistent top-line premium growth in this segment of the insurance industry, according to A.M. Best.

In Best's Market Segment Report, the rating agency notes the upswing in government spending on infrastructure projects has significantly contributed to the surge in surety premiums throughout 2023. This trend is expected to gain further momentum in 2024 as more public projects are set in motion. The direct premium written (DPW) in the surety segment demonstrated sustained growth during the first three quarters of 2023, with an increase ranging between 11 percent and 12 percent compared to the same period in the prior year. A.M. Best projects that the growth trajectory in private construction spending will likely persist, supported by lower borrowing costs in 2024.

A.M. Best highlights that the upswing in government spending on infrastructure projects has significantly contributed to the surge in surety premiums throughout 2023. This trend is expected to gain further momentum in 2024 as more public projects are set in motion. The DPW in the surety segment demonstrated sustained growth during the first three quarters of 2023, with an increase ranging between 11 percent and 12 percent compared to the same period in the prior year. Projections suggest that the growth trajectory in private construction spending will persist, bolstered by lower borrowing costs in 2024.

According to the report, surety stands out as one of the most profitable lines for US property and casualty (P&C) insurers. In 2022, it generated $2.3 billion in net underwriting profit with just $8.6 billion in DPW. Over the decade leading up to 2022, the net profit margin of the surety segment consistently hovered in the mid-30s percentage range in contrast to the P&C industry's 12.8 percent average.

"Because of the success of companies writing surety coverage, carriers are considering allocating more resources to writing this line, and surety underwriters are considering how to expand their portfolios to take further advantage of the profit potential," said Robert Valenta, senior financial analyst, A.M. Best.

The growth of US surety DPW maintained a median rate of 5 percent annually from 2012 to 2022. However, during the postpandemic period, this rate rose to 7.2 percent in 2021 and 15.7 percent in 2022. This surge may be attributed, in part, to the rebound of projects previously stalled due to the pandemic.

"Historically, at the beginning of economic recoveries, state and local infrastructure investment has typically fallen as a share of the economy," said Christopher Graham, senior industry research analyst at A.M. Best. "However, the past couple of years have bucked that trend."

The report also underscores the impact of two pivotal bills passed by Congress in recent years. The Infrastructure Investment and Jobs Act in late 2021 and the Inflation Reduction Act in 2022 marked the first substantial infrastructure spending bills since the American Recovery and Reinvestment Act in 2009.

"The commitment to infrastructure investment, and the construction spending that goes with it, has led to a boost in surety premiums, with surety bonds for new construction projects," Mr. Graham said. "In addition, private construction spending has been resilient despite the impact of higher interest rates on the residential construction market."

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