US Surety Market Sees Growth Amid Rising Construction Spending

US construction spending continues to drive strong results in the surety insurance segment, but a rising loss ratio in 2023 and through the third quarter of 2024 has led to tighter market conditions, according to AM Best.

A recent Best's Market Segment Report, US Surety: Continued Growth, Profits Create a Strong Market, found that the segment's underwriting income reached $2.2 billion in 2023, slightly below the previous year's $2.3 billion, which marked a decade high. The growth has been fueled by increased construction spending, particularly in public infrastructure, which surged in 2023 and 2024. Public construction spending outpaced private construction for a second consecutive year in 2024. Direct premiums written rose 11.2 percent in 2023 and 10.5 percent in the first 9 months of 2024, nearly doubling since 2012.

Despite this growth, the direct loss ratio reached 25.0 percent in the first 9 months of 2024, the highest in 5 years. The increase is largely attributed to rising claims costs due to economic inflation and ongoing challenges in the construction sector, including a tight labor market. While loss ratio increases have been moderate, further deterioration could impact profitability, prompting tighter underwriting standards and increased risk selection.

"Rising losses have led carriers to tighten underwriting standards for certain bond classes," said Robert Valenta, senior financial analyst, AM Best. "They're looking at the key factors driving losses and using insights gained to enhance underwriting practices. Sureties are also monitoring contractor performance closely, particularly those that have had performance issues or are highly leveraged."

Federal legislation, including the Infrastructure Investment and Jobs Act of 2021, the Inflation Reduction Act of 2022, and the CHIPS and Science Act of 2022, has significantly boosted public sector spending, creating more opportunities for insurers offering surety coverage.

Looking ahead, AM Best sees continued opportunities in the surety market. "The prospects for continued growth in the surety segment look promising, not only from infrastructure investments, but also with regards to technology advances and investments in digital platforms, which help streamline the bond issuance process," said Christopher Graham, senior industry analyst, AM Best.

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