The potential boon to the US construction industry from the Trump administration's infrastructure rebuilding plans poses benefits and risks for the surety sector, according to AM Best.
The future of the US surety market "should remain bright" if plans to rebuild US bridges, highways and other infrastructure come to pass over the next year, the ratings agency said yesterday in a report.
"The wealth of opportunities for contractors associated with this undertaking should bring improved margins, and potential profits to construction firms across the nation and the surety insurers that provide bonds for them.
"AM Best believes disciplined underwriting by surety companies that have been proven experts in providing the types of construction bonds that will be more prevalent in an infrastructure rebuild will go a long way toward sustaining the surety industry's success," the ratings agency said.
The firm noted that even before the potential impact of infrastructure rebuilding, an improving construction economy had led to increased revenue for US surety underwriters which, combined with low loss activity, had allowed underwriting results to remain favourable.
Positive results have meant underwriting income has averaged in excess of $1bn every year since 2009, despite a buyers' market where supply has outpaced demand for surety coverage.
On the back of the expansion in construction activity, there has been top line growth each year since 2013, with direct written premiums expected to have passed the $6bn mark last year for the first time in a decade.
But AM Best also warned of the potential impact of increasingly competitive conditions in the surety market, as insurers have flowed into the space in pursuit of the steady profits it has generated, leading to "ample" capacity.
"The competition for the business of small and medium-size contractors, in particular, has heightened, and account retention has been foremost in the strategy of long-term surety writers looking to protect the quality of their portfolios."
The heightened competition could expose companies that had been "less stringent" in their underwriting standards as they sought to grow top line business, AM Best continued.
That could especially be the case with insurers that had experience in underwriting commercial, non-contract bonds, but had recently expanded into the contract bond market.
"It remains to be seen whether the quality of the business written by some of the new market entrants holds up over time," AM Best said.