2025 Surety Outlook

As our McConkey surety team finished an excellent year in 2024, we are looking ahead to what is in store for the industry in 2025. The surety industry is expected to have a stable year of moderate growth in 2025. This reflects the overall non-residential construction industry which saw a 7% growth in spending in 2024, but that growth rate is expected to slow in 2025. There is an overall optimism from contractors for the upcoming year, but current concerns include labor challenges, interest rates, material costs and the incoming administration’s policies on immigration and trade.

The $1.2 trillion Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act and CHIPS have provided stability to the industry with continued spending on government infrastructure, manufacturing & energy. Sectors that are expected to have the strongest demand this year from the AGC 2025 outlook include Data Centers, Water/Sewer, Power, Transportation, Hospital/Other Healthcare, Manufacturing and Bridge/Highway. In contrast, Private Office and Retail are expected to have some of the weakest demand in 2025.

The National Association of Surety Bond Producers collected surveys from 27 different Surety companies in 2024, and 81% of respondents indicated that their company’s performance was better than budget. Inflation is certainly a driver of premium growth in the surety industry affecting contract values of bonded projects. The Surety & Fidelity Association of America (SFAA) reported a total direct loss ratio of 24.5% as of 9/30/2024 for the top 100 surety companies. This is a slight increase from the 22.3% reported at 12/31/2023, and a trend to watch as 2022 and 2021 resulted in 14.6% and 17.7% direct loss ratios respectively.

Claims activity and private equity acquisitions are 2 current challenges in the surety industry. Many of the surveyed surety companies indicated an uptick in both claim frequency and severity which they anticipate continuing or even increasing. Factors impacting the risk in surety claims include replacement construction costs, financial stressors on subcontractors, construction workforce shortages, and the persistence of inflation and supply chain issues. Many surety companies have reservations about supporting private equity owned construction firms due to possible overvaluation of the construction firm resulting in an increased debt load on the balance sheet, and concerns about the PE firm’s long-term commitment to the industry. It is important to discuss continuity planning proactively with your surety as the resulting balance sheet can have a significant impact on bonding capacity.

Many surety companies saw significant pricing changes with their reinsurance treaty renewals in 2024 along with increases in their net retentions as well. The increases in claim size and frequency are hitting reinsurers and are anticipated to continue in 2025. This trend can result in more stringent underwriting terms and conditions for companies that are required to have a bond program in place and could create some movement between surety carriers.

Overall, most surety executives anticipate that capital will continue to enter the surety market in the near term as this segment of the insurance industry remains an attractive place for property and casualty insurers to seek higher returns on investment. New market entrants can pressure established sureties to focus on client retention, at times easing underwriting and lowering rates, but they can pose risks for contractors due to their unpredictable longevity and unreliable underwriting strategies.

At McConkey, we continue to place a heavy emphasis on our own internal underwriting and analysis for each of our clients across all industries and construction trades. If you have any concerns about your current surety program, limits, or upcoming ownership transition planning, please reach out to our team. We are here to help you navigate the market as we work to deeply understand each of our clients’ needs from a financial, operational and growth perspective to best position your company for the future.