Economic Conditions Sharpen Focus on Value of Bonds
July 27, 2020
By Larry Taylor, President and Chairman of the Board
Similar to the construction industry, the surety sector is in a state of uncertainty at this time. Most experts agree on two primary factors that will impact the surety industry’s results: Revenue will decrease, and losses will increase.
While the industry’s revenue (based on premium income) has had a good run of growth for the past seven years, this trend will reverse course due to a drastic slowdown in new construction starts (which is when the surety bond premium is billed). Even if a large federal infrastructure package is passed this year, it is unlikely that it will impact revenue in what is left of 2020.
With regard to losses, the industry was already beginning to see a rise in the fourth quarter of 2019. The economic impact of the COVID-19 pandemic will likely accelerate this trend, with more defaults occurring because of labor challenges, material delivery, jobsite safety, and contractors struggling to fill depleting backlogs to service overhead and debt obligations.
On the positive side, it is during times like these that the value of surety bonds will become more apparent. Obligees—namely public and private owners, general contractors, subcontractors, and material and labor suppliers—of bonds will be thankful that they have the security of bonds as default rates increase. Surety companies build reserves to ensure sustainability in challenging economic times. The surety companies with disciplined underwriting standards and proactive claims departments will come out of this fine, just as they have in other economic downturns. Others may not.
Source: ENGINEERING NEWS RECORD, JULY 27 2020
Note: Additional information on this topic, can be found on Engineering New Records website linked here.