Rate predictions: Surety
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Key takeaway
The adverse economic challenges created by COVID-19 will persist. Companies will continue to face labor shortages and supply chain instability, which will require operations to be nimble and flexible to reduce the impact on both top- and bottom-line results. We do not, however, anticipate an increase in rates to keep up with inflation due to stringent rate regulation.
The surety industry is in flux but making strides.
- Surety and brokerage companies face widespread labor shortages making quality surety talent elusive. Further adoption of the work-from-home culture may help the industry attract and retain high-performing employees.
- Workflow innovation in a digital world continues to be a priority. The surety industry has made great strides at the federal, state and local levels to dramatically increase the acceptance of electronically executed bonds. Brokerages have been successful at making endpoint users comfortable with the process and product. Remote working models and better verification processes have aided in this transition.
Commercial surety
- Surety terms and conditions have stabilized across industries.
- Industries impacted most heavily by the pandemic will continue to see mixed results should new variants appear, adding further uncertainty.
- Real estate, development and homebuilders will continue to thrive with inventories at all-time lows and demand exceeding supply.
Contract surety
- The construction sector is rebounding, with delayed projects coming back online. Labor and material shortages could impact the recovery and stretch schedules while inflationary pressures increase project costs for both contractors and owners.
- Surety capacity is plentiful across the sector along with active competition among sureties to acquire new business. Pricing is stable with no significant upward or downward pressure.
- Large contractors exhibiting operational excellence, sound capital structures and effective risk management practices have access to ample surety capacity to meet their strategic goals. These companies generally remain in strong positions to capitalize on the shifting landscape, opportunistically expand their footprints and acquire talent.
- Significant infrastructure investment is certain, though the timing of when this will be deployed is unknown, and the actual application of the funding to traditional projects has yet to come into focus. Shifts in funding to new project categories, including technology and social outreach, could impact dollars available for traditional infrastructure projects.
Private equity
- Private equity continues to be a significant component of recovery and growth. The anticipated increase in interest rates will impact how underwriters analyze leveraged balance sheets, with debt terms and maturities coming under greater scrutiny.
- At WTW, we have noted a 52% year-over-year increase in M&A projects that contain surety programs. Most indicators and agencies that forecast M&A activity point to another significant jump yet again in 2022.
- The challenges and uncertainty presented by COVID have sharply increased the number of companies looking to recapitalize or reorganize their current structures.
- Special purpose acquisition companies (SPAC) have not performed as favorably as predicted, which could lead to increased M&A activity.
Disclaimer
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