Interest rates have been rising rapidly over the last 18 months as the Federal Reserve tries to battle inflation. These increases have affected borrowing rates for many credit products. Contractors may be concerned that these rising interest rates will affect the rates on their Performance Bonds. Learn more. 

Interest rates do not have a direct impact on the cost of contract bonds such as performance bonds and payment bonds. In fact, contract bond rates tend to be pretty stable compared to other credit products such as a bank line of credit or ILOC. In a rising rate environment, contractors using these instead of performance bonds may find substantial savings. 

The Surety Bond Industry Results

Interest rates can have an indirect effect on performance bond rates though. According to the Surety and Fidelity Association (SFAA) the surety bond industry is coming off of another record year in 2022 in both overall revenue and profitability. The top 100 writers of surety bonds wrote over $8,500,000,000 in bond premium. The same writers had a loss ratio of 14.5%. Generally, if a bond company’s loss ratio is 30% or less, they are making money. 

Based on this tremendous growth and profitability, the industry is very attractive for companies looking to deploy money. If those numbers continue, it will actually put pressure on performance bonds rates to go even lower. This is because companies and investors will be looking to get better returns on their money to combat higher risk free interest rates. More capital in the industry means there will be more pressure to grow, increased competition and decreased surety bond rates.

Negative Interest Rate Factors

Interest rate increases could also negatively affect the bond industry and the costs of performance bonds. Again, this happens in an indirect manner. Increased rates mean higher borrowing costs for both contractors and project owners. It may also make it more difficult for both parties to obtain new loans. If project owners delay or cancel projects, this could negatively affect contractor backlogs and profitability. This has already started to happen in some sectors such as manufacturing. 

Contractors using debt are also suffering with higher interest costs. This puts more stress on contractors who use their bank line of credit or who have heavy equipment financing needs. These factors can contribute to losses for contractors and even performance and payment bond claims. Should the surety bond industry start to experience losses, we could actually see consolidation in the marketplace with bond companies selling or leaving the industry. This in turn makes the market less competitive and could lead to pressure to increase performance bond rates. 

Unfortunately, we do not yet know the full impact that this rising rate environment will have on performance bond costs. The underwriters I speak to are being more cautious as they expect some headwinds in certain trades. However, another record year may make any tightening very short lived. Contractor can learn how Performance Bond rates are directly calculated and impacted here. 

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Josh Carson, AFSB

Vice President at Axcess Surety

Vice President of Axcess Surety. Surety Bond and financial expert dedicated to helping contractors, businesses and individuals understand and obtain surety bond credit.

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