Risk & Business Magazine Jones DesLauriers Insurance Fall 2016 | Page 26

SURETY 101

Surety 101:
Understanding The 3 C’s Of Surety Underwriting

I

f you have ever gone through the
process of setting up a bonding facility
with a surety company for your client
in the construction industry, you may
have been introduced to the 3 C’s of
surety underwriting.
If you have not, the 3 C’s of surety
underwriting are the Capital, Capacity, and
Character of the principal (contractor), and
they form the fundamental considerations
for the underwriting of risks.

When a submission for a bonding facility is
reviewed by surety underwriters, they will
judge the quality of the submission based on
a balance of the 3 C’s. Whether the risk will
be accepted will be based solely on whether
the balance of the three reaches a level of
acceptability to the underwriter.
Understanding the 3 C’s is invaluable as
it will ultimately improve the quality of
the submissions to the surety. This, in
turn, provides additional options for the
contractor and increases the chances of
finding the right surety.
CAPITAL
You often hear the phrase “Cash is King.”
In the construction industry, having an
abundance of available capital and a strong
balance sheet will oftentimes provide a
positive snapshot of a company’s financial
status. From an underwriting perspective,
this analysis involves number crunching
the company’s tangible net worth, working

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capital and debt load. Further, other items
of importance include financial trends, nonconstruction investments and contingent
liabilities. The surety company must ensure
that the contractor has sufficient resources
to finance and support ongoing projects and
financial obligations.
Here are some areas to focus on when
prequalifying your client that surety
companies view as positive financial signs:
•

Stability of sales and manageable
organic growth

•

Retain profit in the company

•

Gross profit and operating margins
stability and growth over time

•

Decrease in interest-bearing debt

•

Maintain a sufficient line of credit

•

Continue to improve composition of
working capital

•

Timeliness of financial reporting

CAPACITY
This refers to the company’s workforce,
expertise, and experience in handling
their projects. It is critical to have an
intimate understanding of the contractor’s
operations. Areas of note include the
following:
•

Résumés of principals and key
employees (This will provide a snapshot
of the history and experience of the key

personnel behind the company.)
•

Sufficient equipment available as well
as access to any specialised equipment
for specific projects

•

Updated and efficient systems
including software that can accurately
assist with accounting, estimating,
scheduling, and job-cost tracking

•

A business plan summarizing the
company’s specialties, markets, and
prospects for growth and profitability

•

A summary of some of the largest
projects ever completed by the
company along with their profitability
figures

•

References and letters of
recommendation from owners,
subcontractors, suppliers, and
architects on previous projects

Surety underwriters prefer to see
contractors grow at a steady pace year-overyear as contractors that grow too fast may
not have the internal infrastructure and
resources in place to handle the increased
workload. In other words, if your client is
seeking bonding support on a project that
is two or three times the size of its largest
projects ever completed, the issue of capacity
will most definitely be raised.
Regular meetings with the contractor will
help you understand the contractor’s ever