The three C’s of surety are, Character, Capacity, and Capital.
Regarding surety underwriting, Character refers to the moral qualities unique to an individual or entity. Capacity refers to the capability of an individual or entity and Capital refers to the financial position of an individual or entity.
All three of these are important to the underwriting process. The principal needs to have the character, capacity, and capital to qualify for surety credit. While the principal may be stronger in one area than another, depending on the specific obligation, the principal must possess all three to some extent.
We believe that while all three Cs are important, Character can sometimes be the most important. If the principal falls a little short in one of the other Cs, character can often move the needle from declined to approved. Strong moral Character is an important trait in all areas of business, not just for the surety program. The best way for the surety to underwrite character is by having a relationship with the principal. For larger, well established accounts, we have regular meetings with the contractor and surety underwriter. Honesty and completeness of the application and financial information is also a good indication of Character.
Some examples of underwriting capacity include, confirming that the principal has experience in the area of construction they are seeking surety credit. For example, a contractor skilled in plumbing, would need to explain a possible electrical job they would like to perform. Or a contractor with experience in California, looking to bid a job in Alaska having never been to Alaska. Or a contractor whose largest completed job is $500,000, asking for a $5 million contract. None of these situations mean that the contractor is not capable of doing the job, however the surety will ask more questions and need additional underwriting. The strength of the other Cs will also help the underwriting.
Examples of capital include reviewing financial statements for adequate working capital, profitability, and net worth. The surety will typically need to underwrite three years company financial statements as well as any affiliated companies’ financial statements and personal financial statement. The surety will run credit and make sure the principal is paying their subcontractors, suppliers, and labor.