Why have I pursued non-standard versus standard market underwriting? During my career in the standard market, I would meet good people that just did not possess all of the qualities of a good standard market account, and I wanted to help them secure bonding. I also discovered that when I was making my decision to pick up an account, I liked judging good character, meeting the account, visiting their operations and interviewing their personnel, and if I did pick up the account, I liked helping them make changes.

During the 80’s, a company called Amwest came along. They developed a philosophy of underwriting small, emerging, and minority accounts in a way that was foreign to me. I was always told it would not work, that those accounts did not deserve bonding, and that by doing so, was to discredit surety. Amwest used primarily two tools of which one was the U.S. Small Business Administration (SBA) Surety Bond Guarantee Program and the other was collateral. From an outsider looking in and not familiar with the methods of taking collateral, it would appear that to take what looked like the last assets available to the company and to have the surety hold them would be a certain death to the construction company.

What I learned was that many accounts did not qualify for standard underwriting simply because of the preparation of their corporate financial statements. They would not have CPA-reviewed financial statements for various reasons. What was interesting and amazing was how many of these little firms located in rural areas across the country had been successful and had saved or had assets that could be put up and used as collateral. Furthermore, the staff of the Small Business Administration (SBA) took time to teach me about how small businesses operate. They explained that in the early years of a new company’s growth that bank lines are really working capital. Furthermore, in the late 1980’s under SBA rules, a construction firm could qualify for a work program of $1,250,000 over $3,000,000 with just an audited financial statement and a bank line of $300,000 with the balance sheet representing little   working capital nor net worth. Fast forward to today, and you will find the SBA program has changed dramatically–the same contractor with just a CPA reviewed financial statement would qualify potentially for a $2,000,000 single over a $6,000,000 aggregate. There are now just three forms sent via electronic transmission.

In the 1990’s, a tool, called funds control or escrow, began to re-emerge. Funds control, or escrow, began basically as a glorified check-writing service with manual spreadsheet tracking. The advent of computers exponentially increased the amount of tracking and number of firms that could be handled by a single employee. As technology progressed, so did the data that could be harvested from the construction projects and the contractors performing the work. Once the tool of funds control was applied, in a very short period of time, loss ratios could be reduced. As technology advanced, funds control and other techniques were used to help nonstandard accounts. In the early 2000s, we made a fascinating discovery that every funds control situation that mandated that 10% for working capital be deposited produced a 0% loss ratio. There may have been rumbles, problems and claims, but the deposited funds took care of all of the presented bad situations.

Fast forward to today and the economy looks a lot like 1980 with the exception of high interest rates. We are in what seems to be a never-ending recession, and contractors need help in obtaining their surety credit. It took 30 years to develop each of the tools discussed above, but they are all available today at the same time and can be used in conjunction with each other to address many nonstandard situations. Capacity, that hasn’t previously existed, is also available today. On one hand, we have to work harder than ever to put an account together, but on the other hand, the advancements made in how we do our work makes this journey, career or job a bit simpler.

Tools Available Today to Underwrite Nonstandard Accounts

1. U.S. SBA Surety Bond Guarantee Program,
2. Collateral,
3. Funds control alone or with deposits and/or hold backs,
4. Third party indemnity, and
5. A combination of all of the above.

To learn more about underwriting nonstandard accounts, consider purchasing NASBP’s audio recording of the May 2011 Virtual Seminar, titled “Funds Control: How to become an Underwriter Survivalist,” presented by Michael C. Pecard, Escrow Manager of North American Construction Services, Inc. and Michael D. Williams, President of CCI Surety, Inc. (CCI). NASBP audio recordings can be purchased from the NASBP web site, by clicking here.

The author of this article is Michael D. Williams, President, CCI Surety, Inc., NACS, Inc. in Golden Valley, MN. He is a member of the NASBP Small and Emerging Business Committee. He can be reached by phone at 866-317-3294 or 800-936-6227 or by email at MWilliams@NacsEscrow.com.