– The Ontario Construction Report Special Feature
The phoenix like rise of Trisura Guarantee Insurance Company from a start-up 10 years ago to its leadership role in the Canadian construction surety marketplace may surprise individuals who associate surety and bonding as a small, conservative segment within old style multinational insurance corporations.
This is especially the case since surety is so highly leveraged that, unless the underwriter has a clear understanding of its clients, market, solid management, and client assessment rules, the default risk would scare off anyone but the most well capitalized businesses.
However, Trisura has proven that nimbleness and entrepreneurial values can combine quite well with solid internal business practices and financial backing from Brookfield Asset Management.
“We started up from scratch with nothing,” said Trisura president Mike George. “The business has gone very well. We’re pleased with the growth rate and profitability of the firm, and in the last five years, it’s been a maturing process.”
“We’ve obviously had to add processes and controls since we started,” he said. “It’s always one of the challenges – how you can maintain your growth rate, with an aggressive approach to doing business, while building a sound and sustainable business, and keeping your core values of being nimble and entrepreneurial.”
George said for the first five years, the new underwriter had to focus on finding new business – not an easy task because surety and insurance relationships, often conducted with clients through brokers, are rarely dislodged easily.
Trisura focused its efforts accordingly, building really good relationships with surety brokers across Canada, creating a responsive and service oriented model that allowed the brokers to serve their clients even more effectively, said Chris Sekine, Trisura’s senior vice president, surety.
“Numerous times Trisura has taken the extra time and effort to put together deals with us, whether structuring something a little differently or agreeing to hit the road at 6 a.m. for an early morning meeting with a client,” said broker Warren Griffiths, Firstbrook Cassie & Anderson Ltd. “It’s the little extra efforts that makes working with them so easy.” (See p. C9 for several brokers’ comments about Trisura’s service.)
The company backs up this service with regional offices in Toronto, Vancouver, Calgary, Montreal, Quebec City and Halifax. Trisura’s advantage: Unlike multinational companies where surety is a small part of the underwriting business, here it encompasses 40 per cent of Trisura’s overall business volume – and feet on the ground in different regions allows the underwriter to have a solid understanding of regional market conditions, risks and opportunities.
Trisura has backed these local relationships with national support, including the hiring of Victor Bandiera as vice president of construction services. Bandiera, a qualified professional engineer, with a background in operating a family run construction company, can assess construction projects’ technical conditions and risk. Meanwhile lawyer Stuart Detsky, assistant vice president, surety and warranty claims, connects his extensive legal knowledge with practical understanding of the surety process.
With its growth, Trisura has been able to take on larger – and smaller – surety challenges.
At the large end, “we can handle projects in the couple hundred million dollar range,” Sekine said. “There’s a trend toward larger projects. We need to stay in lockstep. As our clients grow, we want to grow with them.”
At the other end, Trisura has developed systems that make it possible to economically deliver bid bonds and surety for smaller contractor sureties, often a challenge for any surety underwriter or broker because of the high administrative costs in relation to the tiny premium income.
Pina Mazzoli, Trisura’s vice president, commercial surety, said the company has invested in information technology, including the ability to update and manage its portal, allowing brokers to automate delivery of the low cost bonds under their own brand/identity. (Brokers can elect to enter the required information directly or provide a self-service model to their clients, and they have approval capacities within significant underwriting limits.)
The growth and ability to serve a diversity of contractors’ requirements means that Trisura can serve virtually all underwriting requirements. “The majority of the Canadian construction industry is built on privately owned regional contractors,” said Sekine. “We can handle the largest of regional contractors and accommodate the needs of the smallest.”
“As we’ve grown and built our balance sheet, we’ve positioned ourselves to serve the needs of even bigger contractors,” George said.
In the future, Trisura plans to continue its growth and the company sees much opportunity ahead.
“The new Liberal government has promised $125 billion in federal infrastructure spending over the next decade, in place of the previously planned $53 billion,” George said. “And the provinces have contributed as much or more. Ontario, Alberta, Quebec and BC have all committed to three or four times what the feds have committed in their areas… this is a massive amount of infrastructure spending over the next decade.
” Even with the additional spending, the nation’s infrastructure deficit remains daunting – in the hundreds of billions.
This projected massive increase in demand for construction services, especially those covered by surety bonds, has been tempered in recent years with Public/Private Partnerships (PPP), where consortiums are assembled from builders and financiers. Because these projects are self-funded, they often do not require conventional surety bonds, though could still benefit from performance surety coverage to ensure contract completion and compliance by sub-trades. In addition, the trend of bundling projects into larger mega projects has squeezed out many local contractors.
The squeeze on midsize contractors has been significant. Smaller contractors get by from job to job, and the largest contractors are able to bid and compete for the P3 work and the bundled projects. “The midsize guy has a decision,” George said. “Does he remain smaller or midsize, or does he start going upscale and chasing bigger work?”
Given these industry trends and the challenging economic times, Trisura can see the strain on the income statements of many middle tier contractors, who face increasing competition for a smaller number of projects. However, this seemingly difficult environment doesn’t scare the underwriter.
“We work with our clients through good times and bad times, and are not fleeting in terms of relationships.” George said. “We get information based on past experiences, and our knowledge and confidence in the contractor’s financial resources, and can provide additional surety commitments, based on the contractor’s business plan and our best assessment of where that contractor is going to be a couple of years from now.”
“Simply having a bad year doesn’t mean the contractor is in jeopardy of losing its business,” Sekine added. “The majority of our contractors have enough cushion in their balance sheets to weather the storm – and we work with them to make sure they don’t fall into jeopardy.”
This includes advising contractors about balance sheet structure such as matching long term assets with long term debt, rather than using operating lines of credit for capital expenditures; and keeping lines of credit available for its intended purpose, which is to help finance short term working capital needs. In addition, contractors should also evaluate matching capital expenditure obligations with revenues and cash flow. In other words, it may make more sense to rent The Ontario Construction equipment than to sign multi-year equipment financing loans, unless the contractor truly has the work booked to cover the asset value and debt repayment obligations.
“With our clients, we’ve done the assessment and we’re backing them,” he said. “That’s part of the hidden benefit of surety (to owners): The whole prequalification process and discussion and dialogue with the client when support is required.”
George said there’s a natural (and in the surety business, unusual) close relationship between Trisura, its brokers and clients. This is the world of entrepreneurship, where decision making is quick, and creativity and responsiveness are vital components of relationships and business success. As Trisura is 40 per cent management owned, the owners are on the ground, without massive corporate bureaucracy, and with competent and creative local representatives in communities near brokers and clients.
“We talk to contractors on a different level than our competitors,” Sekine said. “We have a vested interest in everybody’s business growing together, and the dialogue with our customers (brokers and contractors alike) is about how we can help them be more successful.” “
As entrepreneurs ourselves, we embrace risk every single day,” he said. “When contractors are looking to grow, we approach it from our own experience of growing a business. It enables us to empathize, understanding and discussing vital business decisions faced by other entrepreneurs.”
Of course, the surety underwriter still needs to take a responsible approach to risk. The premium leverage, often as low as one per cent of the project at risk means it is vital to be prudent.
However, at Trisura, “the buck stops with us in terms of decision making,” George said. “We don’t defer decisions to head offices in the U.S. or Europe. We make our decisions here. We understand Canada. We pride ourselves in trying to find solutions. We will sit down and find solutions.”
“We find ways to say ‘yes.’ Large organizations become institutionalized and the easy route is to say ‘no’ – but that is not how Trisura was established and that’s not in our best interest.”
In the short term, Trisura believes contractors need to be “really diligent in getting paid on time” and avoid the risk of unpaid change orders. They should make sure their banking relationships are strong and they should minimize their reliance on the banks. Cash is always king. “Contractors usually go broke because they run out of available cash,” George said.
This has created stresses in some markets, such as Alberta, but Trisura doesn’t see major problems because, as noted earlier, the contractors working with the company have solid business structures and capacities, and can adapt to the changing environment.
The future looks bright. “In the long term, we’re bullish,” he said. “In terms of the population and infrastructure spending, Canada is pretty well positioned on a global basis. We’re bullish over the next 15 to 20 years in terms of construction.”
“We’re engineering the business to the future to support what we see as a lot of construction growth over the next while,” George said.
“The economic cycle will change, and the contractors we work with will weather the short term challenges and we will grow together.”