Q&A with Todd Loehnert
A 24-year industry veteran, Todd Loehnert is currently serving as president of the National Association of Surety Bond Producers, which provides education and advocacy for more than 5,000 surety agents and brokers across the country. The association was founded in 1942 and has its national headquarters in Washington, D.C.
Loehnert, of Louisville, Kentucky, is Senior Vice President, Bond Manager and Co-chair of the National Surety Practice Group of Wells Fargo Insurance Services, the fifth-largest insurance brokerage firm in the world and largest bank-affiliated insurance brokerage firm in the U.S.
Loehnert spoke with SuretyBonds.com this summer about the state of the surety industry, legislative initiatives on the horizon and how technology will help reshape the surety industry.
Q: The past few years have been profitable for the surety industry. What's happening today, given the state of the U.S. economy?
A: The surety industry itself sees that this will be a profitable year, although most surety companies believe that their premium growth will be a negative premium growth. This is the first time in 37 years that Travelers, the big hog at the trough, that they have a negative growth budget. I don't know of a carrier that's up as far as written premiums. You're kind of just hunkering down if you're a contractor, hopefully you can at least build up some cash and be in a position where you can wait this thing out. It will turn at some point - could be a year, six months, year and a half. Surety default is going to increase dramatically. We're seeing a lot of small claims. Small claims historically lead to big claims.
Q: Has the recently passed federal stimulus package helped thus far?
A: The money is starting to come out, although this has been a little slow. We really are seeing it in the highways departments - funding and projects actually out. A lot of people are thinking it's an unrealistic bubble. Everybody is incredibly scared of what's going to happen in 2010.
Q: So is it going to get worse?
A: Even if you look at the surety industry itself, it's been very profitable. But if you look at reinsurance, how the industry insures itself, this year, although prices in reinsurance didn't go up very dramatically, coverage limits were decreased. Next year, reinsurance thinks the surety industry is going to have Armageddon - defaults, bankruptcies, lot of leverage, contractors and subcontractors that are very bank dependent. Next year they're anticipating huge jumps in reinsurance. It's scary just the number of bidders, the competition and the profit margins are being driven down through the floor. We're seeing contractors pick up work that's less than cost. They're trying to feed a machine. You've got to have cash flow.
Q: Are there any preventative measures that can be taken?
A: The surety industry and the carriers really need to have underwriting discipline. You have to have that discipline and make sure that you're not waving standards or you're not writing things that you shouldn't - you're not stretching on accounts that you shouldn't stretch on. That's what will mitigate the losses. Q; What sign(s) will indicate to you that a turnaround might be near?
A: To me, it's the housing market. Look at the housing market and lending, and if you start to see that moving, I think that's a big key to our economy changing. You've got to get money out there to go start lending. There's nothing in the private sector and homes aren't moving. Mortgages are back up to where they were nine months ago. As interest rates start to rise, we're all in big trouble.
Q; The NASBP supports a political action committee, SuretyPAC. How active has the surety lobby been in this recent legislative session?
A: They are consistently up on the Hill. They not only track federal bills but they track state legislation. We've got a pretty good grassroots system in states. They were so involved with the stimulus package. Initially there was no surety requirement. They were just going to waive it. Hardly anybody in the legislative knows what our product does. It gets confused with insurance.
Q; What other political and legislative issues will the NASBP focus on in the coming months?
A: We're seeing people trying to get around the bonding process. Those that aren't bondable are trying to find ways to get public work without posting bonds. It's happened for a while, but it tends to happen more in a tight economy where you have a hard surety market. In a hard surety market, a contractor with political ties, (they will) use as much of that politics as they can to get work. They will try and move public bid contracts into personal service contracts, which don't have stringent surety standards.
Q: How important has the Internet and technology become for the surety industry?
A: E-bidding has become really big in transportation departments. Indiana and Illinois DOTs only accept bids electronically. We have to have secure locations, bid verification so you're verifying the bond number and the surety did actually back the bond. There's been talk, which kind of fell through recently, of having a national bond repository. I think that's a good idea.
Q: Has it also become an educational tool?
A: It's an avenue and it's a responsibility, to me. You have a responsibility to educate people on your product, especially a product that is depending on the public sector and is legislated. Another one of our long term goals: Eastern Kentucky University has an insurance program. We have talked about putting a surety template on for them so you can take a class in surety. The ultimate goal would be to have a university that is willing to institute a degree in surety or at least some program that you can go and learn what we do. Most people have no clue what a surety bond is.