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Flexibility and commonsense underwriting

Merchants Bonding is a hit with agents writing surety

By Dennis H. Pillsbury

“Merchants Bonding looks for ways to put the account together rather than reasons to decline,” says Mike Mesenbrink of The Mahoney Group, an independent agency based in Phoenix, Arizona. Mike, who does only bonds, continues, “They use commonsense underwriting and Merchants is easy to work with. The turnaround time on submissions is fast, usually the same day. We’ve been working with Merchants for 18 years. It’s been a long and very prosperous partnership.”

Craig Hansen of the independent agency of Holmes Murphy & Associates, West Des Moines, Iowa, adds to the praise for Merchants. Craig, who like Mike does only bonds, likes the fact that “Merchants will look at each risk individually. Many companies ratio underwrite and use credit scores. I like Merchants’ flexibility. It also helps that the company is local and the largest writer of surety in Iowa. Our agency has been doing business with Merchants for at least 35 years.”

Merchants Bonding Co. (Mutual), Des Moines, “is unique in a few ways,” notes Larry Taylor, president. “Surety is our only business so we’re quite specialized, although we do write E&O with notary bonds.

“The company was formed as a mutual by E.H. Warner in 1933, our great grandfather,” Bill Warner, Jr., secretary, points out. “W.W. Warner, our grandfather, is still involved as chairman emeritus. The board is all family and they all take their responsibilities to policyholders very seriously. We also view our partnerships with independent agents as extremely important. Most of our business comes from independent agents, usually those who are members of the National Association of Surety Bond Producers (NASBP).”

Larry Taylor points out that this is one of the reasons the company is committed to technology. “We want to improve efficiencies externally and internally. Our Web site allows agents to process bonds over the Internet. We rolled it out at the end of 2004 after four years of development. Today, more than 40% of our commercial surety is being done over the Web site. Contract surety requires more communication with underwriters, so most of that business does not lend itself to automated processing. But we are taking steps to automate those processes that make sense. We’ve begun the process of keeping all files in the computer. We’re interviewing imaging software companies to determine which best fits our needs.”

The insurer also boasts an A rating from A.M. Best, an especially impressive accomplish-ment for a monoline company. One need only look at the company’s results to understand why.

Merchants is the 21st largest writer of surety in the country as of the end of 2005, according to data compiled by The Surety Association of America. The company wrote $42.5 million in direct written surety premiums in that year. Its loss ratio in that year was 7.1%, compared with an average for the industry of 39.8%. In 2004, Merchants had an 11.0% loss ratio, while the industry average was 60.6%. In 2003, Merchants was at 14.1%, while the industry reported 49.4%. In 2002, Merchants came in at 18.0%, and the industry was at 69.9%.

In the 2005 edition of Best’s Insurance Reports, the editors point out that “the rating reflects the group’s superior capitalization, solid operating earnings, and excellent balance sheet liquidity.… These positive rating factors are supported by Merchants’ historically profitable underwriting and operating results. It also takes into consideration the advantages of an experienced management team and well-established agency relationships.”

“We need to be excellent underwriters,” Larry says, noting that Merchants consistently outperforms the industry. “But we have to be,” he adds. “We cannot afford to have poor results in surety and make it up somewhere else like some of the multiline companies. We have to get it right because it’s the only thing we do.”

Merchants recently became admitted in all 50 states and the District of Columbia. (Massachusetts was the last one, but the company had received tentative approval for admission when this interview was conducted.) “This allows us to solicit some national programs,” Bill points out. “We already are writing accounts that need bonds in all states.

“While we primarily write small and medium-sized contractors,” he continues, “we also write some large accounts with lines of credit of $50 million or more. Seventy-five percent of our business is contract surety, with the balance in other commer-cial surety, including license and permit, court/judicial, public officials and other commercial surety lines.”

It is especially noteworthy that the company is able to maintain consistently excellent operating results while being praised by its agents for its flexibility in underwriting and willingness to entertain different types of accounts.

“We don’t underwrite from a formal set of guidelines,” Larry says. “We understand that every case is different and judge each one by its own merits. Our advantage comes from the fact that all we do is bonds, and we understand that this really is more of a financial arrangement than an insurance arrangement and we underwrite it that way. We give consideration to the personal backing of the indemnity behind the case, for example.

“We also underwrite from the point of view of net worth or equity and the character of the contractor rather than working capital, which is more commonly used in the industry. And it is not based just on the judgment of one underwriter. Our executive committee constantly reviews our underwriting decisions. The committee includes, in addition to Bill and me, our underwriting executive vice president, Mike Foster; our claims executive vice president, Stan McCormack; and our treasurer, Ed DeKock.”

In addition to the home office in Des Moines, which recently doubled in size to accommodate the company’s growth, Merchants also has an underwriting office in Austin, Texas, its second largest state after Iowa. The claims headquarters is in Scottsdale, Arizona, the next largest state after Texas, followed by California, Michigan and Florida.

Larry concludes, “Our results also are a testament to our agent partners. We have approximately 2,500 agents representing us, with a little more than 500 in each of our two largest states—Iowa and Texas. We’re very selective when we move into a new area, with most of our business coming from members of NASBP. But that doesn’t mean we consider only them. We will look at business from others as well. There’s no minimum account size and we are happy to work with agents that have infrequent bond needs.

“We also recognize that it is a two-way street. Our agents provide us with quality submissions and we reciprocate with a response within one day. We also offer fast and efficient claim service in the event of a loss.”

The results speak for themselves. Merchants has consistently produced an underwriting profit in an industry where that is a rarity, while receiving praise from agents for being easy to work with. The Mahoney Group’s Mike Mesenbrink sums it up when asked what he likes best about Merchants: “It’s all great.” *

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