OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has revised the Long-Term Issuer Credit Rating (Long-Term ICR) outlook to positive from stable and affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term ICR of “a” (Excellent) of Merchants Bonding Company (Mutual) and its affiliate, Merchants National Bonding, Inc. The outlook of the FSR is stable. Both companies are collectively known as Merchants Bonding Co (Mutual) Group or the group and are domiciled in West Des Moines, IA.
These Credit Ratings (ratings) reflect Merchants Bonding’s balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.
The revised Long-Term ICR outlook to positive reflects Merchants Bonding’s long history of profitable operating performance, largely driven by solid underwriting results and growing investment earnings. The group’s underwriting performance is impacted by an elevated underwriting expense, reflecting the higher commissions that are strategically used to obtain the risks that the company prefers to underwrite and to a lesser extent, investment in innovation and technology infrastructure. Merchants Bonding focuses on writing surety accounts with tangible net worth, maintaining adequate working capital with prompt pay records and has a history of profitability. The favorable underwriting results are largely due to management’s strategic focus on profitability initiatives such as agency management and premium growth initiatives that have resulted in larger contract bonds in recent years, as well as utilizing tools to estimate loss ratios for products when determining new rates. AM Best expects the group’s prospective underwriting performance to remain profitable as volatility of key metrics is anticipated to remain low.
Merchants Bonding’s balance sheet strength assessment of strongest reflects its risk-adjusted capitalization at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). Additional factors are the group’s consistent surplus growth over the years, largely driven by profitable underwriting results and supplemented by consistent investment earnings, a high-quality, well-diversified investment portfolio weighted toward fixed-income securities, and stable loss reserving trends as reflected by consistently favorable loss reserve developments in recent years, which are partially offset by above-average equity leverage relative to composite norms.
Merchants Bonding’s neutral business profile is reflective of its geographic diversification with licenses in 50 states and the District of Colombia and product concentration with approximately 92% of premium writings concentrated in the surety line of business, partially offset by management’s expertise in the surety industry and strong agency relationships. In addition, the company ranks among the top national writers, according to The Surety & Fidelity Association of America. Furthermore, agency management and premium growth initiatives have resulted in larger contract bonds in recent years and products are distributed exclusively through a network of independent agents.
Merchants Bonding’s appropriate ERM is demonstrated through a formal risk management process, which provides assurances that the organization’s key compliance, financial, strategic and operational risks are addressed in meeting organizational objectives. Additionally, the company’s comprehensive reinsurance program is diversified and consists of a blend of excess of loss and quota share agreements with a reinsurance panel that is comprised of high quality reinsurers. Furthermore, a formal enterprise risk governance team has been established and is responsible for putting in place policies, procedures and oversight for the ERM function. The board is actively engaged and committed to the group’s ERM program.
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