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C O M M O N S E N S ESURETY SINCE 1933

2014 Annual Report for Merchants Bonding Company

(Mutual) & Merchants National Bonding, Inc.

Common Sense Surety Since 1933

Larry TaylorChairman of the Board& President

Bill Warner, Jr.Executive Secretary

1LETTER FROM LARRY & BILL

As we look back on 2014, we are proud to see that Merchants Bonding Company’s long-term strategic plans began to emerge. We have challenged the company officers to look into the future and envision what a much larger Merchants could be, and we took steps toward that future in 2014. It was a year of transformation at Merchants, setting the stage for our vision: to become a top ten surety in the United States.

The Contract and Commercial Underwriting Departments as well as Information Technology led the transformation of 2014. Josh Penwell completed his transition to vice president of contract surety, Jason Dettbarn was appointed regional vice president and Jim Holter was appointed vice president of commercial surety. The new underwriting leadership team reorganized our territories into regions. This structure will prepare us for growth with our agent partners and career advancement for our associates.

We could not talk about changes in 2014 without recognizing Mike Foster for 16 years of growth and success as the executive vice president of underwriting. On May 5, 2014 Mike transitioned from that position to lead Merchant’s new regional office in Kansas City. Mike continues to be a company leader and mentor, and his first eight months in Kansas City have laid the ground work for growth in that region.

BUILDING FOR THE FUTURELooking Back at 2014

The surety industry is becoming increasingly competitive and much of that competition centers on information technology and data analytics. In early 2014, Brad Rasmussen joined Merchants as the chief information officer. The strides we made in 2014 and our ongoing high-tech advancements are exciting changes and opportunities for our company.

To go along with our 21st century technology, in September of 2014 we announced the construction of our new 21st century building. Merchants Bonding Company is moving its corporate offices to a new, larger facility with an open floor plan allowing for growth and collaboration between teams and departments. We broke ground in October and plan to be in our new building in the fall of 2015.

Each year, A.M. Best honors companies in its Best’s Review magazine for standing the test of time. Merchants has been honored for achieving an “A” excellent rating or better for 56 consecutive years. With the support of our agent partners, we intend to continue to be as highly rated as possible. A.M. Best as well as the Surety & Fidelity Association of America have ranked Merchants the 15th largest surety. Our success would not be possible without partners who are committed to growing profitably with us. We have exciting plans for controlled profitable growth as we advance on our goal of reaching the top ten in surety.

We thank all of Merchants’ clients, associates, and business partners for contributing to our success in 2014. Your support and dedication are important to us. We thank all of you for the business and the relationships and we look forward to the opportunities of 2015 and building for the future.

FINANCIAL HIGHLIGHTSCombined Merchants Bonding Company (Mutual) & Merchants National Bonding, Inc. for the year end December 31, 2014

Loss Ratio & SFAA Ranking

Merchants

Industry (SFAA)

SFAA Ranking

Direct Premium

$63,995,503

$69,787,287

$78,130,023

$82,180,097

$84,046,039

+ 6.5%

+ 9.1%

+ 12.0%

+ 5.2%

+ 2.3% 5-year growth

Surplus

$65,491,148

$70,029,140

$81,119,589

$90,089,091

$96,472,567

+ 9.0%

+ 7.0%

+ 15.8%

+ 11.1%

+ 7.1% 5-year growth

Q3 Results

2ANNUAL REPORT 2014-2015

3BUSINESS HIGHLIGHTS

MERCHANTS LEADERSHIP

JOSH PENWELLVice PresidentContract UnderwritingDes Moines, Iowa

BRAD RASMUSSENChief Information Officer Information TechnologyDes Moines, Iowa

STEVE DORENKAMPVice President & Claims ManagerDes Moines, Iowa

DON BLUMChief Financial Officer& TreasurerDes Moines, Iowa

THERESE WIELAGEVice PresidentMarketingDes Moines, Iowa

LARRY TAYLORChairman of the Board& PresidentDes Moines, Iowa

BILL WARNER, JR.Executive SecretaryDes Moines, Iowa

Executive Committee

JASON DETTBARNRegional Vice PresidentContract UnderwritingDes Moines, Iowa

ED BENNETTAssistant Vice PresidentContract UnderwritingSeattle Branch ManagerSeattle, Washington

Contract Underwriting

4ANNUAL REPORT 2014-2015

JIM HOLTERVice PresidentCommercial UnderwritingDes Moines, Iowa

AUDREY WILLIAMSAssistant Vice PresidentAustin CommercialSurety ManagerAustin, Texas

AARON RASCHKEAssistant Vice PresidentContract UnderwritingDes Moines, Iowa

DOUG SCHNICKERAssistant Vice PresidentContract UnderwritingDes Moines, Iowa

KEENAN LEHMANNAssistant Vice PresidentContract UnderwritingSoutheast Branch ManagerAustin, Texas

MIKE FOSTERAssistant Vice PresidentContract UnderwritingKansas City Branch ManagerKansas City, Kansas

KIRK RATHJENAssistant Vice PresidentContract UnderwritingDes Moines, Iowa

ED SIPFLEAssistant Vice PresidentContract UnderwritingDes Moines, Iowa

Commercial Underwriting

CONNIE ISRAELAssistant Vice PresidentCompliance OfficerDes Moines, Iowa

JAY STUKERJURGENAssistant Vice PresidentInformation TechnologyDes Moines, Iowa

KRIS JENSENAssistant Vice PresidentHuman Resources DirectorDes Moines, Iowa

Support Services

5BUSINESS HIGHLIGHTS

BUSINESS HIGHLIGHTS 2014

JOSH PENWELL | VICE PRESIDENT CONTRACT UNDERWRITING

Contract Underwriting

A big highlight in 2014 was reorganizing the Contract Underwriting Department into a regional structure prepared for growth. The new structure allows Merchants to offer better service to our agents nationwide and helps to create advancement opportunities for our associates. We created the position of regional vice president and added two regional teams with the Kansas City office and the new southeast region – giving us a total of eight regional underwriting teams including four branch offices.

We continued to attract experienced surety underwriters as well as new trainees and assistants, adding nine new associates to the department in 2014. We expanded and enhanced our capabilities from our large bonds program to RAP (Rapid Access Program) our small bonds facility.

Much of 2014 was spent strategically planning for five years ahead and beyond in order to shape the next era for contract underwriting and its contributions to Merchants’ success.

Josh Penwell joined Merchants in 1996 in the Austin office. In 2013, he moved to Des Moines to serve as the Vice President of Contract Underwriting.

Jim Holter joined Merchants in 2004 to lead Commercial Underwriting. In 2013, he became the Vice President of Commercial Surety.

JIM HOLTER | VICE PRESIDENTCOMMERCIAL UNDERWRITING

Commercial Underwriting

The Commercial Department enjoyed a busy and successful 2014. License and permit premium grew 9.1 percent; probate and court-related premium increased 13 percent; and our Theft Guard fidelity product saw 25 percent growth. Three new underwriting positions were created in 2014 to help with existing business and begin our plans for expansion.

Commercial worked closely with the Information Technology (IT) Department on a new pricing feature for the website, which provides an instant quote for most bonds. We also took a leading role in trying, testing and implementing Salesforce.com as the company’s new customer relationship management system and began work to implement a new technology that will lead to “just in time” appointments for agencies and provide cost savings in appointment fees.

6ANNUAL REPORT 2014-2015

BRAD RASMUSSEM | CHIEF INFORMATION OFFICER

Information Technology

The Information Technology Department (IT) implemented new communication, collaboration and technology-delivery practices which led to much higher productivity, quality, and trust in the technology area. A new bond rating engine, quicker delivery of pricing information to customers, and a new customer relationship management system are just a few of the large 2014 projects for IT.

Other highlights include ongoing progress to replace outdated technology, introduce a new tech support system with cloud-based ticketing for internal and external customers, and conduct a third party security scan with remediation of the issues identified.

IT added four new associates in 2014, including Merchants’ new chief information officer and a data analyst to focus on analytics and reporting. IT also led the way on collaborative physical workspace by removing the cubical furniture and replacing it with open and more health-conscious workstations.

Brad Rasmussem joined Merchants in 2014 as the Chief Information Officer.

THERESE WIELAGE | VICE PRESIDENT MARKETING

Marketing

The Marketing Department’s 2014 kicked off with a focus on digital technology, visible in the launch of a new public website with responsive design that makes Merchants’ “virtual front doors” work well on any device. Marketing also added digital versions and video elements to publications, events and promotions in 2014. A new ad campaign which told the industry that “one surety stands out” received congratulations from agents and contractors alike.

The Leaderboard program for contract agents wrapped up its five-year rewards qualifying period in 2014 with 30 percent of agencies within the program qualifying for the top-tier levels as Drivers, Champions and Masters. Strategic planning for Leaderboard 2.0 was completed and plans were announced.

The Pacesetters Program for commercial agents also had a successful year with a 13 percent increase from the previous year in agencies reaching the Silver, Gold and Platinum levels.

The Marketing Department led the successful planning and execution of a record-breaking Bill Warner Sr. Memorial Charity Golf Classic.

Therese Wielage joined Merchants in 2008 as the Vice President of Marketing.

7MERCHANTS LEADERS

BUSINESS HIGHLIGHTS 2014

STEVE DORENKAMP | VICE PRESIDENT CLAIMS MANAGER

Claims

The Claims Department had a favorable 2014 as contract claims continued to adjust to pre-recession levels. The total number of contract claims dropped nearly 25 percent from 2013, and Merchants’ loss ratio declined in conjunction with strong underwriting results. The level of commercial claims increased this year, proportionate to the increase in commercial surety premium. The number of notary claims remained consistent with past production levels.

As the construction industry continues to rebound from the recession, 2014 has provided Merchants with opportunities to write larger accounts and increase work programs, which often results in more complex claims. The Claims Department has responded well to the increasing complexity of claims and has worked effectively to minimize losses.

New members of the Claims Department made significant strides in their training in 2014, which will enable the department to efficiently handle all types of claims as Merchants Bonding Company™ continues to grow.

Steve Dorenkamp joined Merchants in 1995 in the Contract Department. In 2012, he was named Vice President of Claims/Claims Manager.

Don Blum joined Merchants in 2010 as the CFO and Treasurer.

DON BLUM | CHIEF FINANCIAL OFFICER & TREASURER

Accounting, Compliance & Human Resources

The Accounting Department’s 2014 featured the implementation of a new budgeting process that allows better planning and control of operating expenses. As two 40+-year associates retired, we navigated through procedures and enhanced processes, ultimately merging two positions into one. Accounting was also instrumental in the site search/selection, partner selection, and financial due diligence culminating with the start of construction for Merchants’ new home office. The Compliance Department rolled out the General Policies & Procedures Manual, which centralized access to important company information. Compliance partnered with IT in redesigning and testing both the commercial and contract bond rating engines. Following two years of foundational work, Human Resources (HR) introduced a company-wide compensation and performance management system in 2014. HR continued alignment with online recruiting modules, recruiting and on-boarding 26 new full time associates for Merchants’ offices, in addition to interns and part-time associates. HR also configured healthcare eligibility for Patient Protection Affordable Care Act reporting requirements.

2014 YEAR IN REVIEW

MERCHANTS BOARD OF DIRECTORS

COMPANY VIDEO

From the opening of a new office in Kansas City to the groundbreaking for our new corporate headquarters in West Des Moines, 2014 was an exciting year at Merchants Bonding Company™. As we continue to grow our focus on digital technology, we hope you enjoy this video review of Merchants’ 2014.

BONUS: You can also watch some of the other videos of 2014 on our MBC-TV YouTube channel.

8ANNUAL REPORT 2014-2015

Larry TaylorChairman of the Board & President

Bill Warner, Jr. Executive Secretary

Melissa WarnerDirector

Lloyd TaylorDirector

Jan TaylorDirector

Jeff TaylorDirector

Bill TaylorDirector

Don KempDirector

Bill BurkeDirector

MERCHANTS’ NEW HOMETimeline of New Corporate Headquarters

SEPTEMBER 2014Announcement of the new corporate headquarters in West Des Moines.

SEPT DECDECEMBER 2014Driveway Marked & Groundwork Laid

9NEW BUILDING

OCTOBER 2014GroundbreakingOCT

JANUARY 2015Steel is ErectedJAN

10ANNUAL REPORT 2014-2015

APRIL 2015Interior Work BeginsAPR

FALL 2015Construction CompleteJUL

AUGFALL 2015Moving Day

12ANNUAL REPORT 2014-2015

11MERCHANTS CULTURE