October 27, 2020 – Minutes

Minutes: October 27, 2020

Location

Conducted Via Videoconference
October 27, 2020
1:00-5:00 p.m.

Board Members Present

Terri Moran, Chair, Audit Chair
Paul Hanson Partners

Janet Beaver, Vice Chair, Stamping Chair
Tokio Marine-HCC

Rich Gobler, Secretary/Treasurer
Burns & Wilcox

Robert Gilbert, Past Chair
Markel West Insurance Services

Tim Chaix, Member, Education and Compliance Chair
R.E. Chaix and Associates

Jim Faley, Member
Vela Insurance Services

Hank Haldeman, Member, Legislative Chair
Worldwide Facilities, LLC

Jason Howard, Member, Stamping Member
CRC Group

Pam Quilici, Member, Next Generation Chair
Crouse & Associates of N. California

Charlie Rosson, Member
R-T Specialty, LLC

Kathy Schroeder, Member
Sierra Specialty Insurance Services

Terrence Villar, Member
AmWINS

John Washington, Member
Arch Insurance Group

Jerry Sullivan, Member Emeritus
GJS Re

Others Present

Susan Atkins, Admitted Market Liaison Chair
M.J. Hall & Company

Jon Larson, Special Advisory Chair
ACE Westchester

Yusuf Mayet, Technology Chair
Worldwide Facilities LLC

Benjamin McKay, CEO and Executive Director
Surplus Line Association of CA

Joy Erven, COO and Director
Surplus Line Association of CA

David Kodama, EVP
Surplus Line Association of CA

Michael Caturegli, SVP, Data Analysis & Technology
Surplus Line Association of CA

Jody Black, VP, Data Analysis
Surplus Line Association of CA

Cliston Brown, VP, Public Affairs
Surplus Line Association of CA

Vani Ganti, VP, Technology
Surplus Line Association of CA

James Greene, VP, Digital Communications
Surplus Line Association of CA

Glenn Leung, VP, Financial Analysis
Surplus Line Association of CA

Ivan Morse, Controller
Surplus Line Association of CA

All votes or decisions taken by the committee during the meeting are highlighted in yellow for easy reference.

Call to Order and Opening Business

Terri Moran opened the meeting at 1:03 p.m., and Benjamin McKay advised participants of their obligations under the SLA Antitrust Resolution. Cliston Brown called the roll and advised a quorum was present.

Rich Gobler, secretary-treasurer, certified that the minutes of the February 2020 board meeting were correct. Hank Haldeman moved to accept the minutes as presented, Janet Beaver seconded, and the motion passed.

Ms. Moran noted that all board members had agreed to seek reelection by the members in 2021, requiring no further action by the Nominating Committee at this time.

Report of the Chair

Ms. Moran discussed several topics, including:

  • The SLA has paid off its construction loan two years early and has made huge progress on retiring its pension, with that liability likely to be paid off three years ahead of schedule, in 2021.
  • Internships are not likely to happen in 2021 due to the COVID-19 pandemic, but the SLA has done an impressive job in pivoting to online continuing education courses, for which Jo Ann Del Gatto and the Education and Compliance Department deserve credit.
  • The SLA leadership team has made employee engagement a top priority during the work-from-home environment created by the pandemic, with turnover being almost nonexistent since March.
  • The SLA members are far and wide, and needs of the membership vary dramatically. SLA staff are looking at customer segmentation, and the work on this issue is setting the association up for years to come.
  • The annual meeting will take place in a single online session in February, and the SLA is attempting to get an economist with a strong understanding of insurance as the keynote speaker.

CEO Report

Mr. McKay opened with the concept of “Year Zero,” which means a fresh start, a new beginning. He quoted Henry Ford, who said: “If I asked my customers what they wanted, they would have said faster horses.” As a result, the SLA has been trying to give members what the SLA thought they wanted or might find useful. The organization has made strides in fixing its systems, such as accepting electronic payments and creating other efficiencies. Every small change has a ripple effect throughout the organization. The organization also reorganized. Data Analysis had 36 people all reporting to the same vice president; a new structure was put into place. The SLA was lacking public affairs and digital communications professionals and created those new departments; brought the right people onto the bus and built a senior team. The SLA implemented management training throughout 2020 for that senior team to build a common understanding and team-building.

Now it’s time to change the focus, rather than just shoring up the ship, moving more toward a membership organization.

Mr. McKay reviewed some vital statistics and the organizational chart.

  • Only three people have left the organization since March, two being planned retirements and one being an employee who wanted to change his career trajectory.
  • The company is 63% millennials, 29% Generation X, 7% Boomers.
  • About 64% of employees are hourly, 36% exempt.
  • The SLA is 25% white, 75% non-white.
  • The bottom line is that the SLA is a very young, ethnically diverse, hourly paid organization.

Mr. McKay also reviewed a number of recent hires and internal moves.

  • Joy Erven has taken on the additional roles of chief culture officer and membership officer; the SLA eventually is likely to bring in a high-level membership professional
  • Ivan Morse has been hired as controller.
  • Michael Caturegli was elevated to an upper management position above Data Analysis and Technology.
  • Pragya Gupta was hired as organization-wide desktop support.
  • David Kodama was hired as executive vice president.
  • Glenn Leung took over as head of Financial Analysis, replacing Susan Bryant, who retired.
  • Jo Ann Del Gatto was hired to replace Pat McAuley, who retired as head of Education and Compliance.
  • Contractors James Greene and Barbara Trumbly were hired as heads of Digital Communications and Human Resources, respectively.
  • Donna Uboldi was hired as assistant vice president of Financial Analysis.
  • Jody Black was promoted to head of Data Analysis, and Vani Ganti was promoted to head of Technology.

Mr. McKay then went into depth on the SLA’s eight-month membership research project, interviewing 102 members across the country. Half of the SLA’s membership live in California, and the other half lives in 48 other states, with only Wyoming lacking an SLA member.

  • The SLA asked members to rate the association on a scale of 1 to 10, with 7.7 being the average. The largest members provided the lowest rankings. Brokers from out of state and in state rated the SLA roughly equally. Some members believe that the SLA is part of the CDI and in charge of tax filings, which are not correct beliefs.
  • Brokers have a universal approach to processing policies, a centralized process with a broker support team, providing a common area of focus for the SLA.
  • The SLA also learned that 80% of its members interviewed view the SL-2 form as a major pain point.
  • Universally, the SLA’s data analysts got high marks, but brokers and filers expressed concerns about consistency from one analyst to another. The level of scrutiny also varies from policy to policy.
  • A lot of members use a third-party administrator for their filings, such as ResourcePro or a tech platform. The SLA will need to interface more with these third parties going forward.
  • The lack of uniformity nationally is considered a huge issue. One possibility is to get other states to approve the SLA’s CE courses.
    • Jo Ann Del Gatto is reaching out to other SLAs on this.
    • The SLA has also learned that it is competing with other providers of CE credits.
  • On tax filings, the SLA could work with the California Department of Insurance (CDI) as an ombudsman or seek legislation to be helpful to members.
  • Most members, almost universally, felt that one of the SLA’s key roles is advocacy. The SLA has created a Public Affairs Department. Cliston Brown, who has considerable skills in this arena, has been moved into this role.
  • Most members don’t know how to navigate the CDI and are looking to the SLA to play an ombudsman’s role.

Additionally, Mr. McKay outlined the SLA’s three key aspirational goals:

  • 100% compliance
  • Member Value Program (MVP)—how does the SLA bring value to all of its members?
  • Employee health and wellness
  • Potential strategies include:
    • Reduce the pain points by updating the SL-2 form.
    • Create filing teams in Data Analysis; the same team will handle a company’s filings all the time, helping to improve consistency.
    • Establish a Key Filer Influencer Program; try to engage this group and work with them, build relationships and rapport.
      • The most important pillars in building trust are relationships, knowledge and consistency.
      • The SLA needs to build its soft power to be a true advisory organization.
    • Make it easier for filers to connect and get information.
    • Provide tools to make brokers’ jobs easier; this is a natural fit because the SLA has a lot of relationships with this group.
    • Increase broker engagement with the SLA.
      • Better tools.
      • Better content.
      • Better engagement.
    • The SLA should do more to engage C-suite executives and will seek the board’s advice on what to do in this area.
      • Create communities of interest among CFOs.
      • Better understand the C-suite executives.

Review of 2020

Ivan Morse reviewed the 2020 budget-to-actuals and updated the board on the pension. For the first 10 months of the fiscal year, the SLA brought in $20.7 million in stamping fee, and it is clear that revenues will exceed the budget for the year. Costs are down, partly due to the COVID-19 pandemic reducing significantly reducing expenditures in line items such as travel. Expenditures are expected to be $19.2 million, compared to a budget of $19.8 million. The bottom line is that revenue is significantly up, and costs are significantly down.

Regarding the pension, Mr. Morse noted that it started in 1966 and was frozen in 2010. The SLA has wanted to retire that liability for 10 years. The fewer people in the fund, the smaller the cost to offload the pension to an outside organization, such as Prudential.

Among pension members, 12 are active employees, 22 are retirees, and the other approximately 50 are not retired but no longer at the SLA. The SLA reached out to that group to encourage them to take a payout. In all, 35 of those individuals, representing 84% of that cost pool, took a payout and are now off the books. The pension fund is now going to be easier to sell off. The next step involves contacting the 15 non-responders (many of whom need to be tracked down at new addresses) and waiting on responses from them. In 2021, the SLA will work on active employees and current retirees. Mr. Morse’s best estimate of when the SLA can divest itself of the pension is late summer or early fall 2021.

Ms. Moran said part of the reason the board raised the stamping fee was to give the SLA the ability to pay off the pension.

Joy Erven said the SLA had undergone its triennial examination, conducted by Macias Consulting Group, covering 2016-18; the report is with the CDI and is awaiting final approval. For this exam period, the SLA had only one recommendation for improvement from Macias: having a project manager to work with its system vendor, Infinity, to manage that relationship.

Michael Caturegli reported on the market outlook going forward. There have been some shifts in trends, specifically affected by COVID-19, that are either starting to improve or continuing to recede. Going back previously to 2014, there had been consistent growth in the 5% to 8% range. In 2019, the SLA saw a bump, with 11.5% growth, and a 23.2% increase is expected in 2020, which is a substantial anomaly. Forecast models did see 2020 as being an anomaly and tend to re-normalize future growth to 8% or 9%. About $24.5 million is anticipated in registered stamping fees for FY 2020. Average premium is expected to flatten out in the next two years and gradually decrease, possibly heralding a softening market, as contrasted with the hard market in recent years.

Stamping Committee Report

Janet Beaver reported that the Stamping Committee had projected an 8% growth rate in 2021. Factors in this decision included:

  • Final growth for Fiscal Year 2020 expected to come in at 23%.
  • Overall rate hardening
  • Reinsurance contraction
  • Continuation of pandemic effects/potential recession/change in consumer risk behaviors
  • Insurer participation to fill tower of limits
  • Wildfire activity/subsequent risk of mudslides/earth movement
  • Social inflation

Mr. Caturegli said he expected, based on projections, $11.7 billion in received premiums in 2021, with approximately 880,000 transactions, representing a 7% increase.

Mr. Morse reviewed the proposed Fiscal Year 2021 budget. In framing the budget, there were two primary parameters or assumptions: 1) keep the 2021 budget as close to the 2020 budget as possible; 2) continuation of COVID-19. The proposed budget comes to $20,003,229, an increase of only $4,998 over the 2020 budget.

Mr. McKay referenced the SLA’s nearly $9 million in board-designated assets, but noted that approximately $3 million of that included items like desks, computers. In reality, the cash number is at approximately $6 million. Another $3 million in cash is required to remain in compliance with the board’s directives for maintaining certain levels of funding in its contingency funds. Currently, the SLA is in the lag period between the start of a recession and when the surplus lines market begins to feel the effects, so now is the time to put away funding. Ms. Beaver asked what other SLAs are putting away. Mr. McKay reported that Texas is at $21 million, Florida is at $39 million, and New York is at $35 million, so the California SLA is well behind the other large SLAs in this regard.

Ms. Moran then recommended a motion to approve $11.7 billion as the Fiscal Year 2021 premium forecast, $20,003,229 as the Fiscal Year 2021 SLA budget, 8% premium growth, and no change in the stamping fee, to remain at 0.25%.

Charlie Rosson moved to accept Ms. Beaver’s recommendation, Hank Haldeman seconded, and the motion carried.

401k Discretionary Contribution

Mr. Morse gave an overview of the history of the association’s 401(k) discretionary contribution to employees and the financial impact of the board’s decision to award a contribution within a range of 1%-5%. After discussion in closed session, Pam Quilici moved to allocate a 3% discretionary contribution to all SLA employees’ 401(k) funds, and also that Mr. McKay should form a committee to look at overall compensation, and the SLA should put future allocations into an accrual bonus account. Ms. Beaver seconded, and the motion carried.

Culture Report

Ms. Erven gave an overview of what corporate culture is and then discussed some of the specific initiatives of the SLA in this area. The common elements are: vision, practices, people, narrative, and place. The SLA is fortunate to have strong directives from the CDI and its board and committee members to hone its vision. On narrative, she said Mr. McKay has pushed to provide consistent messaging. On people, the SLA has on-boarded a lot of quality staff and challenged existing staff by transforming into a learning organization, and has moved the right people into the right roles. Regarding place, it is harder to define place in the time of COVID. The SLA was fortunate that the Data Analysis Department was on a rotation for remote work. Michael Caturegli and his staff had the SLA up and running immediately after closing the offices due to the pandemic. Creating a great place to work requires resources. One of the main goals for 2021 is to focus on SLA health and wellness. A small focus group will facilitate communication move in both directions. The SLA will report back to the board on programs that it launches.

Education and Compliance Committee Report

Tim Chaix delivered the following report:

  • Thanked Ms. Del Gatto and staff for moving the in-person continuing education (CE) classes to webinars.
  • CE program is growing significantly in 2020. Webinars are gaining attendees from out of state, and they will continue next year even if in-person classes are allowed again.
  • The committee received feedback on some of the courses, and Mr. Chaix will work with staff on this.
  • The membership outreach program involving Ms. Erven and Caroline Gilbert are doing well so far.

Legislative Report

Mr. Brown delivered the following report:

  • The SLA achieved two important legislative victories in 2020:
    • Secured an amendment to Assembly Bill 3012, enabling surplus line writers to write homeowners’ policies being offloaded by the FAIR Plan, after the initial draft of the legislation excluded surplus lines.
      • Mr. Brown worked with legislative staff and the executive director of the FAIR Plan to find a solution.
      • Surplus lines brokers can now place such business as long as the admitted market gets the first opportunity to write it and passes on it.
    • Helped block Assembly Bill 1552, which effectively would have forced insurers to pay COVID-19-related claims that had been specifically excluded within numerous business interruption policies.
      • Mr. Brown worked with legislative staff, and Mr. McKay wrote a letter to the chair of the Senate Insurance Committee in opposition to the bill.
      • The bill’s author withdrew the bill before it could come before the committee for consideration, but may revise and reintroduce it in 2021.
      • The SLA will continue to watch this issue closely and respond as needed.
  • The SLA is closely following Proposition 22, which would allow key insureds such as Uber and Lyft to continue classifying drivers as contractors if successful.
  • The California Department of Insurance plans to hold an Export List hearing in early December; restoring Difference-in-Condition/Stand-Alone Earthquake coverage of less than $10 million to the Export List appears to be an uphill battle.

Mr. Haldeman added that discussions continue at the federal level regarding a potential public/private partnership on pandemic/virus coverage. He advised that nothing new will happen in Washington, D.C., on this issue prior to the seating of a new Congress in January, 2021.

Financial Analysis Department Report

David Kodama reported that analysts are diligently watching the impacts of the pandemic on LASLI-listed companies. Premium registered this year through September was $6.3 billion for LASLI companies and $2.2 billion for non-LASLI companies, increasing by 8.6% and 11.4%, respectively. Total number of LASLI companies stands at 127, with no new companies added in the first nine months of 2020. However, various companies are in various stages of the application process.

The SLA does monitor mergers and acquisitions activity, and is now asking Financial Analysis staff to be mindful about the broader industry trends that may be impacting that activity. COVID-19 dramatically decreased the number of deals in 2020. M&A activity is expected to recover, but the recovery may be slower than expected. Expectations for 2021 are that record low interest rates will attract new investors into the insurance market.

Old Business

Ms. Moran said the board will defer discussion of five-year term limits for non-leadership members of the board to the next meeting.

Adjournment

All business being concluded, Ms. Moran adjourned the meeting at 4:50 p.m.