Board of Directors Meeting: 10/21/2021

Location

Rancho Mirage, CA
October 21, 2021
9:00 a.m. – 12:00 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

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
USI Insurance Services

Kathy Schroeder, Member
Sierra Specialty Insurance Services

Terrence Villar, Member
AmWINS

John Washington, Member
Arch Insurance Group

Jerry Sullivan, Member Emeritus
GJS Re

Board Members Absent

Robert Gilbert, Past Chair
Markel West Insurance Services

Others Present

Jon Larson, Special Advisory Chair
ACE Westchester

Yusuf Mayet, Technology Chair
AmWINS

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

Joy Erven, COO, CCO and Director
Surplus Line Association of CA

Michael Caturegli, Executive Vice President
Surplus Line Association of CA

David Kodama, Jr., Executive Vice President
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

Jo Ann Del Gatto, VP, Education and Compliance
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

Barbara Trumbly, VP, Human Resources
Surplus Line Association of CA

Ivan Morse, Controller
Surplus Line Association of CA

Ed Derentz, Digital Communications Specialist
Surplus Line Association of CA

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

Opening Business and Report of the Chair

A quorum being present, Terri Moran called the meeting to order at 8:47 a.m., and Benjamin McKay advised participants of their obligations under the SLA Antitrust Resolution.

Rich Gobler, secretary-treasurer, certified that the minutes of the June board meeting were correct. Hank Haldeman moved to approve the minutes as presented, Kathy Schroeder seconded, and the motion carried without dissent.

Ms. Moran gave the chair’s report, as follows:

The SLA has shored up its fiscal ship and paid off all bad debts, and is now in a position to shore up its contingency funds.
The SLA’s focus on employee wellness during the COVID-19 pandemic has been very successful. Some of the successes include:
- Creation of the Wellness Committee
- Cohorts for different areas of interest
- 1-on-1 meetings for all levels
- Staff surveys
- Weekly communications by Human Resources, the Wellness Committee and the CEO
- Social activities and lunches
- Surprise gift boxes with themes—movie night, singles swag, parents
- Tuition and fitness reimbursement
- Proactive approach to outfitting remote workers
The SLA’s pivot to remote work enabled it to navigate the pandemic without missing a beat.
- The SLA continues not only to provide the services it has always provided, but to expand them. For example, its educational offerings are now available to anyone who has a computer and an internet connection.
- Additionally, the SLA continues to develop and offer more and more useful data to our members.
The SLA has also really focused in on developing its corporate culture, even with its employees scattered due to the pandemic. That culture is the end product of its core values: striving to be collaborative, motivated, and “knowledge-able.”
Ms. Moran closed her report by expressing pride in how the SLA staff has navigated the pandemic, and gratitude for the help that everyone gave her in her role as chair of the board. She then framed the day and asked Mr. McKay to give his CEO report.

CEO Report

Mr. McKay noted that this was the annual budget meeting, which is very important because it touches on almost everything the SLA does. The SLA is in great financial shape, is on budget, and is achieving its mission. This is the second year in a row the SLA has maintained the same budgetary level. More than a year ago, the future was uncertain. It was important to hold the line on expenses, pay off bad debts and get into position to weather any storms. The SLA raised the stamping fee because in its triennial examination, it was dinged for not having enough reserves. Upon getting the report, the California Department of Insurance (CDI) explicitly told the SLA it did not have enough in reserves. The SLA senior team continues to look at the future as uncertain, not knowing when everything will get back to normal regarding the pandemic. Not having everybody in the office is the new normal for the SLA and it is getting comfortable with the new paradigm. The big ask is a considerable budget increase of about 15 percent. The SLA has not been increasing expenses in order to be fiscally responsible. Now that it is flush, the staff wants to make investments in the company. Three things driving it are:

Keeping staff. The SLA is having a hard time keeping its best people, with companies like PlayStation and Citibank poaching its top performers. If a company does not reward high performers, only low performers will remain. The SLA will force-rank its employees, 1 through 120, and compensate based on that.
Growth. The SLA has procured millions of pieces of data; how does this data match up with federal data, economic trends? All of this data is going to be made available to the entire world, possibly helping members identify trends and become more profitable. The SLA is here to provide needed products and services, and it intends to make it available for free universally. It is important for the SLA to hire a data scientist and really commit to analytics. Data scientist, data architect and data engineer are the continuum of what is needed to do proper data analytics.
Membership. The SLA has more than 100 different computer systems and platforms it is operating. Ten years ago, the SLA was just processing policies and analyzing companies. Now it wants to turn into a member-focused association, fulfilling its purpose of providing value to the members. Last year, the SLA did a year-long survey of the membership, over 100 interviews of brokers, to find out who they are and what they do, and also to rate the SLA’s strengths and weaknesses. It categorized the brokers into three segments and horizontally dissected them by function. It’s a very different value proposition if you’re a CEO versus legal counsel versus a filer, etc. The SLA doesn’t have a lot of interaction with the C-suite at the top level. How does the SLA target products to all those segments? The SLA is endeavoring to create a customer management system in 2022. If someone goes to a meeting, or goes to certain parts of the SLA website, this information will go into their profile, tracking all their interactions, helping the SLA market its various products and services to the right people. The SLA also hopes to identify influencers. If it doesn’t know who its members are, it can’t lead them and foster a healthy, fair and competitive surplus lines marketplace, which is its mission. The ultimate goal is for the SLA to become a modern, credible leader. If the SLA is modern and credible, it can lead.

Hank Haldeman noted that a lot of this comes back to providing member benefits. The SLA is funded by a stamping fee, which is paid by consumers. A lot of the budget is for member benefits. The department notes that the SLA is under-reserved. Is there any comment on the idea that the stamping fee is a member benefit or a consumer benefit. Mr. McKay said the question was essentially whether the SLA was out of its box, and that the CDI has expressed no such concerns. The SLA has a Plan of Operation with the CDI, which outlines the delegated authority the CDI gives the SLA. On an annual basis, the SLA must write a report to the plan and tell the CDI everything it is doing to create a healthy, fair and competitive marketplace. If the SLA is fostering a healthy, fair and competitive marketplace, what it does is fair game. How can it have power or influence the marketplace if all it does is process policies? The SLA has much transparency with the department. If you’re not on the table, you’re on the menu.

Charlie Rosson noted he had been a member of another association. He said when times were good, there were no questions about budget or hiring, but when times were not, and they continued to expand, it raised questions. He expressed that the SLA did not appear to be in danger of going down this path. He said it is important to prepare for the inevitable time when things are tougher and keep in mind whether what the SLA is doing what is valuable and relevant. At some point, though, he said there would likely be a rollback or wing-clipping, and the SLA does not want to put itself in that position. Mr. McKay said the SLA is 100% sensitive to the realities of the marketplace and kept a flat budget in 2021 due to those sensitivities. The SLA plans to budget $9 million less than it expects to bring in, not letting the environment dictate the mission. The SLA endeavors to look around the corner and prepare for what’s coming up.

Jerry Sullivan said there is a very major problem in California that the SLA could get sucked into: wildfires. A lot of the actions the CDI seems to be taking are likely to suggest to the admitted market that they tighten things down a whole lot. The department could look to the surplus lines industry to pick up what the admitted market won’t, which it can’t do, and that’s going to be awkward. Mr. McKay said the department is going to various industries looking for solutions. The SLA doesn’t look at this as an insurance problem; it’s a forestry problem. Kathy Schroeder noted the department said it was an industry problem. Mr. McKay noted that there are 20 times as many trees per acre as there were 50 years ago.

Report of the Controller

Ivan Morse discussed the current state of the budget to actuals for Fiscal Year 2021. All the SLA’s bad debts have been removed, which is a great position to be in. The SLA asked for $20 million for its 2021 budget, and will come in about $20,000 below that number. This includes covering the pension costs. Salaries are over budget by about $380,000, due to the need to retain employees during a time of inflation. Revenues are expected to be $32.5 million, well over an anticipated $29.2 million. Travel and membership engagement are coming in below budget due to the lack of in-person events resulting from COVID. Other categories coming in below budget are professional services and software maintenance, due to greater reliance on internal resources.

Mr. Morse then discussed the annual discretionary lump-sum contribution, noting it will be the last time the board will vote on this topic. In December, a match will be awarded to employees based on what employees contribute to their 401(k). He recounted the history of the discretionary lump sum, awarded on an annually reducing basis to make up for the loss of the pension after 2010. It started at 9% and went down eventually to 3% for the last several years.

Mr. Gobler said that since this is the last year for the discretionary lump sum before going to a straight dollar-for-dollar match up to 6%, the SLA does not want to signal to its employees that they are not deserving of what they received in 2020, and suggested that the discretionary lump sum should not be lower than 3%.

Mr. Morse then discussed the proposed change to the investment strategy related to the SLA’s brokerage account. On a transactional basis, the SLA has a 2.5-year time limit. Every year, its broker-dealer has to sell this investment and reinvest. Because of this, the SLA is constantly buying and selling. During the last audit, the SLA received a demerit for control deficiency; purchases have been growing over the $250,000 limit. The board needs to act to avoid future control deficiencies. It was suggested to go from flat fee to percentage of 5% per transaction and no more than 10% per issuer. The broker-dealer also recommended three other areas to shore up investments—add a percentage of plus or minus 20% to the 2.5-year time limit.

Ms. Moran asked for a motion to award a discretionary lump-sum contribution to all SLA staff’s 401(k) funds. Hank Haldeman moved to award 3%, Rich Gobler seconded, and the motion carried without dissent.

Ms. Moran asked for a motion to change the investment policy as suggested by Mr. Morse during his report. Mr. Haldeman moved to accept the staff’s recommendation regarding the investment policy, Mr.Gobler seconded, and the motion carried without dissent.

Mr. Morse then closed his report by noting that the SLA’s pension fund has now formally been taken off the books with most eligible pensioners opting to receive lump-sum buyouts and the remaining obligation having been sold to Mutual of Omaha. Ms. Moran asked Mr. Morse to remain for a moment as he received an award from the SLA for his work in successfully retiring the SLA’s pension obligations.

Projected Premium and Revenue

Michael Caturegli said that he had run several models in August for the end of the year. On a positive note, the SLA will process about $13.1 billion in processed premium, which is more than expected. A lot of it is driven by outliers and extra large policies. Ultimately, that will mean about $32.5 million in stamping fees. If the outliers are eliminated, the SLA came in around 8% growth, which was anticipated by the board in 2020. The market is organically and consistently healthy. Overall, however, growth will end up around 21%, including outliers. Anticipating a 5%-7% growth in transactions annually, the SLA is on a positive growth trajectory for the foreseeable future. The long-term outlook looks really good. He also talked about late filings and how they affect SLA revenues—some filings in 2020 were coming in up to 200 days late, probably due to COVID, social unrest and business interruption. That number is back down below 120 days. From a numbers perspective, things appear to be going back to normal.

Education and Compliance Commitee Report

Tim Chaix thanked Jo Ann Del Gatto and James Greene for doing a wonderful job this year on live webinars. In 2021, the committee’s mission has been to align programs with education, training and engagement. There have been 10 continuing education courses for 27 credits, attended by approximately 2,600 broker members, with CE credits to 2,200 licensees. Two more courses for five CE credits are coming before year’s end. The committee is also working with the Excess Line Association of New York on a DEI course to roll out in 2022. Additionally, production of SLA University has begun for brokers and support staff who are new to the market. Going forward, courses will be made ADA compliant and available to all of the SLA’s membership. Further, the SLA has released an updated two-hour training course required by the CDI for all employees who transact insurance. More than 200 members have completed this training. Finally, Compliance Connections has been launched to highlight SLA regulatory content. It has been well received and attended by over 1,200 members. Engagement is the key priority as membership continues to grow.

Financial Market Report

David Kodama updated the board on market trends and the Financial Analysis Department. Key takeaways included:

There is a robust amount of registered premiums in 2021. The numbers reflect a 15% increase for non-LASLI carriers, 12% for LASLI carriers.
Two more companies were added to the LASLI in 2021 so far, with eight more in the queue.
Apart from one single insurer, all LASLI-listed insurers maintain a rating of A-minus or better from A.M. Best.
Two acquisitions of LASLI-listed insurers were made by private equity investors.
The LASLI-specific market is financially strong, with underwriting gain of more than $195 million.
Only one LASLI-listed company currently has a negative outlook, and that is with an A rating.
Glenn Leung and Donna Uboldi have built in greater efficiencies and developed more effective communications with the CDI, including regular quarterly meetings.
The SLA is conducting more in-depth reviews of non-LASLI companies. Only one Lloyd’s syndicate has reported a combined rating of less than 100%.

Hiring and Retention Report

Barbara Trumbly said that the SLA is facing challenges in recruiting top talent, keeping employees engaged, and retaining top performers. It has to be able to compete with other businesses who find its employees to be attractive process. Hiring and turnover present financial challenges. During 2021, the SLA has on-boarded 22 employees, with average time to fill a slot at 37 days—but well over 100 days for technology employees. Current turnover rate is 12.8%, up from 8% from 2020 and 10% in 2019. Four employees left involuntarily, one retired, and 10 employees moved on to other opportunities. Currently, the market is seeing something called “The Great Resignation.” It is much less expensive to retain a talented employee than it is to recruit one. The two most common reasons employees have left the SLA is higher pay and to secure a better position. The cost of living in major American cities ranked the San Francisco Bay area as the most expensive place in the United States, more than 86% higher than the national average. An average household in the Bay Area needs $65,000 a year just to make ends meet. One in four Bay Area residents cannot afford necessities. Possible solutions include:

First, it is necessary to answer the question of where the SLA wants to be relative to the market: lead, lag or meet? The SLA needs to strive to lead the market and reward good performance.
Recognize and reward employees for their performance during this time.
Remote work reduces one of the biggest pain points (commuting) but also presents challenges in acclimating new employees.
Continue to provide training and development opportunities.

Stamping Committee Report

Mr. Caturegli talked about projections for Fiscal Year 2022. He said the general economy appears to be going back to normal and growing at a moderate rate. He ran several forecasting models and said he expected the California surplus line market will be about $15.1 billion, a 12.9% increase, about $37.75 million in registered stamping fees for the SLA. Transactions should continue to increase at around 5%, to 860,000 or 870,000 transactions. Looking forward, Mr. Caturegli expects premiums to go over $17 billion in 2023. There has been noticeable growth in premiums per transaction, in part due to the outliers or one-offs he referenced in his earlier report.

Janet Beaver reported that the Stamping Committee, in its September 2021 meeting, had unanimously approved a premium forecast of $15.1 billion and a Fiscal Year 2022 budget of $22,987,713. The committee also made no recommendation to change the stamping fee at this time but suggested that the board may want to consider lowering it for 2023 at a subsequent meeting in 2022, and making an announcement to all SLA members in June 2022 about any change.

Mr. McKay said the SLA has a board-designated pension contingency fund on its books, which is no longer necessary due to the elimination of the pension, and he recommended eliminating that contingency fund.

Jason Howard moved to eliminate the pension contingency fund, Mr. Haldeman seconded, and the motion carried without dissent.

Mr. Haldeman moved to accept the Stamping Committee’s recommendations of a premium forecast of $15.1 billion, a 2022 Fiscal Year budget of $22,987,713, and possible action in 2022 regarding the stamping fee. John Washington seconded, and the motion carried without dissent.

Closing Business and Adjournment

Hearing no further business, Ms. Moran declared the meeting adjourned at 11:44 a.m.