July 21, 2020 – Minutes

Minutes: July 21, 2020

Joint Board of Directors and Stamping Committee Meeting

Location

Conducted Via Videoconference
July 21, 2020
1:30-4:00 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

Joshua Koppel, Stamping Member
The Hartford Financial Services Grp.

John Mundelius, Stamping Member
Union General Insurance Services

Sarah Nichols, Stamping Member
CoverX Specialty Insurance Svcs.

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

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

JoAnn DelGatto, VP, Education and Compliance
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

Susan Bryant, Former SVP, Financial Analysis
Surplus Line Association of CA

Dan Brown, Partner
McDermott, Will & Emery

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

Call to Order and Opening Business

A quorum being present, Terri Moran called the meeting to order at 1:15 p.m.

Attorney Dan Brown of McDermott, Will and Emery advised participants of their obligations under the SLA Antitrust Resolution.

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, John Washington seconded, and the motion passed.

Ms. Moran welcomed Mr. Gobler to board leadership and also welcomed Jason Howard to the board. She then honored special guest Susan Bryant, the SLA’s former senior vice president for Financial Analysis, who retired July 1, 2020. Ms. Bryant spoke briefly and thanked the SLA for the opportunity to work with the association. Ms. Moran then congratulated Joy Erven, COO and Director, on celebrating 17 years with the SLA on July 21, 2020, as well as Michael Caturegli, SVP, Data Analysis and Technology, for 10 years as of April 30, and Benjamin McKay, CEO and Executive Director, for eight years as of July 15.

Report of the Chair

Ms. Moran discussed several important topics, including:

  • The SLA leadership team’s extraordinary efforts toward keeping staff engaged during the COVID-19 pandemic and the months of working from home necessitated by the pandemic.
  • The SLA keeping its promises on fiscal responsibility in the wake of the stamping fee raise that became effective January 1, 2020 and further plans for expense controls in the event of reduced revenues.
  • A reminder that the SLA has a national membership and the importance of that fact as the association takes on the tasks of customer segmentation and engagement.

Ms. Moran also updated the board on her goals, including:

  • Continued fiscal responsibility.
  • A future for the internship program once conditions allow, possibly doing online internships if considered feasible.
  • Progress in growing the SLA’s Grassroots Program to help the association meet current and future legislative challenges.

CEO Report

Mr. McKay gave a final report on the liquidation of the backlog in 2019, noting that the SLA is caught up.

Mr. McKay said that this is “Year Zero.” Up until now, the SLA was doing things like accepting online payments. By comparison, Illinois just this year is trying to get online payments. The SLA took care of that when Mr. McKay first got here. Also, the SLA created a RAPID system that allows us to monitor all activities in the organization and implemented remote working. Additionally, the SLA hired David Kodama, Ivan Morse, Jo Ann Del Gatto, and converted Barbara Trumbly and James Greene from consultants to full-time staff.

The SLA had been talking about raising the stamping fee for a year and made the decision to raise the stamping fee when the yield curve inverted. Also, the SLA paid off the construction loan. When a recession is coming, put some money away and pay off your bad debt. That promise was made at the last annual meeting; it is already kept, and it’s only July. The association jumped on additional space that became available. The SLA is offering a pension payout, keeping the promise to the organization’s pensioners. Although the SLA projected $21.6 million in revenues, it budgeted for $20 million, feeling that this would be responsible with a recession likely coming. This year, the SLA is $1 million under budget; will be asking for $300,000 back for the build-out and due to COVID-19.

Moving forward, the management’s decided judgment is that the SLA has to face the brutal realities. In the book “Good to Great,” there is an example of Admiral Jim Stockdale, held in prison at the Hanoi Hilton for over eight years. His goal was to help the most prisoners get out unbroken. He said “the optimists didn’t make it.” The men who thought they would be home by Christmas didn’t make it. In the senior staff’s estimation, this realization is key: “We’re not going home for Christmas.” This new reality will go well into next year. Even with a vaccine in Quarter 1, who gets it first? First responders, EMTs. When will they get to surplus lines professionals? SLA management holds no illusion that the staff will have access to a vaccine before the end of 2021. That means managing differently. Fortunately, the SLA has all the tools and is way ahead of the curve; functioning at about 70%. The goal is to creep that number up. Two separate consultants have been hired. One is working with senior staff every week to create common tools and understandings we can use to attack these problems. Secondarily, the SLA is doing a market strategy—ask our members how they use SLA services. There are about five segments to break membership into. There are differences in who uses SLA services. A complete marketing report will be available at the next board meeting.

The SLA has had zero layoffs, having planned very carefully in terms of staffing projections, which have been mostly spot-on. A filing deluge is expected in the second half of the year and the SLA is preparing for that. Two promotions: Erin Reagan in Digital Communications and Iona Vinson in Financial Analysis. This is still a vibrant, robust place to work, but employees still face challenges, to be discussed in the COO Report.

COO Report

SLA senior staff has been keeping its eye on operations and staff. Upon receiving the work-from-home order, the SLA was in great shape, after last year’s rolling blackouts and wildfires created an opportunity to test remote working. Remote work agreements and supplies to staff were in place within the first week.

The SLA has also had to consider the various challenges of employees working from home—their health and well-being, dealing with family members, child care, social isolation. The SLA implemented a communication plan and daily check-ins, with phone calls and gift baskets, and put out a wellness survey asking how employees felt about the company and working remotely. Employees were grateful for what the SLA had done for them during the pandemic, grateful for still having jobs. But the level of anxiety remains high. The SLA created a wellness focus group, meeting and laddering out how to reach out to people on a 1-to-1 basis, as well as a one-page resource list where employees could ask for help.

Senior staff has adapted very well to this new way of managing. Flexibility and ability to pivot in times of crisis applies not only to technology but to staff as well. Weekly updates, challenges and hangouts will continue, as well as gift packages instead of the annual picnic. Supplies and assistance will be offered to employees with schoolchildren, and there will be health and safety guidelines implemented for times when employees need to come to the office.

Legislative Report

Hank Haldeman, chair of the Legislative Committee, delivered the following report on the legislative landscape:

  • Regarding COVID, the one piece of legislation that is really front of mind at the moment is AB 1552.
    • Originally, the bill passed the Assembly as a funding bill for Native American curriculum in California high schools, but after it moved to the Senate, the author stripped the funding language and replaced it with language about business interruption coverage.
    • The new language would have the effect of circumventing business interruption exclusions for viruses and pandemics within existing policies, and all policies to come, thereby forcing insurers to pay those excluded claims.
    • Cliston Brown, vice president for Public Affairs, has been in repeated communication with the Senate Insurance Committee about AB 1552, and the state of play is that the bill’s first stop on the Senate side will be the Insurance Committee. The hearing was planned for July 21, 2020, but that is now all up in the air because the Legislature has suspended again due to several staffers and at least one legislator contracting COVID.
    • While the bill dying in committee would be the best possible outcome, it would face a steep hurdle even if it did emerge from the committee.
    • The SLA submitted a letter in opposition to AB 1552 on July 15. APCIA is actively lobbying against the bill as well, and WSIA and CIWA are likely to weigh in.
  • Regarding the commissioner’s actions on moratoriums and grace periods, the SLA has been advising members who have sought its advice that the commissioner and department would like very much for all carriers to abide by his requests. Compliance has been a spectrum. Some are not complying, others (especially those who have admitted carriers within the state) are. It does not seem to have created a lot of friction.
  • The results to date of the SLA’s grassroots marketing campaign have been very good; 100% of the board is signed up and all but one member of the Legislative Committee.

Trends and Effects of COVID-19 on the Marketplace

Mr. Caturegli reported on the surplus lines market impacts being seen due to COVID-19. There are some negative market impacts, but decent growth in 2020 is still expected through 2022. At the fall board meeting, about an 8% increase in premium and 5.4% increase in transactions over 2019 was expected, with $9.4 billion in premium anticipated in 2020. Premium will likely go up by 6% by the end of the year, approximately $9.33 billion in premium and revenues of about $21.77 million in stamping fees. Based on mathematical models, 2021 transactions and premium expected to be about 800,000 and $10.1 billion, respectively, meaning stamping fees of $25.25 million. Expected increases in those figures would mean 820,000 and $10.9 billion in 2022, meaning stamping fees of $27.25 million. Average premium per transaction expected to increase by 5.1% in 2021 and 5.3% in 2022, meaning less of a hard market. The peak is expected in 2024 and a dip starting in 2025 or 2026.

Mr. Caturegli then discussed the impacts of the pandemic on the surplus lines marketplace. There was a substantial dip in quarter two of 2020. A change of 17% growth over the first quarter as compared to quarter one of 2019 dropped almost to zero in quarter two. At the end of 2020, about a 6% loss in anticipated annual premium is anticipated—that is to say, 6% growth as compared to expected 12% growth.

A substantial spike of extensions was noted on March 21st of about 40%. Premium on extensions went up 42%. Extensions up 31% over the first half of 2019. New policies are down 5% but premium up 14%. General endorsements are down across the board. Premiums on audit endorsements are up 28%.

Budget Forecast/Pivot

SLA controller Ivan Morse reviewed the forecast to actual document, noting that revenue was right on target for the first six months of Fiscal Year 2020. The construction loan was paid off as of June 30, 2020. No operating fund draws are needed in 2020. The cash spend is expected to be 3.6% under budget, by about $700,000. The pension payoff project is under way, with a new plan amendment passed to allow lump sum payments. Impact from COVID-19 mostly has reduced expenses for the second half of 2020, many travel and events have been canceled, no re-trainings due to a lack of turnover.

The Bishop Ranch Expansion Project—a $1.6 million loan is no longer needed, but there is a $200,000 increase from other categories for the build-out. Another $100,000 is expected to accommodate changes related to the pandemic. Everything else is pretty much on track.

Mr. Haldeman asked whether it would make sense to increase payments on the pension, given the planned reduction of the budget by $700,000. Mr. McKay noted there is another process to offload the pension to a company like Prudential. The previous bid was $15 million, and the actuarial advice the SLA received at the time was that as interest rates go up, the cost to annuitize the pension went down. Due to adjustments in how much is required to pay toward the pension, the price of maintaining the pension has gone up considerably. The SLA is trying to do cash payouts until it is prepared to go back to the market to offload the pension, which is unlikely prior to October 2021.

Mr. Haldeman moved to use $300,000 out of budget variance and put $200,000 into office expansion and $100,000 for COVID-19, John Washington seconded, and the motion carried.

The Future of the SLA

Mr. McKay discussed the aspiration of 100% compliance, an aspirational goal that encompasses proper filings and compliance with the law. One of the behaviors the SLA is looking at is on-time filing, the number-one compliance failure, and obtaining this behavior requires motivation, ability and a prompt. The SLA has more than 200,000 late filings a year. Motivation might be to create an award for on-time filing. Ability might involve simplifying the SL-2. Another motivation might be a financial penalty. New York implemented a $25 fee, and it worked. Another possibility for ability might be automation.

The other item the SLA is considering is a customer relations management system. The SLA currently has a lot of systems that don’t really talk to each other. To actionize that requires creating a content resource management system. This will be brought to the board for its consideration in October.

Open Discussion

Mr. Washington asked whether during the COVID environment the SLA had reflected on how it conducts business, in particular whether there is any consideration as to whether an in-office workforce is really needed. Mr. McKay responded that the SLA is looking at the San Francisco office. There are two years left on that lease—either the SLA will look at how to shrink or eliminate that footprint, or the market is going to tank and reduce expenses considerably. Vacancy rates are going up but rents also are going up. The Bishop Ranch lease still has about seven years. The SLA does have a lot of employees who would like to go to full-time remote; there are discussions about the office being more of a meeting area than a full-time workspace. Ms. Moran said the bigger issue could be the issue of social isolation.

Mr. McKay brought up the Financial Analysis Department report in the packet and asked attendees to pose questions to David Kodama or Glenn Leung.

James Faley asked about the error rate after the stamping fee change and whether the SLA had done a good job of getting the message out. Mr. Caturegli said there were very few errors in this area. Most filings are electronic, and those are automatically calculated by the system. But even the PDF and manual filings had few issues.

All business being concluded, Ms. Moran adjourned the meeting at 3:46 p.m.