Joint Board of Directors and Stamping Committee Meeting Minutes: 06/30/2021

Location

Conducted via Videoconference from SLA offices in San Ramon, CA
June 30, 2021
1:30-4:00 p.m.

Board Members Present

Terri Moran, Chair
Paul Hanson Partners

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
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

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

Others Present

Susan Atkins, Admitted Market Liaison Chair
Golden Bear Insurance Company

Jon Larson, Special Advisory Chair
ACE Westchester

Joshua Koppel, Stamping Committee Member
Cap Specialty

John Mundelius, Stamping Committee Member
Union General Insurance Services

Sarah Nichols, Stamping Committee Member
CoverX

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, 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

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 1:36 p.m., and Dan Brown advised participants of their obligations under the SLA Antitrust Resolution. Cliston Brown called the roll and advised a quorum was present, at which point Ms. Moran officially called the meeting to order.

Rich Gobler, secretary-treasurer, certified that the minutes of the March board meeting were correct. Hank Haldeman moved to approve the minutes as presented, Pam Quilici seconded, and the motion passed without dissent.

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

For the first six months of this fiscal year, the SLA has had a phenomenal year, with revenue of $13.85 million, 28% ahead of budget; premium of $5.6 billion, 29% ahead of projections. Transactions are consistent at 15,500 per week. On the expense side, the SLA is $1.2 million under budget, or 13 percent.
COVID has been a double-edged sword. On one hand, SLA staff has not been out and about making calls as it normally would have done; however this has allowed the association to make huge progress on key initiatives.
With the onset of COVID and stay at home orders, the SLA quickly pivoted to “employees first” and created communication and involvement strategies to keep employees engaged and, frankly, cared for. This has evolved tremendously and the purposefulness around “employees first” is evident in the Wellness Committee and cohorts that have been established to keep employees engaged, even as plans go forward to reopen the office.
While Diversity, Equity and Inclusion (DEI) have been discussed, there wasn’t the attention and mindfulness this requires, as pointed out by John Washington. Joy Erven, who recently completed a Cornell University course on DEI and is spearheading the SLA’s efforts on this vitally important topic.
David Kodama identified an issue that will likely impact all of the SLA’s partners. AM Best has decided to create a program to assess what they call a Performance Assessment of Delegated Underwriting Authority Enterprises. This will impact MGAs, program administrators, wholesalers and coverholders. Several industry leaders participated in a discussion with AM Best hosted by TMPAA, which created more questions than answers. This is something that should stay on the board’s radar screen.
The SLA has made tremendous progress on the pension, which Ivan Morse discussed in detail later in the meeting.
The SLA has identified a need to improve our cyber security and have changed vendors and also are working to improve cyber training of the staff.

CEO Report

Benjamin McKay thanked the board for its service to the SLA and the surplus lines industry. He noted that the good decisions made by the board during his tenure kept the SLA going, helped it eliminate its backlog, kept it from running out of money, and kept the SLA competent to fulfill its mandates. There are challenges the SLA still faces, including renewed interest from the CDI, asking for more ongoing meetings and regular reports from the SLA. David Kodama is the liaison and is taking on this role with aplomb. The triennial examination recommended the SLA increase its reserves, which the SLA had begun to do in the time period following the time period that was subject to the audit.

Other reasons for increased interest is that the surplus line market has grown, and the department is looking to the surplus lines sector to take on roles it hadn’t played as much in the past—homeowners’ insurance being a key example. Another challenge has to do with hiring. It is difficult to hire right now; salary expectations are high and workers are not readily available. The SLA is beginning to lose employees to retirement and to other organizations. The SLA is now competing with Citibank and PlayStation for talent. It is a testament to the SLA’s hiring; it used to lose people who wanted to go back to school, and now it is losing employees to prominent employers.

The SLA is working on issue spotting and Mr. McKay expressed a concern about when industry consolidation might create antitrust concerns. The Department of Justice has stepped in to challenge the Aon-Willis merger on anticompetitive grounds. This is something the SLA will continue to monitor.

Mr. McKay said the SLA would ask for a change to the investment policy at the next board meeting.

Diversity, Equity and Inclusion Report

Ms. Erven reported on the SLA’s Diversity, Equity and Inclusion (DEI) initiative. She asked attendees to take a moment to think about a time when they felt like they were marginalized, not treated fairly, or not included. She noted that in her Cornell course, students had to do this exercise. She also had to think about times when she had fallen short on being inclusive. DEI challenges everyone to open their minds to different ways of thinking. She also asked how many participants are going through DEI training at their own workplaces and received a number of positive responses.

Definitions:

Diversity is who we are (the SLA is a very diverse workforce).
Equity is being fair
Inclusion is making sure people are treated fairly and with respect and that their voices are being heard without fear.

Diversity is being invited to the party and inclusion is being asked to dance.

Key stats:

50% male, 50% female
46.8% Millennials, 28.4% Generation X, 16.5% Generation Z, 8.3% Baby Boomers

The SLA is promoting DEI by:

Ensuring hiring, wages, job descriptions and promotions are scrutinized for diversity, fairness and inclusiveness
Making educational opportunities available to all staff and educational assistance to all members children
Celebrating ethnic holidays
Regular surveys to all staff
Professional development
Modeling behaviors needed to move industry forward

Board members can help further the DEI initiative by making DEI part of their conversations, joining a DEI cohort, and embracing change.

Next Steps:

Special Advisory Committee to discuss and develop DEI initiatives
SLA team cohorts organized to discuss DEI initiatives
DEI speaker at annual meeting
Board and committee members selected with an eye on deliberate diversity and inclusion metrics

Ms. Erven encouraged board members to open their hearts and minds to having difficult conversations on this topic and said she welcomed feedback.

Mr. Gobler suggested creating a continuing education course on DEI.

Committee Reports

Education and Compliance Committee

Jo Ann Del Gatto presented a video highlighting what the department has been doing, with an emphasis on engagement, education and training. A new membership outreach program is under way with direct communication to over 300 filing brokers and entities. The program will be expanded to welcome all licensees to the SLA. There have been five CE course to more than 1,700 members and more than 1,400 CE credits. It discussed upcoming courses and training courses, such as SLA University and Compliance Connections, which have drawn more than 1,200 attendees. Tim Chaix said the committee had expanded the continuing education program based on emerging market trends. This year, courses will provide up to 35 CE credits for members, and the on-demand library will include six to eight courses with 22 to 25 credits. Video recording has begun for SLA University, and a broker training will be rolled out later in 2021. Additionally, the SLA is responsible for a CDI-required two-hour training for transactors, and this has undergone a significant overhaul.

Next Generation Committee

Pam Quilici noted that for the first time, there are five generations in the current workforce.

Generation Z was born after 1995 (26 and younger). It is the first generation to graduate and start their careers during a pandemic and are 100% digital. They’re very optimistic, inclusive, created, fast learners, money-motivated. They like feedback and do not take very direct feedback personally. They only have an eight-second attention span. They make up ¼ of the total population—the biggest generation yet. They like working from home. More than 60% of them think they can change the world, as compared to 39% of Millennials. They have issues with ADHD, body image and mental health.
Millennials are now 27-40, taking on management roles, 35% of the current labor force. They have high expectations, confident but impatient, needing supervision. They are the first generation not to do as well as their parents. They need lots of praise and training.
Generation X is age 41-56, Baby Boomers are 57-75 and “Builders” are 76-91.
There is lots of usefulness for all of these generations, but Generation Z is coming out of the psychology era—emotional intelligence, a skill-set we need to train all generations on. Better job performance and leadership skills come from higher emotional intelligence.
Diversity is important, but that can include diversity of thought as well.

Ms. Quilici’s presentation focused on three areas: finding jobs, sharing our industry and retention.

Finding Jobs—Social media needs to be leveraged better, so the committee has a LinkedIn page. Also, it is important to reach out to universities and colleges, and via word of mouth.
Sharing Our Industry—Videos are being developed on why surplus line insurance professionals chose the industry and why they like it, as well as what training and mentoring looked like during the pandemic. These would be placed on social media and the SLA website, and provided to members for them to use as well.
Retention—It is important to discover what Generation Z is saying about retention, surveying them. They say a lot of it has to do with the on-boarding process and whether they can have variety, changes every three months. They want to see great leadership. They don’t need a boss or a manager to tell them what to do or incentivize them to do something. They want leaders, somebody who is out front pulling them along. They also want mentors from different generations. They want to learn. They are fast learners. Keeping them learning is very positive. They like instant feedback and want it told to them like it is; give them feedback in real time so they can make changes. They want to be included.

Operations and Financials

Michael Caturegli reported on revenue through the first half of 2021 as compared to 2020 and prior years. He discussed seasonality—the differences in quarters, which can be used to help with predictive modeling.

Quarter 1 is historically low for premium, 13.3% less than the average for the entire year, while Quarter 3 is about 15% higher than the average. If the SLA received $1,000 in Quarter 1, it could assume $1,330 per quarter.
Quarter 3 is skewed by a couple of large policies (ridesharing and utility company policies) that come in during that quarter.
Transactions are more stable than premium. Quarters 1 and 2 are essentially flat, with a spike in Quarter 3, which has a lot of post-summer activity.

Mr. Caturegli also discussed the impact of late filings on SLA revenue. Even after a year of the new stamping fee, the effective stamping fee rate was 0.242%. It is now starting to stabilize somewhat, and he attributed the extreme lateness to the pandemic. The effective rate is now 0.249%, just under the 0.25% stamping fee.

Additionally, Mr. Caturegli projected $11.686 billion in premium this year in California, approximately $29.2 million in stamping fees, representing 10% growth over 2020. This is healthy, but not like the magnitude of the past two years, where growth exceeded 20%. This is consistent with multi-year modeling showing the market flattening out by the end of 2022. Seasonally adjusted transactions point to about 805,000 items, about a 6% increase over 2020.

Looking at some of the key lines of coverage, Mr. Caturegli noted that over 2021, the industry has seen a 462% growth in retail, which suffered greatly in 2020. Compared to 2019, it is up 161%, so it is not just a recovery from COVID. Construction has been consistent, with 21.1% growth over 2019 and 23.6% growth over 2020. Real estate has also been stable (13.3% over 2019, 12.0% over 2020). Entertainment is the only line that really has not recovered yet.

In the overall market, premiums were 23.7% higher in the first half of 2020 as compared to 2019, and are 13% higher in the first half of 2021 as compared to 2020.

Mr. Morse reported on the budget to actuals for the first half of Fiscal Year 2021. The SLA is forecasting to earn $29.2 million in revenue, up 15.6%, which is $4 million higher than the budgeted $25.25 million. Cash spend is expected to be 1% under the initial budget. Outside of salaries and benefits, variances are extremely small. The SLA is on track to net $9.4 million in 2021, excluding the final pension payout. The brokerage account has increased $3.96 million in 2021, a 44% increase. The SLA has access to a $3 million line of credit which has not been touched at this point.

Mr. McKay presented the SLA’s recommendation for the midyear budget pivot, as follows:

Projects

The proposal called for an increase in project costs totaling $345,000, including two new projects. The majority of this cost will come from reducing the cost of other projects, totaling $212,000, including one cancelled project. Net increase: $133,000.

New Projects

“BR Build Out / SF Office” and “Tag Revision”

Operations

Payroll to increase to assist with search and demand for IT professionals in the remote work environment. The SLA faces difficulty with bringing in key roles at budgeted rates and concerns about maintaining current key IT employees.
Temp help cost to increase to cover critical role in IT where a key member was called out for active military reserve duty.
Not reflected: Pension will have one time accounting expense around $2 million.

Financial

No significant financial cost difference from 2021 budget after adjusting for pivot requests.

		Running Cost	Budget Cost	Over / (Under)	Pivot Adjust Over / (Under)
Education & Compliance
SLA LC Diversification Enhancements	Pivot Request - $131.2k	$69,815	$100,000	($30,185)	$31,200
SLA LC On Demand Course Creation	Pivot Request - $74k	$33,330	$60,000	($26,670)	$14,000
CCPA Member Support	Pivot Request - $50k	$0	$125,000	($125,000)	($75,000)
CAS Enhancements	Pivot Request - $140k	$1,375	$50,000	($48,625)	$90,000
2021 WSSLC	Pivot Request - $30k	$1,761	$91,000	($89,239)	($61,000)

DA Department
Data Analysis CAS Enhancements	Pivot Request - $70k	$30,043	$40,000	($9,958)	$30,000
SL Forms Re-Design	Pivot Request - $50k	$0	$80,000	($80,000)	($30,000)
Tag Project	Pivot Request - Add	$0	$80,000	($80,000)	$80,000

DC Department
SLA Website Prototype ¹	Pivot Request - Cancel	$6,415	$52,000	($45,585)	($45,585)

Administration
BR or SF office	Pivot Request - $100k	$37,474	$0	$37,474	$100,000
Temp Help	Pivot Request - $100k	$34,750	$20,000	$14,750	$100,000

Additional Item
Salaries ²	Pivot Request - $250k

¹ This is now part of the SLA’s customer resource management (CRM) build.

² The SLA anticipates having funds within the $20 million budget to cover this amount but feels that this is a prudent request.

Mr. Haldeman moved to accept the pivot as presented by staff, Mr. Gobler seconded, and the motion passed without dissent.

Mr. Morse reported on the investment policy with four recommendations. Ms. Moran said the board should take some time to review it and bring it up at the next meeting.

Average portfolio maturity, currently a maximum of 2.5 years, with a recommendation for a target of 2.5 years with a +/-20% average maturity band.
Concentration limits, currently $250,000 per issuer/issue, with a recommendation to target a 5% issue and 10% issuer maximum based on the market value of the portfolio.
Credit ratings, currently Aa/AA minimum per security, with a recommendation to expand to include all ratings of investment grade-rated securities (Baa3/BBB- minimum)
Allowable sectors, currently U.S. government, U.S. agencies/GSEs (including MBS), corporates, CDs, municipals (taxable) and money market funds, with a recommendation to maintain all, and add asset-backed securities

Pension Update

Mr. Morse reported that the pension plan is officially terminated as of today. The federal Pension Benefit Guaranty Corporation (PBGC) comment period expires on July 6. It is not expected that the PBGC will have any objections, so final distribution paperwork will go out to the remaining 47 people on the plan. In August, those who have not responded will be assumed to have taken the “do nothing” option. Final payments will depend on how many people take the final distribution. By October, pensioners should begin receiving their payments. By the end of the fiscal year on November 30, the SLA should no longer be the administrator of the pension.

Closing Business and Adjournment

Hearing no further business, Ms. Moran declared the meeting adjourned at 3:26 p.m.