June 26, 2022: Joint BOD & Stamping Com. Meeting Minutes
Joint Board of Directors and Stamping Committee Meeting
Monterey Plaza Hotel, Monterey, CA
June 26, 2022, 10:30 a.m.-2:30 p.m.
| Board Members Present: | |
| Janet Beaver, Chair | Aurenity |
| Rich Gobler, Vice Chair, Stamping Chair | Burns & Wilcox |
| John Washington, Secretary-Treasurer | Arch Insurance Group |
| Terri Moran, Past Chair, Audit Chair | Paul Hanson Partners |
| Tim Chaix, Member, Education and Compliance Chair | R.E. Chaix and Associates |
| Jim Faley, Member | Vela Insurance Services |
| Sarah Nichols, Member | Crum & Forster Insurance Brokers, Inc. |
| Pam Quilici, Member, Next Generation Chair | R-T Specialty |
| Charlie Rosson, Member | USI Insurance Services |
| Kathy Schroeder, Member | XPT Partners LLC |
| Terrence Villar, Member | AmWINS |
| Members Absent: | |
| Robert Gilbert, Member | Markel West Insurance Services |
| Hank Haldeman, Member, Legislative Chair | AmWINS |
| Others Present: | |
| Jerry Sullivan, Board Member Emeritus | GJS Re |
| Susan Atkins, Admitted Market Liaison Chair | Golden Bear Insurance Company |
| Jon Larson, Special Advisory Chair | Westchester Chubb |
| Yusuf Mayet, Technology Chair | AmWINS |
| Joshua Koppel, Stamping Committee Member | KUBE Construction Risk |
| John Mundelius, Stamping Committee Member | Union General Insurance Services |
| Kelly Tate, Stamping Committee Member | Aurenity |
| Benjamin McKay, CEO and Executive Director | Surplus Line Association of CA |
| Joy Erven, COO, CCO and Director | Surplus Line Association of CA |
| Michael Caturegli, Chief Technology and Analysis Officer | Surplus Line Association of CA |
| David Kodama, Jr., Chief Industry and Regulatory Officer | Surplus Line Association of CA |
| Jody Black, Vice President, Data Analysis | Surplus Line Association of CA |
| Cliston Brown, Vice President, Public Affairs | Surplus Line Association of CA |
| Jo Ann Del Gatto, Vice President, Education and Compliance | Surplus Line Association of CA |
| Vani Ganti, Vice President, Technology | Surplus Line Association of CA |
| James Greene, Vice President, Digital Communications | Surplus Line Association of CA |
| Glenn Leung, Vice President, Financial Analysis | Surplus Line Association of CA |
| Barbara Trumbly, Vice President, 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 |
| Tristan Jeha, Digital Communications Specialist | Surplus Line Association of CA |
| Chandrani Mukhopadyay, Senior Accountant | Surplus Line Association of CA |
An asterisk (*) indicates participation via telephone.
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, Janet Beaver called the meeting to order at 10:58 a.m. and Benjamin McKay advised participants of their obligations and responsibilities under the SLA Antitrust Resolution.John Washington, secretary/treasurer, certified that the minutes of the October, 2021 board meeting were true and correct. Terri Moran moved to approve the minutes as presented, Pam Quilici seconded, and the motion carried without dissent.Ms. Beaver gave then framed the meeting and provided some highlights, including the launch of the SLA’s customer relationship management (CMS) system and the transition by the SLA to a new 401(k) vendor, noting that further details would be provided during staff reports.
CEO Report
Mr. McKay reported that the SLA is incredibly healthy shape. The SLA aspires to be a modern, credible leader in how it works with its audiences and in how it communicates with them, using digital communications . The information it puts out needs to be quality and needs to be correct. Being modern and credible are prerequisites for being a leader. It is important to be a leader because the markets will not follow if the SLA is not a leader. There are three overarching goals (“three caribou”):
- Employee Health and Wellness
- Member Value Program
- 100% Compliance
The SLA meets those goals by setting subordinate goals. The CRM speaks directly to the Member Value Program.
The SLA also has three core values:
- Collaborative
- Motivated
- Knowledge-Able
Everyone in the organization has to have these core values for everything to work.
The SLA is the advisory organization, by statute, for the CDI. In the olden days, being the advisory organization meant the CDI would ask the SLA what was going on in the market, the SLA would ask its leaders, and the SLA would report back. But now, many of the questions get deep into analytics and the law. For example—heat maps showing where all the homeowners policies are in the state. Ten years ago, the SLA could not do that. Now it can. It requires deep processing power and analytics to fulfill the SLA’s role in helping to foster a healthy, fair and competitive marketplace.
The SLA is trying to realign its human and capital resources to meet its goals. A budget pivot, by definition, is a realignment of capital resources—the realigning of capital to meet a strategic objective. Surveys of SLA employees tend to show approval ratings in the high 90% range.
The SLA does not have a mandatory return to the office in the wake of the COVID pandemic. It is still completely voluntary.
Mr. McKay noted title changes for Michael Caturegli and David Kodama, who were previously executive vice presidents and are now chief technology and analysis officer, and chief industry and regulatory officer, respectively. He reviewed the Senior Staff organizational chart and detailed for the board the reporting structure.
Mr. McKay talked about the various segments of the SLA’s membership and how the SLA needs to reach out to top-tier members with C-suite focused messaging. For example: get the head of the construction industry to provide three minutes on camera regarding trends in the industry.
Staff Reports
Ivan Morse said the 401(k) has reached a point where it needs an extra audit. Now that the pension fund has been retired, the SLA has added flexibility. Consistently, there are questions about why individual employees pay so much in fees for their 401(k). The SLA has identified a provider that will reduce the necessary fees. The current provider refuses to lower its fees. The SLA is now moving forward on transitioning its 401(k) funds, with the expectation that the transition will be very beneficial for employees. Savings are expected to be at least $100,000 a year. The total 401(k) funds are about $23 million.
Mr. Morse also reviewed the budget-to-actuals. Revenue-wise, the SLA was expecting revenues of $37.8 million in Fiscal Year 2022, and now expects to bring in about $42 million. The SLA has budgeted for $23 million and is on track to stay within that budget.
Mr. Morse briefed the board on the inflation adjustments provided by the SLA to employees making up to $102,000. Employees earning up to $55,000 received a 5% adjustment, and the remainder (between $55,000 and $102,000) received 3%. He noted that surveys show when employees leave, they usually get about 4.5%, so it is hoped that the adjustment will help the SLA avoid turnover.
Vani Ganti discussed the Member Value Program and the successful launch of the CRM program, a big step toward achieving one of the three caribou (the Member Value Program). It will help reduce response time by SLA teams and is being rolled out in stages, training SLA teams to use the system. About 23,000 contacts have been loaded into the program—any industry individual the SLA interacts with.
Stamping Committee Report
Stamping Committee Chair Rich Gobler said the stamping committee had met on June 2, 2022, to discuss a stamping fee adjustment and the staff’s proposed budget pivot for the rest of Fiscal Year 2022. In the meeting, the committee voted unanimously to recommend a stamping fee change from the current 0.25% to 0.18%. It also voted unanimously to accept the proposed budget pivot.
- Education and Compliance requests $236,000 pivot for CAS enhancements.
- Financial Analysis requests a $98,000 pivot for an S&P interface.
- Technology is canceling one reporting enhancements job for $50,000 and using the same amount for MFA multi-factor authentication.
- The annual meeting was under budget by $92,508.
- A request of $250,000 is needed for salary adjustments due to inflation.
The proposed budget pivot would be essentially a wash, with no new spending being necessary.
Mr. McKay said that the SLA’s expectation was that it would bring in $42 million, roughly $5 million more than projected at the beginning of the year. That means a $19 million surplus on a $23 million budget. The stamping fee was raised in the first place because the SLA had a number of liabilities and the inversion of the yield curve signaled a recession—which meant putting money in the bank and getting rid of debt. The SLA has $25 million invested in contingency funds—money segregated on the balance sheet for a future purpose. It’s an accounting fiction. The money is invested with the SLA’s broker/dealer. Whatever is undesignated is considered non-designated board assets. For the first time in 10 years, the SLA has non-designated assets; it has reached the maximum on its designated funds. That is probably enough to have a full year of funding if needed, and additional revenues are expected for the next year. The SLA wants to show it is a good financial steward, and a year of contingency funds is fair. Among association executives, the consensus on how much to hold in reserve varies from six months to 18 months. That’s an industry standard, which has legal validity. That is why the SLA recommends lowering the stamping fee.
Mr. McKay posed the question: If there is a recession, what does that look like? SLA staff went back and looked at the recession that started in December 2007 and lasted for roughly three years. The SLA suffered declines of 3%, 2%, 19%, and 10%. On a baseline $25 million budget, and assuming the same losses, those would mean losses of $8.5 million. The SLA would have to supplement its budget to the tune of $8.5 million to maintain all current operations without layoffs or reductions in services.
For eight years, the SLA was drawing down its contingency funds. In those days, brokers were largely opposed to changing the stamping fee, which had generally been done without much notice. Brokers were either paying additional money or sending money back to insureds. The SLA promised five years with no change—in fact, going seven years and one month before changing the stamping fee after the yield curve inversion. In the meantime, the SLA was getting to its minimum allowable levels for contingency funds as set by the board.
Every three years, the SLA undergoes a triennial examination reviewing all SLA processes related to the delegated authority it possesses from the California Department of Insurance (CDI). There have been no comments about the SLA having too much money, but there have been comments about it having too little money. At the last audit, the recommendation was to raise the stamping fee—which the SLA had already done. Mr. McKay said he was concerned the next audit might say the SLA has too much money.
Mr. Caturegli spoke about the models the SLA uses to make financial forecasts. Inflation is a wild card. The models still show market growth, but even with a big second quarter (39% growth), May and June are on par. The growth is not going down. It is likely to be a year of double-digit increases even with no growth in the second half of the year.
The SLA noticed in quarter two of 2022 that there had been 39% growth over quarter one. In the last 22 years, that is the highest quarter-over-quarter growth the SLA has had. There wasn’t any one gigantic policy that moved that number up, unlike some of the large policies that had helped spike growth in the past. The SLA is now 38% higher than it was in the first six months of 2021, with some effects from COVID still likely to have been in play. Barring anything catastrophic, even if the first half of the year has to carry the second half, the trajectory remains positive.
Mr. Caturegli also discussed how the Stamping Committee had arrived at a recommendation to change the stamping fee to 0.18%. Currently, the SLA is looking at a 19% increase in investment funds over and above what it spends. Investment accounts can be expected to climb to about $35 million. The SLA is likely to finish 2022 with 27% growth. At 0.18%, an additional $8 million could be expected to go into those accounts, increasing them to about $43 million. Another $14 million can be expected due to the lag in adjustment to the lower stamping fee. But he reiterated that inflation is not accounted for in all of these models.
Mr. Washington asked if there might be a way to redirect some of the SLA’s surplus without lowering the stamping fee. Mr. McKay suggested that one possibility might be to buy a building, but the downside would be getting into the landlord business. Mr. McKay also said he was not averse to having an ad hoc investment committee created to review what the SLA is doing with investments, and directed Mr. Morse to distribute the investment guidelines to the board.
Joshua Koppel said that apart from a recession, it’s important to consider the ebb and flow within the industry and it is important to have a cushion in case the admitted market takes on large portions of the industry’s current footprint. Kelly Tate added that with inflation happening now, rates will have to tumble next year to account for that inflation.
Ms. Beaver said there are still many unknowns—global pandemic, monkeypox, potential recession. Mr. McKay noted that lowering the stamping fee this year does not preclude lowering it again next year.
Mr. Caturegli also noted the SLA had hired a data scientist, a former professor at the University of Illinois with a Ph.D. in finance from Auburn University.
Mr. Morse concluded the presentation by going into greater detail on the budget pivot proposal outlined by Mr. Gobler.
Ms. Moran moved to adjust the stamping fee to 0.18%, effective January 1, 2023. Tim Chaix seconded, and the motion carried without dissent.
Ms. Quilici moved to accept the staff’s proposed budget pivot (as detailed on page 3). Mr. Chaix seconded, and the motion carried without dissent.
Board Development
As part of the ongoing series of board development topics, Barbara Trumbly discussed board member responsibilities. She noted that reading the constitution and Plan of Operation are necessary and vital for board members.
Board members are fiduciaries who need to steer the organization toward a secure future, making sure the company has adequate resources to advance its mission. Board members are tasked with legal obligations to ensure that the SLA serves its mission and benefits its members. Three primary legal duties are care, loyalty and obedience.
- The duty of care describes the level of competence and business judgment that an prudent person would exercise when making business decisions that affect themselves. The board is responsible for knowing the mission, vision and plans of the SLA and remaining alert to problems or concerns and investigating irregularities in association government.
- The duty of loyalty has to do with the potential conflict between association decisions and personal benefit. If a conflict does arise, the board member has a duty to recuse.
- The duty of obedience means helping keep the SLA on track toward its stated purpose and mission.
However, the board does not exist solely to fulfill its legal obligations or fiduciary responsibilities. Board members also play a significant role in culture, strategic focus, effectiveness, financial stability, and serving as ambassadors and advocates.
The board owns the vision of where the SLA is headed, and staff executes a detailed plan of work that stays within budget under the direction and guidance of the CEO. It is like a legislature—it sets policy but does not directly execute it. The primary role of the CEO is to facilitate that strategic direction.
Closing Business and Adjournment
Hearing no further business, Ms. Beaver adjourned the meeting at 1:41 p.m.