2020 – Minutes

Stamping Meeting Minutes: 09/23/2020

Location

Conducted via Videoconference
September 23, 2020
1:00-4:00 p.m.

Committee Members Present

Janet Beaver, Chair
HCC Casualty Insurance Services

Jason Howard, Member
CRC Insurance Services

Joshua Koppel, Member
The Hartford Financial Services Group

John Mundelius, Member
Union General Insurance Services

Sarah Nichols, Member
CoverX Specialty Insurance Services

Others Present

Terri Moran, Chair of the Board of Directors
Paul Hanson Partners

Rich Gobler, Secretary/Treasurer of the Board of Directors
Burns & Wilcox

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

Joy Erven, COO and Director
Surplus Line Association of California

David Kodama, EVP
Surplus Line Association of California

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

Cliston Brown, VP, Communications & Government Relations
Surplus Line Association of California

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

Ivan Morse, Controller
Surplus Line Association of California

Members Absent

None

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

Table of Contents

Call to Order and Opening Business

  • Janet Beaver, chair, called the meeting to order at 1:06 p.m.
  • Benjamin McKay, CEO and Executive Director of the SLA, reviewed the antitrust resolution and reminded participants of their obligations under the law and that resolution. He noted that participants should be especially aware of avoiding antitrust actions during the breakout sessions, and that confidential information used during today’s meetings should not be used for any other purposes than the business being considered at this meeting.
  • Ms. Beaver thanked participants, outlined the order of business for the meeting and noted in her opening comments that SLA is financially sound, under budget, and over on reserves, and the surplus lines marketplace is strong.
  • Ms. Beaver asked for a motion on the 2019 Stamping Committee minutes. John Mundelius moved to accept the minutes as presented, Joshua Koppel seconded, and the committee approved the minutes without dissent.

CEO Report

Mr. McKay reported on the SLA efforts over the previous eight years to strengthen itself financially and to put away funding necessary to smooth the results of any economic downturn to hit the industry, including the retirement of debts and the recent adjustment in the stamping fee. The SLA has also modernized significantly in recent years:

  • Moved from paper-based organization, using a million sheets of paper a year, to a digital-based organization, with online education, filing, review and payments.
  • All systems now cloud-based rather than server-based, averting disaster when the SLA’s server room in its old San Francisco office flooded.
  • Developed remote-working capability to meet the challenges of possible natural catastrophes and staff expansion, which has served the SLA well while forced to work on a 100% remote basis due to wildfire-induced electrical shutoffs in 2019 and the COVID-19 pandemic in 2020.

Mr. McKay also discussed the SLA senior staff’s budgeting process, including weekly management training to address the process, and surveying of members. Separated goals into “caribou” and “rabbits,” with three main “caribou” to be addressed in 2021. Each department then submitted budgets, under the expectation from SLA Chair Terri Moran, to keep the budget static. The three “caribou” include employee health and wellness; customer relations management; and 100% compliance.

  • Employee health and wellness is not so much as a budget item as an organizational focus.
  • The SLA is growing from a bureaucratic processing organization to a membership association, to provide advocacy, education and information to members. The SLA, which did not even have a dedicated communications function eight years ago, has now hired a membership manager to address member concerns and outreach.
  • While 100% compliance is an aspirational goal, the annual number of 300,000 tags (issued for filing errors) needs to be addressed.

The SLA, unlike many other SLAs in other states, wears two hats: it is a stamping office, delegated authority from the state to process policies; the other hat is the association hat, for educating, advocating and promoting compliance. The SLA is working now with an eye toward growing its role on the association side.

Fiscal Year 2020 Revenue to Forecast

SVP Michael Caturegli reported there had been a 23% increase over 2019. Assuming the increase continues, the SLA is looking well. The Stamping Committee in 2018 estimated an 8% increase in premium and revenues in 2019, which was the largest expected increase in a very long time. Some models anticipated increases exceeding 20%, and it appears that the industry and the SLA will see increases exceeding that number.

Mr. Caturegli noted a “stamping fee” lag in this year’s numbers. After the increase of the stamping fee from 0.2% to 0.25%, effective January 1, 2020, late filings have slowed the full transition to the 0.25% rate. Late filings continue to be a serious problem for the SLA. Until August, the majority of policies were still coming in at the old rate. In 2018, the average late filing was 104 days late. In 2019, it went up to 114 days. In August 2020, the average was 201 days late.

On transactions, Mr. Caturegli reported that about 764,000 transactions are expected to come in by the end of the year, with a 3-4 day baseline.

Fiscal Year 2020 Budget to Actuals

Controller Ivan Morse reported an expected $24.45 million revenue for Fiscal Year 2019, 8.2% higher than expected, and operating expenses coming in 6% under budget, a total of $1.1 million; on a budget of $19.998 million, the SLA expects to spend $18.9 million in FY 2019. Salaries and benefits are under expected levels, with less attrition leading to fewer labor contract purchases. Asset expenditures are 0.9% over expected levels. The loan for construction at Bishop Ranch was $3 million, to be paid off within five years. At Ms. Moran’s instruction, the SLA moved to retire that debt ahead of schedule and did so this year. The SLA converted that outstanding debt into a revolving line of credit, which could provide quick funding, if needed, in an emergency situation.

Mr. Morse also addressed the SLA pension, another item that Ms. Moran wants the SLA to address. The SLA had a pension for nearly 50 years, which was frozen in 2010. The SLA has been carrying the cost ever since. Historically, it was not a major financial burden to carry those costs, coming to about $60,000 a year. That has now increased to $600,000 a year. Mr. Morse reached out to 47 pensioners asking them to take a lump-sum payment voluntarily. A total of 32 took the payment, reducing the SLA liability by 84%. The pool is much more manageable at this point.

Contingency Funds Discussion

Mr. McKay provided an overview of the SLA’s contingency funds, explaining that approximately $3 million of the SLA’s $8.967 million in contingency funds include items like desks, computers, etc., which are not liquid assets. The Financial Accounting Standards Board (FASB), an organization that establishes financial accounting and reporting standards for public, private, and nonprofit companies, has promulgated a rule to change this accounting, which means that once the rule takes effect, in about a year, the SLA’s contingency funds will drop by $3 million. This will take the SLA out of compliance with the requirements for its contingency funds. Of the extra $4 million that the SLA expects to earn in revenues, over and above the FY 2019 budget, $3 million will need to come off the top to ensure that the SLA remains in compliance with its contingency fund requirements once the new FASB rule takes effect.

Fiscal Year 2021 Premium Estimates

Mr. Caturegli said mathematical models suggest the SLA can expect about an 8.1% increase in 2021. That would mean the SLA would take in $29.1 million in received stamping fees, based on an estimate of $11.7 billion in premiums. He also gave an overview of how premiums from selected industries have responded to the COVID-19 pandemic. The communications, financial, food delivery, food prep, insurance, manufacturing, medical, municipal, transit and utilities sectors saw notable gains.

Breakout Rooms

Participants were split up into two breakout rooms to discuss their outlook on the market, the economy and premium estimates for 2021, and one representative from each breakout room summarized their groups’ conclusions.

Rich Gobler reported that Breakout Room 2 had arrived at an estimated 8% premium increase in FY 2021, but that this was a very conservative estimate.

Mr. Mundelius reported that Breakout Room 1 had arrived at an estimated 8% premium increase in FY 2021, based on Mr. Caturegli’s estimates, as well as an increase in renewal rate, wildfire exposure, social unrest, contraction of reinsurance and a consistent or hardening market. He agreed that 8% was probably a conservative estimate.

Proposed Fiscal Year 2021 Budget

Mr. Morse presented the SLA’s proposed budget for Fiscal Year 2021. The proposed expense budget is 5% higher than last year (increasing from $18,513,232 to $19,493,229), but proposed capital expenditures are lower (decreasing from $1,485,000 to $510,000), and the variance between the proposed budget for 2021 is only $4,998 higher than the approved budget for 2020. Professional development, as well as postal expenses, are expected to drive increased expenses. The travel budget, however, is down, in accordance with expectations that the COVID-19 pandemic will continue to restrain business travel.

In all, the SLA is proposing a FY 2021 of $20,003,229, compared to a budget of $19,998,232 in FY 2020.

Ben McKay said the recommendation was going to be 8%. Mr. Caturegli pointed out that the stamping fee adjustment and 8% increase would mean projected revenues of $29 million.

Ms. Beaver asked what the SLA would do with the extra money, over and above the proposed budget and the $3 million needed for the SLA’s contingency funds, and Ms. Moran suggested it could be used to help pay off the pension. Mr. McKay said it was important to keep the promise made to pensioners, and also to get the liability off the SLA’s books, and that the extra $6 million should be enough to pay off the pension, with an eye toward eliminating that liability by the end of FY 2021. In FY 2022, the expectation is to increase the contingency funds, and then potentially look at adjusting the stamping fee in FY 2023. He noted that the SLA is underfunded compared to its leading counterparts. In 2018, Florida had assets of $39 million, and New York had $29 million, but more recent estimates from New York indicate that number is closer to $35 million. Texas is at $26 million.

Ms. Beaver asked if there was a motion to approve a premium growth estimate of 8% in Fiscal Year 2021, a budget of $20,003,229, and no change in the stamping fee of 0.25%. Mr. Koppel moved, Mr. Mundelius seconded, and the committee passed the motion without dissent.

Adjournment

All business being concluded, Ms. Beaver adjourned the meeting at 3:45 p.m.