What started as a $4 million project to upgrade technology at the Surplus Lines Stamping Office of Texas is now anticipated to exceed $9.6 million before the SMART system is fully implemented. The board of directors of SLTX approved an amendment to the statement of work adding $350,000 to the contract for 2020 when it met on Oct. 28, anticipating SMART development expenses to reach more than $7 million by the year end of this year.
In other business, the board approved the 2021 budget, met its new contracted general counsel and approved contracts for cloud migration and storage services. In addition, Executive Director Greg Brandon reported third quarter results and announced a shift in SLTX’s communications philosophy and actions, and Board Chairman Rosemarie Marshall, AmWINS, shared correspondence the board members received from the Texas Department of Insurance.
At $7.77 million, the expenses in the 2021 operating budget approved by the board is 30 percent higher than the 2020 budgeted expenses of $5.99 million. Revenue is anticipated to be 38 percent lower, with 2021 revenue budgeted at $6.2 million, compared with $10.3 million in the 2020 budget. (By the end of October 2020, actual revenue collection was $9.9 million, with two months to go in the year.)
The revenue deficiency is caused by cutting in half the stamping fee for policy filings beginning Jan. 1, as the board works to bring the SLTX reserve fund down to the allowable level. The increase in expenses anticipated for 2021 is driven by a $929,082, or 78 percent, increase in general and administrative costs and a $316,380, or 48 percent, increase in professional services. The next highest budget change is in salaries and benefits, which increase by $303,150, or 10 percent.
While the 2021 proposed budget is compared to 2020’s budget in the document provided to the board, actual operating expenses for 2020 through the end of the third quarter represent only 54.6 percent of 2020’s total operating budget for the year.
SLTX’s 2021 capital budget was approved at $3.5 million, including a $2.6 million line item for continued SMART software development. The capital budget also anticipates unforeseen updates, upgrades and bug fixes to both the SMART and legacy systems.
New general counsel
Having chosen Mitchell, Williams law firm from among five respondents to its RFP for legal services when it met on Sept. 17, the SLTX board reviewed the engagement letter offered by Stanton Strickland and met him and two colleagues through a virtual connection.
The engagement letter sets the firm’s monthly flat fee at $10,000, which covers anticipated time to perform the standard operational legal services required by SLTX’s request for proposal. The costs will be allocated among the firm’s legal and paralegal staffs, ranging from $150 per hour for paralegal services to $650 per hour for the firm’s senior member Burnie Burner’s services. Strickland’s time will be billed at $500 per hour. The same rates apply to legal services provided that are outside the standard operational services identified in the RFP.
According to the minutes of the Sept. 17 meeting, the Mitchell, Williams firm “stood out” by being in business 65 years, with over 90 lawyers in four U.S. offices. The firm’s core practices are insurance regulation, business and litigation. Attorneys with the firm have represented TSLA and WSIA on compliance requirements, and the firm has strong quasi-government experience. The firm’s fees were neither the highest nor lowest of the firms responding to the RFP.
Strickland, who is with the firm’s Austin office, is SLTX’s primary contact for the engagement set to begin Nov. 1.
Strickland, along with other firm members, replaces longtime SLTX general counsel Alex Gonzales, Duane Morris, who served in the role since 1991. Gonzales was with the State Board of Insurance when the stamping office was created in 1987 and remained with TDI through 1990.
Gonzales’s monthly retainer in 2019 was set at $3,000, even though the SLTX 2019 budget anticipated spending about $222,000 for legal services during the year. Ultimately, legal services paid by the stamping office in 2019 reached $590,000, for an average monthly expenditure of about $49,000 for legal services.
Legal services, within the expense item for professional services, account for $150,000 in the board-approved 2021 budget, indicating the board anticipates spending no more than $30,000 for legal fees outside the standard legal services. The total professional services budget for 2021 of $982,380 includes not only legal services but also IT related services and financial auditors. Actual professional services expenses for the current year were $555,872, as of the end of September.
The board approved a cloud migration at a cost of $60,000 and a related three-year Microsoft services contract totaling $418,167. The vendor for the cloud migration is Cyber7. While the staff anticipated $150,000 in other costs associated with the project, the board deferred approval of the contingency amount, even though it is included in the 2021 budget.
Executive director’s report
Brandon provided the board with an overview of SLTX activities and results for the most recently ended quarter. Premium reported to SLTX by the end of September reached $5.99 billion, with every month except July setting a new monthly record. Item count, which reflects stamping office workload, stands at 802,321 which is about four percent below last year’s item count at the end of the third quarter.
Stamping fees by the end of September totaled just under $9 million. As of the end of October, stamping fee revenue totaled just under $10 million, with the item count remaining about 4.3 percent below 2019’s count by the end of October.
Based on a formula included in the Plan of Operation, SLTX’s reserves exceed the allowable limit by about $18.4 million, a number expected to be reduced over the next few years as SLTX revenue falls below budgeted expenses. The revenue shortfall anticipated in the 2021 operating and capital budget is about $5.1 million.
The agency currently has two vacancies for policy analysts and has posted the jobs on its website and other virtual job posting sites.
Brandon said that HR Director Denisse Orellana revamped communications to focus on services provided by SLTX rather than report on general industry news. Based on research of user responses that revealed unopened emails and little use of links, SLTX will no longer provide news of events and personnel not directly connected to SLTX’s services and mission.
Correspondence from TDI
Prior to adjourning the meeting, Marshall shared a letter to all board members from James Person, general counsel of TDI, urging them to implement best practices, including training board members so they understand the “serious weight” of their responsibilities and making certain that the board’s outside counsel fulfills his responsibilities under direct oversight of the board.
Person said in his letter that Commissioner Kent Sullivan instructed him to send this letter prior to his departure from office on Sept. 30. The letter to board members is dated Oct. 2.
Marshall told board members that the letter had been directed to members of all boards and commissions that fall under TDI’s supervision and that it was not directed at SLTX in particular. Past Board Chairwoman Lorrie Cheshier, Worldwide Facilities, MHI-MGA Division, commented that the letter was “not surprising” given her conversations with the commissioner’s office during her tenure as SLTX chairwoman.
TDI’s distribution of letters similar to the one received by SLTX board members included eight other boards or governing committees, and one advisory committee: Texas Self-Insurance Group Guaranty Fund Association, Texas Life and Health Insurance Guaranty Fund Association, Texas Windstorm Insurance Association, Fair Access to Insurance Requirements (FAIR) Plan, Texas Title Guaranty Fund Association, Texas Property and Casualty Insurance Guaranty Fund Association, Texas Medical Liability Insurance Underwriting Association, Texas Automobile Insurance Plan Association, and Texas Standard Request Form for Prior Authorization of Prescription Drug Benefits Advisory Committee.