Management is focused on finding innovative solutions and leveraging technology to create insurance-related solutions that can set our agents apart, while benefiting policyholders. In late 2015, management formed a strategic analytics department focused on utilizing high-quality data to make better decisions. Key priorities for this department include partnering with the Company's 16 local branch offices to develop innovative products and services, improving claims fraud detection capabilities, prioritizing claims resources and integrating a decision science discipline into the decision making process. During 2016, the strategic analytics department undertook several initiatives, including the creation of an innovation lab, which is comprised of team members who are empowered to collaborate, make quick decisions and take action to develop new and creative insurance-related solutions. One of the first projects undertaken by the innovation lab was the development and introduction of a telematics program, which is currently being piloted with select agencies. Management's approach to telematics has been much different than other insurance companies, and has been well received by agents. Rather than focusing solely on improving the Company's underwriting results, the focus has been directed towards agent differentiation and helping policyholders lower their costs of doing business through improvements in fuel economy, uptime and driver retention. Other projects being developed include a computer application to assist insureds in identifying and reporting hazards that can lead to slip and fall accidents, a pilot program with schools that utilizes sensors to monitor and manage property risks using real-time data, and a partnership with a start-up company that has developed patent pending wearable technology that monitors environmental exposures to help identify and address safety risks in industrial workplace environments.
Since 1989, the pool participants have included an asbestos exclusion in liability policies issued for most lines of business. The exclusion prohibits liability coverage for “bodily injury”, “personal injury” or “property damage” (including any associated clean-up obligations) arising out of the installation, existence, removal or disposal of asbestos or any substance containing asbestos fibers. Therefore, the pool participants’ current asbestos exposures are primarily limited to commercial policies issued prior to 1989. At present, the pool participants are defending approximately 1,856 asbestos bodily injury lawsuits, some of which involve multiple plaintiffs. Claims activity associated with eight policyholders dominates the pool participants’ asbestos claims, representing an aggregate 1,812 lawsuits with 2,074 claimants. Most of the lawsuits are subject to express reservation of rights based upon the lack of an injury within the applicable policy periods, because many asbestos lawsuits do not specifically allege dates of asbestos exposure or dates of injury. The pool participants’ policyholders named as defendants in these asbestos lawsuits are typically peripheral defendants who have little or no exposure and are often dismissed from asbestos litigation with nominal or no payment (i.e., small contractors, supply companies, and a furnace manufacturer).
Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet cash obligations. The Company had positive cash flows from operations of $83.4 million in 2016, $85.6 million in 2015 and $91.8 million in 2014. The Company typically generates substantial positive cash flows from operations because cash from premium payments is generally received in advance of cash payments made to settle claims. These positive cash flows provide the foundation of the Company’s asset/liability management program and are the primary driver of the Company’s liquidity. The Company invests in high quality, liquid securities to match the anticipated payments of losses and settlement expenses of the underlying insurance policies. Because the timing of the losses is uncertain, the majority of the portfolio is maintained in short to intermediate maturity securities that can be easily liquidated or that generate adequate cash flow to meet liabilities.
The Company is a holding company whose principal asset is its investment in its property and casualty insurance subsidiaries and its reinsurance subsidiary (“insurance subsidiaries”). As a holding company, the Company is dependent upon cash dividends from its insurance subsidiaries to meet all its obligations, including cash dividends to stockholders and the funding of the Company’s stock repurchase program. State insurance regulations restrict the maximum amount of dividends insurance companies can pay without prior regulatory approval. The maximum amount of dividends that the insurance subsidiaries can pay to the Company in 2017 without prior regulatory approval is approximately $52.7 million. The Company received $9.7 million, $9.2 million and $378,000 of dividends from its insurance subsidiaries and paid cash dividends to its stockholders totaling $16.2 million, $14.2 million and $12.6 million in 2016, 2015 and 2014, respectively.
In our opinion, EMC Insurance Group Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
See note 8 for a discussion on fair value measurement. Following is a brief description of the various pricing techniques used for the asset classes of Employers Mutual’s VEBA trust.
The participants in the pooling agreement have purchased annuities from life insurance companies, under which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions. The Company’s share of case loss reserves eliminated by the purchase of those annuities was $110,000 at December 31, 2016. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $183,000 at December 31, 2016 should the issuers of those annuities fail to perform. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.