-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Aj9rFxPWRLre7YrtOyhkVmmTobByvFPlDEDdWlzkQjoonD0d73q2hPk8ULIk31+r xq301nPoCkevPy6oFLYdcw== 0000066025-98-000006.txt : 19980331 0000066025-98-000006.hdr.sgml : 19980331 ACCESSION NUMBER: 0000066025-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDLAND CO CENTRAL INDEX KEY: 0000066025 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310742526 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06026 FILM NUMBER: 98578932 BUSINESS ADDRESS: STREET 1: 7000 MIDLAND BLVD STREET 2: P O BOX 125 CITY: AMELIA STATE: OH ZIP: 45102-2607 BUSINESS PHONE: 5139437100 MAIL ADDRESS: STREET 2: P O BOX 1256 CITY: CINCINNATI STATE: OH ZIP: 45201 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1997 Commission File Number - 1-6026 THE MIDLAND COMPANY Incorporated in Ohio I.R.S. Employer Identification No. 31-0742526 7000 Midland Boulevard Amelia, Ohio 45102-2607 Tel. (513) 943-7100 Securities registered pursuant to Section 12(b) of the Act: Common stock - no par value. - American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all other reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes__X__ No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting common stock held by nonaffiliates, which includes shares held by executive officers and directors, of the registrant as of March 16, 1998 was $251,911,000. Number of shares of common stock outstanding as of March 16, 1998 - 3,100,446. Documents Incorporated by Reference Annual Report to Shareholders for the year ended December 31, 1997 is incorporated by reference into Parts I, II and IV. Registrant's Proxy Statement dated March 6, 1998 is incorporated by reference into Parts III and IV. 1 THE MIDLAND COMPANY FORM 10-K DECEMBER 31, 1997 Certain statements contained in this report that are not historical facts constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, and are intended to be covered by the safe harbors created by that Act. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Any forward-looking statement speaks only as of the date made. The Midland Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made. Statements concerning expected financial performance, on-going business strategies and possible future action which The Midland Company intends to pursue to achieve strategic objectives constitute forward-looking information. Implementation of these strategies and the achievement of such financial performance are each subject to numerous conditions, uncertainties and risk factors. Factors which might cause deviations from the forward-looking statements include, without limitations, the following: 1) changes in the laws or regulations affecting the operations of the Company or any of its subsidiaries; 2) changes in the business tactics or strategies of the Company or any of its subsidiaries; 3) acquisition(s) of assets or of new or complementary operations, or divestiture of any segment of the existing operations of the Company or any of its subsidiaries; 4) changing market forces or litigation which necessitate, in Management's judgment, changes in plans, strategy or tactics of the Company or its subsidiaries and 5) adverse weather conditions, fluctuations in the investment markets, changes in the retail marketplace or fluctuations in interest rates, any one of which might materially affect the operations of the Company and/or its subsidiaries. 2 PART I ITEM 1. Business. Incorporated by reference from the inside cover and pages 2 through 11 and 28 (Note 17) of the Registrant's 1997 Annual Report to Shareholders. The number of persons employed by the Registrant was approximately 805 at December 31, 1997. Property and Casualty Loss Reserves The Company's consolidated financial statements include the estimated liability (reserves) for unpaid losses and loss adjustment expenses (LAE) of its property and casualty insurance subsidiaries. The liability is presented net of amounts recoverable from salvage and subrogation and includes amounts recoverable from reinsurance for which receivalbes are recognized. The Company establishes reserves for losses that have been reported to the Company and certain legal expenses on the "case basis" method. The Company estimates claims incurred but not reported ("IBNR") and other adjustment expenses using statistical procedures. The Company accrues salvage and subrogation recoveries using the "case basis" method for large claims and statistical procedures for smaller claims. The Company's objective is to set reserves that are adequate; that is, the amounts originally recorded as reserves should at least equal the amounts ultimately expected to be required to settle losses. The Company's reserves aggregate its best estimates of the total ultimate cost of claims that have been incurred but have not yet been paid. The estimates are based on past claims experience and reflect current claims trends as well as social, legal and economic conditions, including inflation. The reserves are not discounted. The Company reviews its loss and loss adjustment expense reserve development on a regular basis to determine whether the reserving assumptions and methods are appropriate. Reserves initially determined are compared to the amounts ultimately paid. The Company regularly makes statistical estimates of the projected amounts necessary to settle outstanding claims, compares these estimates to the recorded reserves and adjusts the reserves as necessary. The adjustments are reflected in current operations. There are no material differences between the loss and LAE liability reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles ("GAAP") and that reported in the annual statements filed with state insurance departments in accordance with statutory accounting practices ("SAP"). The following table provides an analysis of changes in loss and LAE reserves for 1997, 1996 and 1995 (net of reinsurance amounts) for the Company. Based on the information available during and at the end of each of the respective years, operations were charged $5,230,000 in 1997 and $3,771,000 in 1996 as a result of an increase in the estimated amounts needed to settle prior years' claims. Operations were credited $7,347,000 in 1995 for such estimates. Such reserve adjustments, which affected current operations during each of the years, resulted from developed losses from prior years being different than were anticipated when the liability for losses and loss adjustment expense were originally estimated. These development trends have been considered in establishing the current year liabilities. 3 (Amounts in 000's) --------------------------------------- 1997 1996 1995 --------------------------------------- Balance at January 1 $ 88,992 $ 61,497 $ 52,078 Less reinsurance recoverables 24,208 13,785 14,597 --------------------------------------- Net balance at January 1 64,784 47,712 37,481 --------------------------------------- Incurred related to: Current year 163,035 166,554 141,887 Prior years 5,230 3,771 (7,347) --------------------------------------- Total incurred 168,265 170,325 134,540 --------------------------------------- Paid related to: Current year 113,841 121,782 105,269 Prior years 37,307 31,471 19,040 --------------------------------------- Total paid 151,148 153,253 124,309 --------------------------------------- Net balance at December 31 81,901 64,784 47,712 Plus reinsurance recoverables 26,433 24,208 13,785 --------------------------------------- Balance at December 31 $108,334 $ 88,992 $ 61,497 --------------------------------------- Analysis of Loss and LAE Reserve Development The next table presents the development of the estimated liability for the ten years prior to 1997. The top line of the table illustrates the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate was increased or decreased as more information became known about the frequency and severity of claims for individual years. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. The "Net Reserve Re-estimated" section of the table shows the cumulative redundancy (deficiency) developed with respect to the previously recorded liability for all years as of the end of 1997. For example, the Company's 1990 reserve of $16,570,000 has been re-estimated as of year-end 1997 to be $13,589,000, indicating a redundancy of $2,981,000. The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. For example, as of December 31, 1997, the Company had paid $13,550,000 of the currently estimated $13,589,000 of losses and LAE that have been incurred as of the end of 1990; thus an estimated $39,000 of losses incurred as of the end of 1990 remain unpaid as of the current financial statement date. The Company's reserve development has been unfavorable beginning in 1995 due to the Company's expansion into certain areas of commercial lines insurance. These developments have been considered in establishing the current year liabilities. 4 Analysis of Loss and Loss Adjustment Expense Development (Amounts in 000's) Year Ended December 31 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 ------------------------------------------------------------------------------------------------------------ Reserve for Unpaid Losses, Net of Reinsurance $12,553 $12,464 $15,732 $16,570 $19,089 $20,405 $27,744 $37,481 $47,712 $64,784 $ 81,901 Net Reserve Re-estimated as of: One Year Later 12,148 11,609 15,167 15,492 17,160 18,425 25,668 30,134 51,483 70,014 Two Years Later 12,456 11,534 15,043 14,859 15,699 18,451 22,686 32,074 53,467 Three Years Later 12,351 11,292 14,397 13,841 15,202 16,871 21,154 31,880 Four Years Later 12,374 11,024 13,773 13,929 14,497 16,616 20,966 Five Years Later 12,165 10,886 13,758 13,663 14,393 16,505 Six Years Later 12,172 10,926 13,754 13,598 14,373 Seven Years Later 12,211 10,962 13,722 13,589 Eight Years Later 12,235 10,948 13,741 Nine Years Later 12,235 10,967 Ten Years Later 12,235 Net Cumulative Redundancy (Deficiency) $ 318 $ 1,497 $ 1,991 $ 2,981 $ 4,716 $ 3,900 $ 6,778 $ 5,601 $(5,755) $(5,230) ================================================================================================== Net Cumulative Amount of Reserve Paid Through: One Year Later $ 9,825 $ 8,659 $11,210 $11,117 $10,937 $11,730 $ 9,684 $19,040 $31,471 $37,307 Two Years Later 11,270 9,644 12,902 12,488 12,685 14,397 18,445 26,471 41,785 Three Years Later 11,644 10,461 13,355 12,965 13,588 15,923 19,930 29,237 Four Years Later 12,011 10,668 13,465 13,208 14,171 16,312 20,427 Five Years Later 12,067 10,739 13,595 13,471 14,307 16,381 Six Years Later 12,103 10,825 13,689 13,530 14,331 Seven Years Later 12,152 10,915 13,704 13,550 Eight Years Later 12,232 10,930 13,703 Nine Years Later 12,235 10,929 Ten Years Later 12,235 Net Reserve - December 31 $20,405 $27,744 $37,481 $47,712 $64,784 $ 81,901 Reinsurance Recoverables 2,780 6,220 14,597 13,785 24,208 26,433 ---------------------------------------------------------- Gross Reserve-December 31 $23,185 $33,964 $52,078 $61,497 $88,992 $108,334 ========================================================== Net Re-estimated Reserve $16,505 $20,966 $31,880 $53,467 $70,014 Re-estimated Reinsurance 2,249 4,700 12,416 15,448 26,160 ----------------------------------------------- Gross Re-estimated Reserve $18,754 $25,666 $44,296 $68,915 $96,174 =============================================== Gross Cumulative Redundancy (Deficiency) $ 4,431 $ 8,298 $ 7,782 $(7,418) $(7,182) ================================================ 4
Reinsurance The Company reinsures certain levels of risk with other insurance companies and cedes varying portions of its written premiums to such reinsurers. In addition, the Company pays a percentage of earned premiums to reinsurers in return for coverage against catastrophic losses. To the Company's knowledge, none of its reinsurers are experiencing financial difficulties. Furthermore, the Company monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The composition of its reinsurers has not changed significantly in recent years. The Company has not experienced any uncollectible reinsurance amounts or coverage disputes with its reinsurers in over ten years. ITEM 2. Properties. Incorporated by reference to the inside front cover and pages 2 through 11 of the Registrant's 1997 Annual Report to Shareholders. ITEM 3. Legal Proceedings. Reference is made to Item 3 of the December 31, 1995 Registrant's Form 10-K concerning criminal litigation against M/G Transport Services, Inc., a subsidiary of the Registrant. Upon Motion, the Court dismissed six of the remaining eight counts against M/G, four of the six remaining counts against one former employee and all of the remaining counts against two former employees. The United States has appealed. On October 31, 1997, M/G was fined $250,000 and placed on two years' probation on the two remaining counts. The Company does not expect any additional fines unless the United States is successful in its appeal. ITEM 4. Submission of Matters to a Vote of Security Holders. None during the fourth quarter. PART II ITEM 5. Market for the Registrant's Common Stock and Related Security Holder Matters. Incorporated by reference to pages 12, 28 (Note 18) and 32 of the Registrant's 1997 Annual Report to Shareholders. The number of holders of the Company's common stock at December 31, 1997 was approximately 1,340. The Company's common stock is registered on the American Stock Exchange (MLA). ITEM 6. Selected Financial Data. Incorporated by reference to page 13 of the Registrant's 1997 Annual Report to Shareholders. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference to pages 14 through 16 of the Registrant's 1997 Annual Report to Shareholders. ITEM 8. Financial Statements and Supplementary Data. Incorporated by reference to pages 12 and 17 through 30 of the Registrant's 1997 Annual Report to Shareholders. ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures. None. 6 PART III ITEM 10. Directors and Executive Officers of the Registrant. Incorporated by reference to the Registrant's Proxy Statement dated March 6, 1998. Executive Officers of the Company - J. P. Hayden, Jr. - Age 68 - Chairman and Chief Executive Officer Michael J. Conaton - Age 64 - President and Chief Operating Officer J. P. Hayden, III - Age 45 - Senior Executive Vice President John W. Hayden - Age 40 - Senior Executive Vice President John R. LaBar - Age 66 - Vice President and Secretary Robert W. Hayden - Age 59 - Vice President John I. Von Lehman - Age 45 - Executive Vice President and Chief Financial Officer W. Todd Gray - Age 30 - Treasurer J. P. Hayden, Jr. and Robert W. Hayden are brothers. J. P. Hayden, III and John W. Hayden are sons of J. P. Hayden, Jr. The Board of Directors of The Midland Company voted at their regular meeting on March 5, 1998 to elect the following new executive officers effective with the Company's Annual Shareholders' Meeting on April 9, 1998. Mr. J. P. Hayden, III was elected Chairman and Chief Operating Officer of The Midland Company. Mr. John W. Hayden was elected President and Chief Executive Officer of The Midland Company. Mr. J. P. Hayden, Jr. was elected Chairman of the Executive Committee of the Board. Mr. Michael J. Conaton was elected Vice Chairman of the Board. During 1997, W. Todd Gray was elected Treasurer. Mr. Gray joined Midland in 1994 and served as Internal Audit Manager and, more recently, Assistant Treasurer. Prior to that he was with a national accounting firm. During 1996, J. P. Hayden, III and John W. Hayden (formerly Vice Presidents) were elected Senior Executive Vice Presidents. Also in 1996, John I. Von Lehman (formerly Vice President, Treasurer and Chief Financial Officer) was elected Executive Vice President and Chief Financial Officer. The officers listed above have served in the positions indicated for the past five years (except as noted above). ITEM 11. Executive Compensation. Incorporated by reference to the Registrant's Proxy Statement dated March 6, 1998. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference to the Registrant's Proxy Statement dated March 6, 1998. ITEM 13. Certain Relationships and Related Transactions. Incorporated by reference to the Registrant's Proxy Statement dated March 6, 1998. 7 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements. Incorporated by reference in Part II of this report: Data pertaining to The Midland Company and Subsidiaries - Report of Independent Public Accountants. Consolidated Balance Sheets, December 31, 1997 and 1996. Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. (a) 2. Financial Statement Schedules. Included in Part IV of this report: Data pertaining to The Midland Company and Subsidiaries - Page Independent Auditors' Consent and Report on Schedules. 12 Schedule I - Summary of Investments - Other Than Investments in Related Parties - December 31, 1997 13 Schedule II - Condensed Financial Information of Registrant 14-18 Schedule III - Supplementary Insurance Information for the Years Ended December 31, 1997, 1996 and 1995 19 Schedule IV - Reinsurance for the Years Ended December 31, 1997, 1996 and 1995 20 Schedule V - Valuation and Qualifying Accounts for the Years Ended December 31, 1997, 1996 and 1995 21 Schedule VI - Supplemental Information Concerning Property- Casualty Insurance Operations for the Years Ended December 31, 1997, 1996 and 1995 22 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a) 3. Exhibits. 3. Articles of Incorporation and Code of Regulations - Filed as Exhibit 3 to the Registrant's 1980 Annual Report on Form 10-K, and incorporated herein by reference. 10.1 The Midland Company 1992 Employee Incentive Stock Plan and The Midland Company Stock Option Plan for Non-Employee Directors and The Midland Company 1972 Stock Options Plan- Incorporated by reference to Registrant's Statement 33-48511 on Form S-8. 8 PART IV (Continued) 10.2 A description of the Company's Profit Sharing Plan, Salaried Employees' Non-Qualified Savings Plan and the Supplemental Retirement Plan - Incorporated by reference to the Registrant's Proxy Statement dated March 6, 1998. 11. Computation of Consolidated Net Income Per Share for the years ended December 31, 1997, 1996 and 1995. 23 13. Annual Report to security holders - Incorporated by reference to the Registrant's 1997 Annual Report to Shareholders. 21. Subsidiaries of the Registrant. 24 22. Published Report Regarding Matters Submitted to Vote of Security Holders - Incorporated by Reference to the Registrant's Proxy Statement dated March 6, 1998. 23. Independent Auditors' Consent - Included in Consent and Report on Schedules referred to under Item 14(a)2 above. 27. Financial Data Schedule (b) Reports on Form 8-K - A Form 8-K was filed on October 14, 1997 in connection with the September 29, 1997 sale of the Company's Sportswear operation. 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MIDLAND COMPANY Signature Title Date S/ J. P. Hayden, Jr. Chairman and March 5, 1998 (J. P. Hayden, Jr.) Chief Executive Officer S/ John I. Von Lehman Executive Vice President March 5, 1998 (John I. Von Lehman) and Chief Financial, Accounting Officer 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. THE MIDLAND COMPANY Signature Title Date S/ George R. Baker Director March 5, 1998 (George R. Baker) S/ James E. Bushman Director and Member March 5, 1998 (James E. Bushman) of Audit Committee S/ James H. Carey Director and Member March 5, 1998 (James H. Carey) of Audit Committee S/ Michael J. Conaton President, Chief Operating March 5, 1998 (Michael J. Conaton) Officer and Director S/ J. P. Hayden, Jr. Chairman, Chief Executive March 5, 1998 (J. P. Hayden, Jr.) Officer and Director S/ J. P. Hayden, III Senior Executive Vice March 5, 1998 (J. P. Hayden, III) Presidnet and Director S/ John W. Hayden Senior Executive Vice March 5, 1998 (John W. Hayden) President and Director S/ Robert W. Hayden Vice President and Director March 5, 1998 (Robert W. Hayden) S/ William T. Hayden Director March 5, 1998 (William T. Hayden) S/ William J. Keating Director March 5, 1998 (William J. Keating) S/ William McD. Kite Director March 5, 1998 (William McD. Kite) S/ John R. LaBar Vice President, Secretary March 5, 1998 (John R. LaBar) and Director S/ John M. O'Mara Director and Member March 5, 1998 (John M. O'Mara) of Audit Committee S/ John R. Orther Director and Member March 5, 1998 (John R. Orther) of Audit Committee S/ William F. Plettner Director March 5, 1998 (William F. Plettner) S/ Glenn E. Schembechler Director and Member March 5, 1998 (Glenn E. Schembechler) of Audit Committee S/ John I. Von Lehman Executive Vice President, March 5, 1998 (John I. Von Lehman) Chief Financial, Accounting Officer and Director 11 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES To the Shareholders of The Midland Company: We consent to the incorporation by reference in Registration Statements No. 33-64821 on Form S-3 and No. 33-48511 on Form S-8 of The Midland Company of our report dated February 12, 1998, incorporated by reference in this Annual Report on Form 10-K, and our report (appearing below) on the financial statement schedules of The Midland Company for the year ended December 31, 1997. Our audits of the consolidated financial statements referred to in our aforementioned report also included the financial statement schedules of The Midland Company and its subsidiaries, listed in Item 14(a)2. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. S/Deloitte & Touche, LLP Deloitte & Touche, LLP Cincinnati, Ohio March 23, 1998 12 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule I - Summary of Investments - Other than Investments in Related Parties December 31, 1997 Column A Column B Column C Column D - -------------------------------------------------------------------------------- Amount at which shown in the balance Type of Investment Cost Value sheet - -------------------------------------------------------------------------------- Fixed maturity securities, available-for-sale: Bonds: United States Government and government agencies and authorities $195,066,000 $197,864,000 $197,864,000 States, municipalities and political subdivisions 83,997,000 86,877,000 86,877,000 Mortgage-backed securities 7,902,000 7,948,000 7,948,000 Foreign governments 511,000 510,000 510,000 Public utilities 1,407,000 1,403,000 1,403,000 All other corporate bonds 67,150,000 68,436,000 68,436,000 ------------------------------------------- Total 356,033,000 363,038,000 363,038,000 ------------------------------------------- Equity securities, available-for-sale: Common stocks: Public utilities 1,149,000 1,452,000 1,452,000 Banks, trusts and insurance companies 5,126,000 52,157,000 52,157,000 Industrial, miscellaneous and all other 25,179,000 38,696,000 38,696,000 Nonredeemable preferred stocks 2,257,000 2,269,000 2,269,000 ------------------------------------------- Total 33,711,000 94,574,000 94,574,000 ------------------------------------------- Accrued interest and dividends 5,685,000 5,685,000 5,685,000 ------------------------------------------- Short-term investments 35,532,000 35,532,000 35,532,000 ------------------------------------------- Total investments $430,961,000 $498,829,000 $498,829,000 =========================================== 13 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Condensed Balance Sheet Information December 31, 1997 and 1996 ASSETS 1997 1996 ----------------------------- Cash $ 236,000 $ 267,000 ----------------------------- Marketable Securities (at market value): Fixed Income (cost, $2,427,000 in 1997 and $427,000 in 1996) 2,427,000 427,000 Equity (cost, $354,000 in 1997 and $362,000 in 1996) 2,456,000 1,343,000 ----------------------------- Total 4,883,000 1,770,000 ----------------------------- Receivables - Net 7,010,000 6,801,000 ----------------------------- Intercompany Receivables -- 6,822,000 ----------------------------- Property, Plant and Equipment (at cost) 35,878,000 33,635,000 Less Accumulated Depreciation 3,552,000 2,090,000 ----------------------------- Net 32,326,000 31,545,000 ----------------------------- Investments in Real Estate 14,779,000 18,868,000 ----------------------------- Other Assets 3,720,000 2,434,000 ----------------------------- Investment in Subsidiaries (at equity) 197,206,000 153,965,000 ----------------------------- Total $ 260,160,000 $ 222,472,000 ============================= 14 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Condensed Balance Sheet Information December 31, 1997 and 1996 LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 ----------------------------- Notes Payable within One Year: Banks (including current portion of long-term debt) $ 25,425,000 $ 28,824,000 Commercial Paper 5,791,000 4,700,000 ----------------------------- Total 31,216,000 33,524,000 ----------------------------- Other Payables and Accruals 3,403,000 1,593,000 ----------------------------- Intercompany Payables 501,000 -- ----------------------------- Long-Term Debt 28,014,000 27,667,000 ----------------------------- Shareholders' Equity: Common Stock - No Par (issued and outstanding: 3,111,000 shares at December 31, 1997 and 3,042,000 shares at December 31, 1996 after deducting treasury stock of 532,000 shares and 601,000 shares, respectively) 911,000 911,000 Additional Paid-In Capital 15,359,000 14,846,000 Retained Earnings 153,797,000 138,423,000 Net Unrealized Gain on Marketable Securities 44,123,000 23,587,000 Treasury Stock (at cost) (14,704,000) (16,621,000) Unvested Restricted Stock Awards (2,460,000) (1,458,000) ----------------------------- Total 197,026,000 159,688,000 ----------------------------- Total Liabilities and Shareholders' Equity $ 260,160,000 $ 222,472,000 ============================= 15 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Condensed Statements of Income Information For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 ----------------------------------------- Revenues: Dividends from Subsidiaries $ 8,900,000 $ 20,500,000 $ 35,117,000 All Other Income, Primarily Charges to Subsidiaries 7,746,000 7,876,000 9,434,000 ----------------------------------------- Total Revenues 16,646,000 28,376,000 44,551,000 ----------------------------------------- Expenses: Interest Expense 4,775,000 5,101,000 5,248,000 Depreciation, Amortization and Impairment 6,195,000 2,548,000 4,884,000 All Other Expenses 833,000 2,033,000 1,727,000 ----------------------------------------- Total Expenses 11,803,000 9,682,000 11,859,000 ----------------------------------------- Income Before Federal Income Tax 4,843,000 18,694,000 32,692,000 Provision (Credit) for Federal Income Tax (1,599,000) (654,000) (902,000) ----------------------------------------- Income Before Change in Undistributed Income of Subsidiaries 6,442,000 19,348,000 33,594,000 Change in Undistributed Income of Subsidiaries: From Continuing Operations 17,925,000 (15,605,000) (17,546,000) From Discontinued Operations (6,817,000) (2,675,000) (6,496,000) ----------------------------------------- Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000 ========================================= 16 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Condensed Statements of Cash Flows Information For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 ----------------------------------------- Cash Flows from Operating Activities: Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000 Loss from discontinued operations 6,817,000 2,675,000 6,496,000 ----------------------------------------- Income from continuing operations 24,367,000 3,743,000 16,048,000 Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in undistributed income of subsidiaries (17,925,000) 15,605,000 17,546,000 Depreciation, amortization and impairment 6,195,000 2,548,000 4,884,000 Increase in other assets (1,286,000) (1,359,000) (1,044,000) Decrease (increase) in receivables 134,000 689,000 (3,995,000) Increase in other payables & accruals 1,575,000 90,000 871,000 Other - net 36,000 28,000 166,000 ----------------------------------------- Net cash provided by operating activities 13,096,000 21,344,000 34,476,000 ----------------------------------------- Cash Flows from Investing Activities: Acquisition of property, plant & equipment (2,617,000) (1,516,000) (28,060,000) Capital contributions to subsidiaries (12,326,000) -- (2,999,000) Sale of property, plant & equipment 535,000 66,000 599,000 Change in investments (excluding unrealized appreciation/depreciation) (1,991,000) 7,690,000 5,379,000 ----------------------------------------- Net cash provided by (used in) investing activities (16,399,000) 6,240,000 (25,081,000) ----------------------------------------- Cash Flows from Financing Activities: Net change in intercompany accounts 7,323,000 (21,363,000) (35,029,000) Increase (decrease) in long-term debt 948,000 (767,000) 20,551,000 Increase (decrease) in short-term borrowings (2,909,000) (2,920,000) 8,074,000 Dividends paid (2,677,000) (1,962,000) (1,844,000) Net issuance (purchase) of treasury stock 587,000 (545,000) (1,091,000) ----------------------------------------- Net cash provided by (used in) financing activities 3,272,000 (27,557,000) (9,339,000) ----------------------------------------- Net Increase (Decrease) in Cash (31,000) 27,000 56,000 Cash at Beginning of Year 267,000 240,000 184,000 ----------------------------------------- Cash at End of Year $ 236,000 $ 267,000 $ 240,000 ========================================= 17 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Notes to Condensed Financial Information For the Years Ended December 31, 1997 and 1996 The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes included in the Registrant's 1997 Annual Report to shareholders. Total debt of the Registrant (parent only) consists of the following: DECEMBER 31, --------------------------- 1997 1996 --------------------------- Short-Term Bank Borrowings $ 24,000,000 $ 28,000,000 Commercial Paper 5,791,000 4,700,000 Mortgage Notes: 7.20% - Due January 1, 2001 1,773,000 -- 6.92% - Due December 20, 2005 19,768,000 20,304,000 5.82% - Due December 1, 2003 7,898,000 8,187,000 --------------------------- Total Debt $ 59,230,000 $ 61,191,000 =========================== See Note 9 to the consolidated financial statements included in the 1997 Annual Report to Shareholders for further information on the Company's outstanding debt at December 31, 1997. The amount of debt that becomes due during each of the next five years is as follows: 1998 - $1,425,000; 1999 - $1,524,000; 2000 - $1,639,000; 2001 - $1,070,000; 2002 - $1,142,000. 18 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule III - Supplementary Insurance Information For the Years Ended December 31, 1997, 1996 and 1995 (Amounts in 000's) Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K Future Policy Other Benefits, Amortization Deferred Benefits, Policy Claims, of Deferred Policy Losses, Claims and Net Losses and Policy Other Acquisition Claims and Unearned Benefits Premium Investment Settlement Acquisition Operating Premiums Cost Loss Expenses Premiums Payable Revenue Income(1) Expenses Costs Expenses Written ------------------------------------------------------------------------------------------------------------------------ 1997 Property & Casualty $52,198 $116,898 $222,530 $305,198 $20,018 $168,265 $78,762 $45,003 $342,308 Life & A&H 3,392 3,236 17,810 5,961 1,195 2,898 2,418 515 2,738(2) Other 119 3,600(3) ------------------------------------------------------------------------------------------------------------------------ Total $55,590 $120,134 $240,340 $ - $311,159 $21,332 $171,165 $81,180 $49,118 $345,046 ======================================================================================================================== 1996 Property & Casualty $42,308 $ 92,940 $190,071 $275,529 $17,161 $170,325 $79,100 $37,624 $289,144 Life & A&H 3,034 2,890 18,346 5,085 1,045 2,101 2,433 485 2,178(2) Other 63 3,246(3) ------------------------------------------------------------------------------------------------------------------------ Total $45,342 $ 95,830 $208,417 $ - $280,614 $18,269 $172,426 $81,533 $41,355 $291,322 ======================================================================================================================== 1995 Property & Casualty $40,352 $ 66,394 $176,499 $258,867 $15,103 $134,540 $78,487 $38,356 $284,485 Life & A&H 2,794 1,953 14,449 4,139 949 1,671 2,033 401 2,763(2) Other 55 718(3) ------------------------------------------------------------------------------------------------------------------------ Total $43,146 $ 68,347 $190,948 $ - $263,006 $16,107 $136,211 $80,520 $39,475 $287,248 ======================================================================================================================== Notes to Schedule III: (1) Investment income amounts for the above insurance segments represent investment income on the actual investment securities in each such segment. Investment expenses, which are deducted from investment income, and other operating expenses, include both expenses incurred directly in the insurance segments and expenses allocated to and among the insurance segments based on historical usage factors. (2) Amounts represent accident and health insurance written premiums only. (3) Expenses relate to Parent and Agency Operations with related revenues of $3,219, $1,602 and $618 in 1997, 1996 and 1995, respectively, which are not depicted in the above schedule.
19 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule IV - Reinsurance For the Years Ended December 31, 1997, 1996 and 1995 Column A Column B Column C Column D Column E Column F Ceded to Assumed Percentage of Gross Other from Other Net Amount Assumed Amount Companies Companies Amount to Net -------------------------------------------------------------------- 1997 Life Insurance in Force $371,298,000 $170,668,000 $200,630,000 0.0% ==================================================================== Insurance Premiums and Other Considerations: Life Insurance $ 5,724,000 $ 2,310,000 $ 120,000 $ 3,534,000 3.4% Health Insurance 4,394,000 2,061,000 94,000 2,427,000 3.9% Property & Liability Insurance 375,610,000 98,406,000 27,994,000 305,198,000 9.2% -------------------------------------------------------------------- Total Premiums $385,728,000 $102,777,000 $28,208,000 $311,159,000 9.1% ==================================================================== 1996 Life Insurance in Force $327,473,000 $163,604,000 $ 5,730,000 $169,599,000 3.4% ==================================================================== Insurance Premiums and Other Considerations: Life Insurance $ 4,703,000 $ 2,140,000 $ 481,000 $ 3,044,000 15.8% Health Insurance 3,450,000 1,932,000 523,000 2,041,000 25.6% Property & Liability Insurance 346,919,000 92,674,000 21,284,000 275,529,000 7.7% -------------------------------------------------------------------- Total Premiums $355,072,000 $ 96,746,000 $22,288,000 $280,614,000 7.9% ==================================================================== 1995 Life Insurance in Force $231,956,000 $122,038,000 $18,127,000 $128,045,000 14.2% ==================================================================== Insurance Premiums and Other Considerations: Life Insurance $ 3,232,000 $ 1,475,000 $ 779,000 $ 2,536,000 30.7% Health Insurance 2,185,000 1,410,000 828,000 1,603,000 51.7% Property & Liability Insurance 301,388,000 60,567,000 18,046,000 258,867,000 7.0% -------------------------------------------------------------------- Total Premiums $306,805,000 $ 63,452,000 $19,653,000 $263,006,000 7.5% ====================================================================
20 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule V - Valuation and Qualifying Accounts for the Years Ended December 31, 1997, 1996 and 1995 ADDITIONS CHARGED BALANCE AT (CREDITED) TO BALANCE BEGINNING COSTS AND DEDUCTIONS AT END DESCRIPTION OF PERIOD EXPENSES (ADDITIONS) OF PERIOD - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997: Allowance For Losses $ 799,000 $ 184,000 $ 230,000 (1) $ 753,000 YEAR ENDED DECEMBER 31, 1996: Allowance For Losses $ 863,000 $ (50,000) $ 14,000 (1) $ 799,000 YEAR ENDED DECEMBER 31, 1995: Allowance For Losses $ 1,014,000 $ 443,000 $ 594,000 (1) $ 863,000 NOTES: (1) Accounts written off are net of recoveries. (2) 1996 and 1995 amounts have been changed from amounts previously reported. Amounts related to the disposal in 1997 of one of the Company's business segments have been excluded. 21 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations For the Years Ended December 31, 1997, 1996 and 1995 (Amounts in 000's) Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K Claims and Claim Reserves Adjustment for Unpaid Expenses Amortization Deferred Claims Discount, Incurred of Deferred Paid Claims Affiliation Policy and Claim if any, Net Related to Policy and Claim with Acquisition Adjustment Deducted in Unearned Earned Investment Current Prior Acquisition Adjustment Premiums Registrant Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses Written - ------------------------------------------------------------------------------------------------------------------------------------ Consolidated Property- Casualty Subsidiaries 1997 $52,198 $116,898 $ - $222,530 $305,198 $20,018 $163,035 $ 5,230 $78,762 $151,148 $342,308 =================================================================================================================== 1996 $42,308 $ 92,940 $ - $190,071 $275,529 $17,161 $166,554 $ 3,771 $79,100 $153,253 $289,144 =================================================================================================================== 1995 $40,352 $ 66,394 $ - $176,499 $258,867 $15,103 $141,887 $(7,347) $78,487 $124,309 $284,485 ===================================================================================================================
22 EX-11 2 EXHIBIT (11) THE MIDLAND COMPANY AND SUBSIDIARIES Exhibit (11) - Computation of Consolidated Net Income Per Share For the Years Ended December 31, 1997, 1996 AND 1995 1997 1996 1995 ----------------------------------------- Consolidated Net Income: Income From Continuing Operations $ 24,367,000 $ 3,743,000 $ 16,048,000 Income (Loss) From Discontinued Operations (6,817,000) (2,675,000) (6,496,000) ----------------------------------------- Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000 ========================================= Calculation of Basic Earnings (Loss) Per Share of Common Stock: Weighted Average Common Shares Outstanding, Excluding The Dilutive Effect Of Stock Options And Stock Awards 2,985,000 2,948,000 2,952,000 ----------------------------------------- Basic Earnings (Loss) Per Share Of Common Stock (average shares outstanding divided by income): Continuing Operations $ 8.16 $ 1.27 $ 5.44 Discontinued Operations (2.28) (0.91) (2.20) ----------------------------------------- Total $ 5.88 $ 0.36 $ 3.24 ========================================= Calculation Of Dilutive Earnings (Loss) Per Share Of Common Stock: Adjusted Weighted Average Common Shares Outstanding, Including The Dilutive Effect Of Stock Options And Stock Awards 3,097,000 3,033,000 3,072,000 ----------------------------------------- Dilutive Earnings (Loss) Per Share Of Common Stock (adjusted average shares outstanding divided by income): Continuing Operations $ 7.88 $ 1.23 $ 5.22 Discontinued Operations (2.21) (0.88) (2.11) ----------------------------------------- Total $ 5.67 $ 0.35 $ 3.11 ========================================= 23 EX-13 3 THE MIDLAND COMPANY 1997 ANNUAL REPORT THE MIDLAND COMPANY Midland was founded in 1938 as a consumer finance company by the late J. Page Hayden, Sr. and H. R. LaBar. Today, Midland has two primary subsidiaries - Insurance and Transportation. Midland is a publicly traded company on the American Stock Exchange (MLA). American Modern Insurance Group, Inc. American Modern Insurance Group, Inc. (AMIG) is an insurance holding company licensed in all 50 states through its six property and casualty companies and two credit life companies. AMIG has traditionally specialized in writing physical damage insurance and related coverages on manufactured housing . AMIG has expanded to other areas of insurance including Homeowners, Lower Valued Homes, Dwelling Fire, Mortgage Fire, Collateral Protection, Watercraft, Long-Haul Truck, Commercial and Excess and Surplus Lines. M/G Transport Services, Inc. M/G Transport currently charters barges and brokers freight for the movement of commodities on the inland waterways. M/G owned a fleet of 276 dry cargo jumbo hopper barges at December 31, 1997. The barges are primarily used by the Company's brokerage operation. FINANCIAL HIGHLIGHTS THE MIDLAND COMPANY AND SUBSIDIARIES For the Years Ended December 31, 1997 1996 1995 Revenues from Continuing Operations $375,430,000 $337,738,000 $313,227,000 ============= ============= ============= Income from Continuing Operations $ 24,367,000 $ 3,743,000 $ 16,048,000 Loss from Discontinued Operations (6,817,000) (2,675,000) (6,496,000) ------------- ------------- ------------- Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000 ============= ============= ============= Basic Earnings (Loss) Per Common Share: Continuing Operations $ 8.16 $ 1.27 $ 5.44 Discontinued Operations (2.28) (.91) (2.20) ------------- ------------- ------------- Total $ 5.88 $ .36 $ 3.24 ============= ============= ============= Diluted Earnings (Loss) Per Common Share: Continuing Operations $ 7.88 $ 1.23 $ 5.22 Discontinued Operations (2.21) (.88) (2.11) ------------- ------------- ------------- Total $ 5.67 $ .35 $ 3.11 ============= ============= ============= Cash Dividends Per Common Share $ .70 $ .66 $ .62 ============= ============= ============= Book Value Per Common Share $ 63.32 $ 52.49 $ 51.85 ============= ============= ============= Common Shares Outstanding 3,111,000 3,042,000 3,020,000 ============= ============= ============= TABLE OF CONTENTS Financial Highlights 1 Chairman's Letter 2-3 A Tribute to Retiring Directors 4-5 American Modern Insurance Group, Inc. 6-9 M/G Transport Services, Inc. 10-11 Quarterly Data 12 Selected Consolidated Financial Data 13 Management's Discussion and Analysis 14-16 Income Statements 17 Balance Sheets 18-19 Cash Flows 20 Notes to Financial Statements 21-29 Report of Independent Public Accountants 30 Management's Report 30 Officers and Directors 31 Officers of Subsidiary Companies and Other Information 32 1 CHAIRMAN'S LETTER We are pleased to report to you that 1997 was a dynamic and rewarding year for your Company. Consolidated earnings from operations were the highest in Midland's history. Your Company's insurance and river transportation subsidiaries experienced excellent profitability in 1997. At the same time, Management made the strategic decision to divest the sportswear operation and, as a result, this operation was sold during the third quarter of 1997. Operating results have been restated to separately report the Company's continuing and discontinued operations. We believe that Midland's 1997 operating income from continuing operations is indicative of the earnings potential of the Company. FINANCIAL RESULTS Midland posted net income from continuing operations for the 12 months ended December 31, 1997 of $24,367,000, $7.88 per share (as calculated on a diluted basis) on revenues of $375,430,000. This compares to net income from continuing operations for the same period in 1996 of $3,743,000, $1.23 per share, on revenues of $337,738,000. Net income from continuing operations included after-tax realized investment capital gains of $.88 per share in 1997 and $.58 per share in 1996. Loss from discontinued operations for the 12 months ended December 31, 1997 was $(6,817,000), $(2.21) per share, compared to $(2,675,000), $(.88) per share in 1996. Consolidated net income, including both continuing and discontinued operations, was $5.67 per share for the 12 months ended December 31, 1997 compared to $.35 per share in 1996. SHAREHOLDERS' EQUITY Midland's shareholders' equity grew by 20 percent in 1997 to $63.32 per share. It is gratifying to note that shareholders' equity per share has increased at a compounded annual growth rate of 14 percent over the last three years. Your Board of Directors, at its March 1997 meeting, approved an increase in the cash dividend paid to shareholders from 66 cents to 70 cents per share on an annualized basis. This is the eleventh consecutive year that your Board has increased the dividend. INSURANCE By almost any measure, 1997 was a great year for American Modern Insurance Group, Inc. (AMIG), Midland's wholey owned insurance subsidiary. AMIG generated record levels of premium volume, underwriting profits, net investment income and net capital gains in 1997. AMIG's return on average shareholders' equity This page includes a picture with the following caption: (from left) J. P. Hayden, Jr., Chairman and Chief Executive Officer, and Michael J. Conaton, President and Chief Operating Officer. 2 was 15.1 percent in 1997. Net premiums written for AMIG's property and casualty operations increased at a compounded annual growth rate of 18 percent over the past five years. This growth has come from both AMIG's traditional manufactured housing channel as well as through a select group of other niche product lines. With a return to favorable weather patterns throughout the United States in 1997, AMIG's property and casualty companies' ratio of losses and expenses to premiums earned (combined ratio) improved to 95.8% in 1997 as compared to 104.3% in 1996. AMIG has reported combined ratios below 100% in seven of the last eight years. INSURANCE INVESTMENT PORTFOLIO As a result of strong cash flow from operations along with appreciation in the market value of AMIG's investment holdings, AMIG's investment portfolio also reached record levels in 1997, increasing by $96 million to $494 million in market value at year end. Likewise, AMIG's pre-tax investment income increased to record levels, totaling $21.3 million in 1997 plus an additional $4.2 million in pre-tax realized capital gains. AMIG's portfolio, at market value, is invested approximately 80 percent in high-quality fixed income securities and 20 percent in equity securities. RIVER TRANSPORTATION Midland's river transportation subsidiaries, M/G Transport Services, Inc. and MGT Services, Inc. (M/G), experienced tremendous success in 1997. M/G's net profits were $3.1 million, 60 percent ahead of the prior year. These results represented an 18.5 percent return on its average shareholder equity and made 1997 M/G's most profitable year since 1989. M/G continues to operate its business within niche markets in a somewhat concentrated geographical area. This mix of business has been historically profitable for M/G and M/G's Management anticipates continued success as M/G moves forward. DISCONTINUED OPERATIONS As previously reported, CS Crable Sportswear, Inc., the Company's sportswear subsidiary, sold substantially all of its assets on September 29, 1997. The results of operations and loss on disposal for these operations are reported separately as discontinued operations. The proceeds from the sale, approximately $13.3 million, were primarily used to reduce Midland's short-term borrowings. More importantly, this divestiture will afford Management the opportunity to focus on its core businesses and to utilize Midland's capital base to support the Company's profitable operations. BOARD OF DIRECTORS MATTERS On pages 4 and 5 of this year's annual report, we pay tribute to three directors who are retiring from your Company's Board in March of 1998. Each of these directors has provided immeasurable value to Midland with their guidance and oversight over many years. It is noteworthy that two of these directors, Mr. William F. Plettner and Mr. John Orther, have served as directors since the Company first went public in 1961 and also served extended terms as executive officers of the Company. Mr. William McD. Kite has served as a director since 1966 while also serving as Midland's Chief Outside Legal Counsel for many years. We are also quite pleased to announce the election of a new director, Mr. James E. Bushman, President and CEO of Cast-Fab Technologies, Inc., who joined Midland's Board of Directors in December of 1997. Mr. Bushman brings many years of successful business experience to your Board and we certainly look forward to his assistance in the years ahead. LOOKING TO THE FUTURE We begin 1998 with much enthusiasm from what we accomplished in 1997 and for what we plan to accomplish in the new year. In the areas of insurance and related financial services and in river transportation, our growth strategies are built on the financial strength and stability of the Company. We continually strive to provide the very best service to our current and future customers. We are optimistic about our future because we have talented and dedicated employees with a demonstrated expertise to successfully exploit niche markets. In conclusion, all of Management extends a sincere thanks to you, our shareholders, for your continued trust and support. S/ J. P. Hayden, Jr. J. P. Hayden, Jr. Chairman and Chief Executive Office February 12, 1998 3 A TRIBUTE TO RETIRING DIRECTORS "It is with great pride that we pay tribute to three very special members of Midland's Board of Directors who will retire from the Board on March 5, 1998. As you will note in the captions below, these three individuals have served on your Company's Board for a combined total of over 100 years. We will miss their guidance and insight from a business perspective and, from a personal perspective, I, like the other members on your Board, will miss their friendship and the warmth and vitality of their spirit. "We are pleased to honor each of them with the title of Director Emeritus." J. P. Hayden, Jr. Chairman of the Board and Chief Executive Officer William McD. Kite Mr. Kite has served as a member of Midland's Board for 33 years. Through these years, Mr. Kite also served as Midland's Chief Outside Legal Counsel as a partner with the law firm of Cohen, Todd, Kite and Stanford. In his service as Chief Outside Counsel and as a member of Midland's Board, Bill Kite has always provided Management with sound advice and judgment. He has guided the Company through the many difficult business challenges that your Company has successfully handled over the years. This page includes a picture of William McD. Kite. 4 John R. Orther Mr. Orther was one of the Company's first Board Members after the Company had a public stock offering in 1961. John Orther joined Midland on February 1, 1954. He worked in the Company's financial department and served Midland in the capacity of Financial Vice President during the 1960's and up until the time of his departure in 1969. Mr. Orther helped provide Midland with financial guidance through a critical time of the Company's development and continued to serve Midland as a member of the Company's Board of Directors and Audit Committee. This page includes a picture of John R. Orther. William F. Plettner Mr. Plettner's association and service to Midland spans over five decades. Bill Plettner has served as a member of Midland's Board of Directors since 1961, the year of the Company's first public stock offering. More importantly, he began his business career with Midland in 1946 and, from that time forward, he played a very fundamental role in developing new areas of enterprise that would contribute to the growth and profitability of the Company. Mr. Plettner served in the capacity of President and Chief Operating Officer of The Midland Company from 1980 to 1988 and as Vice Chairman in 1989. This page includes a picture of William F. Plettner. 5 AMERICAN MODERN INSURANCE GROUP, INC. We are pleased to report that 1997 was an extremely successful year for American Modern Insurance Group, Inc. (AMIG), Midland's wholly owned insurance subsidiary, as operating profits and revenues reached record-setting levels. AMIG is licensed in all fifty states through its six property and casualty companies and two credit life companies. The property and casualty companies continued their strong growth in 1997, as net premiums written increased by approximately 18% over 1996. American Modern Insurance Group's net underwriting income reached an all-time high in 1997. The combined ratio (the ratio of losses and expenses to premiums earned) for 1997 was 95.8%, which compares most favorably with an estimated industry result of 101.8%. This favorable ratio comes despite incurring after-tax losses of approximately $3.7 million from the spring flooding that took place in the Ohio River Valley. AMIG's combined ratio has been below 100% in seven of the last eight years, an outstanding performance record by any measure. American Modern Insurance Group's weather-related catastrophe losses were at their lowest level since 1993, decreasing by 60% from 1996 levels. The industry's $3.0 billion of catastrophe losses in 1997 was at its lowest level since 1988. Nevertheless, the Company remains committed to the management of exposure to natural catastrophes through the expanded utilization of the available catastrophe modeling technologies. Once again, AMIG experienced strong results from its traditional physical damage insurance and related coverages for manufactured housing. AMIG also achieved growth and profitability in its other specialty personal lines insurance This page includes a picture with the following caption: (From left) John W. Hayden, Vice Chairman and Kurt Schwamberger, President and Chief Operating Officer, AMIG 6 products such as Low Value Dwellings, Watercraft, Recreational Vehicles and Collectible Autos. As many companies reduce rates and move to alternative distribution channels in an attempt to achieve the "low cost provider" status, AMIG remains committed to sound underwriting procedures and the effective utilization of its multiple channels of product distribution. AMIG's Financial Services Division offers a variety of products to financial institutions and their customers. This division provides valuable services to its customers through its unique comprehension of their needs. Net written premiums for the Financial Services Division increased by approximately 22% over 1996. Additionally, strategies are now in place to distribute Watercraft and Recreational Vehicle products through AMIG's existing finance business partners. Ameritrac, American Modern Insurance Group's in-house loan and lease tracking service, continued to grow during 1997. Ameritrac now tracks and services approximately 1.3 million loan and lease accounts for more than 40 financial institutions. During 1997, Ameritrac expanded its services to include flood determinations, agent portfolio conversions, direct mail marketing and payment processing through electronic fund transfers. In 1998, Ameritrac plans to continue to develop and offer new services to its many clients. Refocusing the direction of the Commercial Lines Division was a clearly defined objective in 1997. While operating results have not yet reached the standards AMIG has established, AMIG is pleased to report that significant progress has been made. AMIG has strengthened and reorganized the Commercial Lines underwriting and claims operations. Future focus will be on improving underwriting profitability and product development that build on synergies between our commercial and personal lines operations. As always, American Modern Insurance Group remains committed to providing superior service to its policyholders. An example of this commitment can be found in AMIG's personal lines claims department. The 111 in-house adjusters and 123 field staff adjusters are continuing to handle claims in a timely and efficient manner. In fact, during 1997, AMIG was able to handle 82% of all claims with its own staff and settle 87% of all property claims within 30 days of being reported. AMIG continues to invest in technology as a competitive tool enabling it to deliver products and services efficiently and economically. Recent developments in the This page includes two pictures with the following captions: (From left) Kenneth G. Boberg, Executive Vice President and Chief Financial Officer, and Ronald L. Crippin, Executive Vice President, AMIG (From left) AMIG Senior Vice Presidents, Thomas A. Knighten, Robert E. Hilliard, and Werner E. Kruck 7 use of imaging will bring improved customer service, claim processing and underwriting through AMIG's "VISION" System. AMIG is now capable of delivering insurance policy quotes for property and casualty policies and credit life policies to agents using the Internet. Because technology continues to change at such a rapid pace, AMIG has invested in independent consulting expertise to help assess its current status and to help it plan for the future. American Modern Insurance Group is in the process of becoming "Year 2000" compliant. Most of this effort has been completed over the past several years as part of new development and normal system maintenance. To this end, a formal "Year 2000" task force has been established to create and monitor the Company's "Year 2000" policy. The American Modern Insurance Group's investment portfolio continues to be conservatively invested in equity and high-quality fixed income securities. AMIG has no investments in real estate or high risk derivative products. The fixed income portfolio maintains a weighted average quality of approximately AA to AAA and the current average maturity of the fixed income portfolio is approximately 4.1 years. The value of the portfolio has continued to grow through the generation of significant cash flow from operations as well as market appreciation on the portfolio. In addition, the portfolio generated approximately $4.2 million in net pre-tax capital gains in 1997. We wish to thank AMIG's many business partners and acknowledge the impact of their contributions to the Company's success over the past year and the prospects for the future. Management would also like to thank all of the employees of American Modern Insurance Group, for without their dedication, AMIG's success would not have been possible. This page includes a picture with the following caption: (From left) AMIG Senior Vice Presidents, Charles J. Jenkins, James P. Romerill, and Patrick M. Gallagher This page also includes a five year bar chart with the following data (amounts in millions): AMIG NET WRITTEN PREMIUM 1993 $182.883 1994 240.348 1995 291.808 1996 296.095 1997 349.220 8 AMERICAN MODERN INSURANCE GROUP, INC. INVESTMENT PORTFOLIO This page includes three five year bar charts with the following data: MARKET VALUES (000's) 1993 1994 1995 1996 1997 ----------------------------------------------------- Governments $ 73,834 $101,320 $155,648 $172,153 $201,363 Municipals 66,215 64,112 94,548 71,492 88,187 Corporates 11,182 31,162 35,972 41,099 78,958 Cash Equivalents 43,838 43,782 31,941 50,509 33,105 Equities 23,538 26,738 40,830 63,445 92,332 NET INVESTMENT INCOME (000's): Operations Capital Gains ------------ --------------- 1993 $10,069 $3,735 1994 11,070 2,190 1995 16,399 2,373 1996 18,446 2,689 1997 21,432 4,170 UNREALIZED GAINS (000's): Equities Fixed Income ------------ -------------- 1993 $7,774 $ 6,814 1994 6,605 (5,128) 1995 16,018 1,962 1996 26,005 2,415 1997 51,895 7,005 - ------------------------------------------------------------------------------- ANNUALIZED TOTAL RETURN (Total Return is the rate of return on a portfolio that takes into consideration both interest income and dividends plus the change in the market value.) Periods Ending December 31, 1997 ------------------------------------------------- 1 Year 3 Year 5 Year - ------------------------------------------------------------------------------- EQUITIES: AMIG 57.6% 45.8% 27.5% S&P 500 Index 33.4% 31.2% 20.3% FIXED INCOME: AMIG Before Tax 8.0% 8.3% 6.4% AMIG After Tax 5.6% 5.8% 4.6% After Tax Lehman Brothers Intermediate Government/ Corporate Index 5.0% 5.8% 4.3% The average maturity and duration of AMIG's Fixed Income Portfolio was 4.1 years and 3.4, respectively, at December 31, 1997. 9 M/G TRANSPORT SERVICES, INC. The Midland Company's transportation subsidiaries, M/G Transport Services, Inc. and MGT Services, Inc. (M/G), completed their third successful year since restructuring in December of 1994. At that time, M/G decided to concentrate on niche affreightment markets where it could provide superior service. M/G's gross revenues have increased at a 7.4% compounded annual growth rate and pre- tax income has increased at a 40.9% compounded annual growth rate. Return on average equity for the three years succeeding M/G's restructuring has been 18.5% (1997), 11.3% (1996) and 8.1% (1995). M/G experienced flood-related hardships on the lower Mississippi River in the first and second quarters of 1997. M/G's Management is pleased with this year's results and feels that the operational structure affords M/G the flexibility to react to these weather-related problems that are an inevitable part of the business. As of December 31, 1997, M/G either owned or had under a long-term capital lease 276 jumbo hopper barges. Of the 276 barges, 133 were covered and the remaining 143 barges were open tops. As of December 31, 1997, the average age of M/G's 276 This page includes a picture with the following caption: (from left) Jack L. Lordo, Vice President, J. P. Hayden, III, President and Chief Operating Officer, and Raymond R. Ludmann, Treasurer, M/G Transport Services, Inc. 10 barges was 12 years. This represents a relatively newer fleet compared to the majority of other independent barge lines. It has been M/G's operating philosophy to charter, on an as-needed basis, barges to augment its fleet. As of December 31, 1997, M/G had 139 barges on charter resulting in a total of 415 jumbo hopper barges under management. Of the 139 barges on charter, 97 can be returned at M/G's discretion. This philosophy allows M/G to more effectively control its invested capital. As an indication of M/G's dedication and commitment to the barge affreightment market and to its valued customers, M/G acquired 66 new barges in the last 18 months, requiring a capital investment of $18.1 million. These acquisitions were primarily funded using internally generated capital. At the present time, M/G is contemplating the acquisition of additional barges in order to maintain fleet size and to provide for moderate growth. M/G's Managment feels that it is operationally and financially well poised to take advantage of strategic growth opportunities as might occur. It is M/G's goal to be a valued partner with all of its business relationships by providing operational flexibility to meet our customers' changing needs. Once again, M/G would like to sincerely thank its employees for their hard work and continued dedication to the success of M/G. Without a strong customer and employee base, M/G would not have achieved the above successes. This page includes a picture with the following caption: Caption #2: (from left) J. Kevin Jennings, Executive Vice President and Thomas C. Terrell, III, President, MGT Services, Inc. 11 QUARTERLY DATA THE MIDLAND COMPANY AND SUBSIDIARIES First Quarter Second Quarter Third Quarter Fourth Quarter ------------------------------------------------------------ 1997 Revenues from continuing operations $ 90,027,000 $ 92,783,000 $ 92,949,000 $ 99,671,000 =========================================================== Income from continuing operations $ 4,265,000 $ 5,047,000 $ 6,112,000 $ 8,943,000 Loss from discontinued operations (1,175,000) (1,067,000) (4,575,000) - ----------------------------------------------------------- Net income $ 3,090,000 $ 3,980,000 $ 1,537,000 $ 8,943,000 =========================================================== Basic earnings (loss) per share: Continuing operations $ 1.43 $ 1.70 $ 2.04 $ 2.99 Discontinued operations (.39) (.36) (1.53) - ----------------------------------------------------------- Total $ 1.04 $ 1.34 $ .51 $ 2.99 =========================================================== Diluted earnings (loss) per share: Continuing operations $ 1.39 $ 1.64 $ 1.97 $ 2.88 Discontinued operations (.38) (.35) (1.48) - ----------------------------------------------------------- Total $ 1.01 $ 1.29 $ .49 $ 2.88 =========================================================== Dividends per common share $ .175 $ .175 $ .175 $ .175 =========================================================== Price range of common stock (AMEX) 37 1/4 - 44 1/4 38 - 50 49 1/4 - 57 1/2 57 1/8 - 64 1/2 =========================================================== 1996 Revenues from continuing operations $ 80,318,000 $ 85,019,000 $ 85,325,000 $ 87,076,000 =========================================================== Income from continuing operations $ (4,091,000) $ 1,911,000 $ (373,000) $ 6,296,000 Loss from discontinued operations (1,153,000) (1,257,000) (21,000) (244,000) ----------------------------------------------------------- Net income (loss) $ (5,244,000) $ 654,000 $ (394,000) $ 6,052,000 =========================================================== Basic earnings (loss) per share: Continuing operations $ (1.39) $ .64 $ (.12) $ 2.14 Discontinued operations (.39) (.42) (.01) (.09) ----------------------------------------------------------- Total $ (1.78) $ .22 $ (.13) $ 2.05 =========================================================== Diluted earnings (loss) per share: Continuing operations $ (1.39) $ .61 $ (.12) $ 2.06 Discontinued operations (.39) (.40) (.01) (.09) ----------------------------------------------------------- Total $ (1.78) $ .21 $ (.13) $ 1.97 =========================================================== Dividends per common share $ .165 $ .165 $ .165 $ .165 =========================================================== Price range of common stock (AMEX) 46 - 50 1/2 38 - 50 3/8 36 1/2 - 45 5/8 33 3/4 - 39 1/4 =========================================================== Note: The sum of the quarterly reported diluted earnings per share may not equal the full year as each is computed independently. 12 SELECTED CONSOLIDATED FINANCIAL DATA THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1997 1996 1995 1994 1993 ------------------------------------------------------------------ Revenues From Continuing Operations $375,430,000 $337,738,000 $313,227,000 $273,987,000 $232,965,000 ================================================================== Income From Continuing Operations $ 24,367,000 $ 3,743,000 $ 16,048,000 $ 11,637,000 $ 20,337,000 Loss From Discontinued Operations (6,817,000) (2,675,000) (6,496,000) (2,218,000) (2,365,000) ------------------------------------------------------------------ Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000 $ 9,419,000 $ 17,972,000(a) ================================================================== Basic Earnings (Loss) Per Common Share: Continuing Operations $ 8.16 $ 1.27 $ 5.44 $ 3.92 $ 6.84 Discontinued Operations (2.28) (.91) (2.20) (.75) (.80) ------------------------------------------------------------------ Total $ 5.88 $ .36 $ 3.24 $ 3.17 $ 6.04(a) ================================================================== Diluted Earnings (Loss) Per Common Share: Continuing Operations $ 7.88 $ 1.23 $ 5.22 $ 3.82 $ 6.61 Discontinued Operations (2.21) (.88) (2.11) (.73) (.76) ------------------------------------------------------------------ Total $ 5.67 $ .35 $ 3.11 $ 3.09 $ 5.85(a) ================================================================== Marketable Securities $498,829,000 $400,462,000 $367,054,000 $278,088,000 $224,614,000 ================================================================== Total Assets $760,463,000 $655,979,000 $600,905,000 $479,497,000 $433,263,000 ================================================================== Unearned Insurance Premiums $240,340,000 $208,417,000 $190,948,000 $158,316,000 $118,802,000 ================================================================== Insurance Loss Reserves $120,134,000 $ 95,830,000 $ 68,347,000 $ 57,715,000 $ 42,607,000 ================================================================== Long-Term Debt $ 62,518,000 $ 62,470,000 $ 65,456,000 $ 47,091,000 $ 56,522,000 ================================================================== Shareholders' Equity $197,026,000 $159,688,000 $156,595,000 $132,437,000 $133,110,000 ================================================================== Book Value Per Common Share $ 63.32 $ 52.49 $ 51.85 $ 44.19 $ 44.39 ================================================================== Cash Dividends Per Common Share $ .70 $ .66 $ .62 $ .58 $ .54 ================================================================== Common Shares Outstanding 3,111,000 3,042,000 3,020,000 2,997,000 2,999,000 ================================================================== (a) Includes a credit of $4,867,000 (per common share: basic - $1.63; diluted - $1.58) for the cumulative effect of a change in accounting from the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", effective January 1, 1993. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE MIDLAND COMPANY AND SUBSIDIARIES____________________________________________ REPORTABLE SEGMENTS The discussions of Results of Operations and Liquidity and Capital Resources are grouped according to the Company's three reportable business segments: Insurance, Transportation and Other. A description of the operations of each of these segments, along with a brief discussion of the Discontinued Operations, is included below. Insurance The Company's insurance operations consist primarily of six property and casualty companies and two credit life companies operating as American Modern Insurance Group (AMIG). AMIG is collectively licensed through its subsidiaries to write business in all 50 states plus the District of Columbia. The majority of AMIG's business is physical damage insurance on manufactured homes, generally written for a term of 12 months with coverages similar to conventional homeowner's insurance policies. Other insurance products include Lower Valued Homes, Dwelling Fire, Homeowners, Mortgage Fire, Collateral Protection, Watercraft, Long-Haul Trucking, Commercial and Excess and Surplus Lines. Transportation M/G Transport Services, Inc. and MGT Services, Inc. (M/G), the Company's transportation subsidiaries, operate a freight brokerage business. M/G arranges for the movement of dry bulk commodities such as petroleum coke, iron ores, barite, fertilizers, sugar and aggregates on the lower Mississippi River and its tributaries. Other The Other segment consists primarily of miscellaneous activities that are considered immaterial. Discontinued Operations On September 29, 1997, the Company's sportswear subsidiary, CS Crable Sportswear, Inc., sold substantially all of its assets to Brazos, Inc., a subsidiary of Brazos Sportswear, Inc. The assets were sold for approximately $13.3 million in cash resulting in an after-tax loss on the disposal of approximately $3.3 million. The cash proceeds from this transaction were primarily used to reduce the Company's short-term bank borrowings. The results of operations and the related loss on disposal for these operations are categorized in the consolidated financial statements as "Discontinued Operations" and reported separately from continuing operations. Management does not expect any future activity in regard to this subsidiary to have a material impact on the consolidated financial results of the Company. RESULTS OF OPERATIONS 1997 Compared to 1996 Consolidated Midland Income from continuing operations for 1997 increased to $24,367,000, $7.88 per share (calculated on a diluted basis), from $3,743,000, $1.23 per share, in 1996. Included in income from continuing operations are after-tax capital gains of $2,710,000, $.88 per share, in 1997 and $1,748,000, $.58 per share, in 1996. The Company reported a loss from discontinued operations for 1997 of $(6,817,000), $(2.21) per share. This compares to a loss of $(2,675,000), $(.88) per share, in 1996. Consolidated net income, including both continuing and discontinued operations, increased to $17,550,000, $5.67 per share, in 1997 from $1,068,000, $.35 per share, in 1996. Consolidated revenues from continuing operations increased 11.2% to $375,430,000 from $337,738,000 in 1996. These improved results are indicative of the strong financial performances generated by the Company's insurance and transportation subsidiaries. Insurance AMIG reported record profits in 1997. Premium production, underwriting profits, net investment income and capital gains all reached new highs in 1997. These record-setting levels resulted in a return on average equity of 15.1% for AMIG. Net written premium within the property and casualty operations increased over $50 million, or 18%, to $342 million. This premium growth was primarily the result of volume increases from the manufactured home, park and dealer and collateral protection product lines. Premium rate increases also contributed to AMIG's premium growth, but to a much lesser degree than volume increases. The strong growth in net written premium production also resulted in increases in the December 31, 1997 balances of receivables, deferred insurance policy acquisition costs, commissions payable, unearned premiums, loss reserves and other payables compared to the prior year end. The growth in net written premium also resulted in increases in operating and administrative costs. Commission expenses, on the other hand, remained flat due to increases in ceding commissions received by AMIG (which were included as offsets to commission expenses). AMIG's property and casualty operations generated pre-tax underwriting income of $12,938,000 in 1997 compared to a pre-tax loss of $(11,806,000) in the prior year. The property and casualty companies' ratio of losses and expenses to premiums earned (combined ratio) improved to 95.8% in 1997 from 104.3% in the prior year. This combined ratio compares favorably to the estimated industry average combined ratio for 1997 of 102%. The improved underwriting results were primarily the result of more favorable weather patterns throughout the United States in 1997. AMIG's 14 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.) weather related losses in 1997 were at their lowest level since 1993. The 1996 underwriting results were negatively impacted by catastrophic weather related losses ranging from severe winter storms and flooding during the first part of the year to Hurricanes Fran and Bertha which caused heavy damage along the eastern United States during the third quarter of 1996. As a result of the above, the insurance losses and loss adjustment expenses actually decreased in 1997 while earned premiums increased by nearly 11%. AMIG's net investment income (before taxes and excluding capital gains) increased by approximately 17% to $21.3 million in 1997 from $18.3 million in 1996. This increase was primarily the result of the growth in the insurance investment portfolio. The investment portfolio increased by $96 million to $494 million in market value at December 31, 1997. This growth is due primarily to three factors: 1) cash flow from underwriting, 2) investment income and capital gains generated from the portfolio itself, and 3) unrealized appreciation in the market value of the securities. The gross unrealized appreciation on marketable securities increased to $58,901,000 from $28,426,000 at the prior year-end. The increase in the unrealized appreciation was largely responsible for the increase in the deferred federal income tax liability in 1997. Transportation 1997 was M/G's most profitable year since 1989. M/G's net profits improved to $3.1 million from $1.9 million in 1996. These favorable results translate to an 18.5% return on average equity for 1997. M/G's revenues increased 3% to $34.9 million in 1997. This increase was due primarily to an overall increase in the volume of loadings and total tonnage hauled. Pricing per ton-mile actually decreased slightly in 1997 compared to 1996. Transportation operating expenses decreased due to an overall decrease in litigation related charges in 1997 compared to 1996. 1996 Compared to 1995 Consolidated Midland Income from continuing operations for 1996 was $3,743,000, $1.23 per share (calculated on a diluted basis), compared to $16,048,000, $5.22 per share, in 1995. Included in income from continuing operations are after-tax capital gains of $1,748,000, $.58 per share, and $1,542,000, $.50 per share, for 1996 and 1995, respectively. The Company reported a loss from discontinued operations for 1996 of $(2,675,000), $(.88) per share. This compares to a loss of $(6,496,000), $(2.11) per share, in 1995. Consolidated net income, including both continuing and discontinued operations, was $1,068,000, $.35 per share, in 1996 compared to $9,552,000, $3.11 per share, in 1995. Consolidated revenues from continuing operations increased 7.8% to $337,738,000 from $313,227,000 in 1995. Insurance AMIG concluded 1996 on a profitable basis even though its operations were severely impacted by numerous adverse occurrences throughout most of 1996. As a result of these catastrophic losses, coupled with the adverse development of several commercial lines claims, AMIG experienced a larger than normal increase in insurance losses and loss adjustment expenses in 1996 compared to 1995. Also in 1996, AMIG expensed approximately $3.4 million (pre-tax) in litigation costs related to the settlement of a class action lawsuit in Alabama and Mississippi. This combination of higher-than-normal losses and unusual litigation expenses resulted in a higher-than-normal combined ratio (ratio of losses and expenses to premiums earned) for AMIG's property and casualty insurance companies of 104.3% in 1996 as compared to 97.2% in 1995. Both written and earned premiums increased in 1996 to record levels. This increase in premium production in 1996 over 1995 was due to the overall growth of all of AMIG's existing insurance products as well as expansion into other areas of insurance. Transportation M/G's revenues increased 11% and pre-tax income increased 25% in 1996 as compared to 1995 levels. This increase, coupled with the related increases in expenses, was due primarily to an overall increase in tonnage hauled. These favorable results were achieved even though M/G expensed $1.8 million (pre-tax) more in litigation costs in 1996 than in 1995 related to the operations of the transportation subsidiary sold in 1994. LIQUIDITY AND CAPITAL RESOURCES Consolidated Midland and Parent Company Operations As of December 31, 1997, $611,861,000 of Midland's $760,463,000 in total assets (80%) was comprised of marketable securities, short-term investments, receivables and cash. Liabilities that generally represent cash requirements over various periods in the future included claim liabilities, accrued commissions, short-term borrowings and other payables and totaled $234,399,000 at December 31, 1997. Management expects that the cash and other liquid investments coupled with the future collection of receivables will be readily available to match these cash requirements. The parent Company relies primarily on dividends from its subsidiaries to assist in servicing its debt, paying its operating expenses and paying dividends to Company stockholders. The payment of dividends to the parent Company from the Company's subsidiaries is restricted by state regulatory agencies and/or covenants contained in debt agreements. Such restrictions, however, have not had, and are not expected to have, a significant impact on the parent Company's liquidity or its ability to meet its long or short-term operating, financing or capital obligations. 15 Capital expenditures, other than for barge acquisitions, amounted to $7,638,000, $4,403,000 and $28,130,000 for 1997, 1996 and 1995, respectively. A large percentage of the 1995 capital expenditures related to the construction of the Company's new corporate headquarters. The total cost of this facility amounted to approximately $29 million. As of December 31, 1997 the Company and its subsidiaries had no material commitments for capital expenditures. The Company issues commercial paper, generally below the bank prime borrowing rates. The Company has $50 million of conventional short-term credit lines available at costs generally not exceeding prime borrowing rates. Additional short-term lines are available to the Company at the discretion of various lending institutions with comparable rates. AMIG has a $40 million long-term credit facility available on a revolving basis at various rates. Total interest bearing debt outstanding at December 31, 1997 amounted to $92.3 million. The Company intends to service its existing debt with internally generated funds. The net cash generated from operating activities from continuing operations was $80,025,000, $46,460,000, and $70,811,000 in 1997, 1996 and 1995, respectively. This positive cash flow is the direct result of the favorable cash flow from operations generated by each of the Company's operating subsidiaries. Insurance AMIG generates substantial cash inflows primarily from premiums, investment income and proceeds from maturities of portfolio fixed income securities. The principal cash outflows for the insurance operations relate to the payment of claims, commissions, premium taxes, operating expenses, income taxes and the purchase of marketable securities. Cash flow from insurance operations is expected to remain sufficiently positive to meet future operating requirements and to provide for reasonable dividends to its parent Company. In each of the years presented, funds generated from the insurance operating activities were used primarily to purchase investment grade marketable securities, accounting for the majority of the cash used in investing activities. Transportation M/G also generates positive cash flow from operating activities. The primary cash inflow comes from its affreightment revenue. The primary outflows of cash relate to the payment of barge charter costs, debt service obligations, operating expenses, income taxes and the acquisition of capital equipment. Like the insurance operations, cash flow from the transportation operations is expected to remain sufficiently positive to meet future operating and capital requirements while providing for reasonable dividends to its parent Company. The transportation subsidiaries acquired 25 barges in 1996 and 41 barges in 1997. The total cost of these 66 barges was approximately $18.1 million. As consideration for these acquisitions, M/G Transport exchanged four of its towboats in 1996 and paid $11.9 million in 1997. These acquisitions were financed primarily with internally generated capital and short-term bank borrowings. M/G Transport is currently evaluating its capital equipment needs for 1998 and beyond. Consideration is being given to acquiring, by purchase or lease, additional barges to augment its current fleet. Capital for such acquisitions will likely be generated through a combination of internally generated funds and traditional long-term bank financing. OTHER MATTERS Year 2000 Compliance The Company has, and will continue to make, certain investments in its software systems and applications to address the Company's year 2000 compliance. The Company began addressing the year 2000 compliance issue several years ago in connection with a business driven upgrade to the mainframe operating system. The Company has formed a Task Force, comprised of operational and management level employees, to continuously assess, from both an internal and an external perspective, year 2000 compliance. Management intends to dedicate the necessary resources to ensure that all mission critical internal systems are year 2000 compliant prior to the December 31, 1999 deadline. The financial impact to the Company has not been, and is not anticipated to be, material to its financial position or the results of its operations. Impact of Inflation Management does not consider the impact of the change in prices due to inflation to be material in the analysis of the Company's overall operations. Private Securities Reform Act of 1995 Forward Looking Statements Disclosure This Report contains forward looking statements. For purposes of this Report, a "Forward Looking Statement", within the meaning of the Securities Reform Act of 1995, is any statement concerning the year 1998 and beyond. The actions and performance of the Company and its subsidiaries could deviate materially from what is contemplated by the forward looking statements contained in this Report. Factors which might cause deviations from the forward looking statements include, without limitations, the following: 1)changes in the laws or regulations affecting the operations of the Company or any of its subsidiaries; 2) changes in the business tactics or strategies of the Company or any of its subsidiaries; 3) acquisition(s) of assets or of new or complementary operations, or divestiture of any segment of the existing operations of the Company or any of its subsidiaries; 4) changing market forces or litigation which necessitate, in Management's judgment, changes in plans, strategy or tactics of the Company or its subsidiaries and 5)adverse weather conditions, fluctuations in the investment markets, changes in the retail marketplace or fluctuations in interest rates, any one of which might materially affect the operations of the Company and/or its subsidiaries. 16 CONSOLIDATED INCOME STATEMENTS THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Revenues: Insurance: Premiums earned $311,159,000 $280,614,000 $263,006,000 Net investment income 21,332,000 18,269,000 16,107,000 Net realized investment gains 4,170,000 2,690,000 2,373,000 Other insurance income 3,219,000 1,602,000 618,000 Transportation 34,933,000 34,064,000 30,371,000 Other 617,000 499,000 752,000 ------------------------------------------- Total 375,430,000 337,738,000 313,227,000 ------------------------------------------- Costs and Expenses: Insurance: Losses and loss adjustment expenses 171,163,000 172,426,000 136,211,000 Commissions and other policy acquisition costs 81,180,000 81,533,000 80,520,000 Operating and administrative expenses 49,118,000 41,355,000 39,475,000 Transportation operating expenses 30,079,000 31,163,000 28,033,000 Interest expense 4,983,000 4,829,000 3,037,000 Other operating and administrative expenses 4,204,000 3,115,000 3,462,000 ------------------------------------------- Total 340,727,000 334,421,000 290,738,000 ------------------------------------------- Income from Continuing Operations Before Federal Income Tax 34,703,000 3,317,000 22,489,000 ------------------------------------------- Provision (Credit) for Federal Income Tax 10,336,000 (426,000) 6,441,000 ------------------------------------------- Income from Continuing Operations 24,367,000 3,743,000 16,048,000 ------------------------------------------- Discontinued Operations: Loss from discontinued operations less related income tax credits of $1,881,000, $1,411,000 and $3,477,000 in 1997, 1996 and 1995, respectively (3,492,000) (2,675,000) (6,496,000) Loss on disposal of assets less related income tax credit of $1,790,000 (3,325,000) - - ------------------------------------------- Loss from Discontinued Operations (6,817,000) (2,675,000) (6,496,000) ------------------------------------------- Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000 =========================================== Basic Earnings (Loss) Per Share of Common Stock: Continuing operations $ 8.16 $ 1.27 $ 5.44 Discontinued operations (2.28) (.91) (2.20) ------------------------------------------- Total $ 5.88 $ .36 $ 3.24 =========================================== Diluted Earnings (Loss) Per Share of Common Stock: Continuing operations $ 7.88 $ 1.23 $ 5.22 Discontinued operations (2.21) (.88) (2.11) ------------------------------------------- Total $ 5.67 $ .35 $ 3.11 =========================================== Cash Dividends Per Share of Common Stock $ .70 $ .66 $ .62 =========================================== See notes to consolidated financial statements. 17 CONSOLIDATED BALANCE SHEETS THE MIDLAND COMPANY AND SUBSIDIARIES December 31, 1997 1996 - ------------------------------------------------------------------------------ ASSETS Cash $ 5,277,000 $ 3,342,000 --------------------------------- Marketable Securities: Fixed income (cost, $397,033,000 in 1997 and $333,259,000 in 1996) 404,038,000 335,675,000 Equity (cost, $33,928,000 in 1997 and $30,931,000 in 1996) 94,791,000 64,787,000 --------------------------------- Total 498,829,000 400,462,000 --------------------------------- Receivables: Accounts receivable 59,492,000 54,673,000 Less allowance for losses 753,000 799,000 --------------------------------- Net 58,739,000 53,874,000 --------------------------------- Reinsurance Recoverables and Prepaid Reinsurance Premiums 49,016,000 52,805,000 --------------------------------- Property, Plant and Equipment: Original cost 111,418,000 95,656,000 Less accumulated depreciation and amortization 39,806,000 35,201,000 --------------------------------- Net 71,612,000 60,455,000 --------------------------------- Investments in Real Estate 14,779,000 18,868,000 --------------------------------- Deferred Insurance Policy Acquisition Costs 55,590,000 45,342,000 --------------------------------- Net Assets of Discontinued Operations - 16,518,000 --------------------------------- Other Assets 6,621,000 4,313,000 --------------------------------- Total Assets $760,463,000 $655,979,000 ================================= See notes to consolidated financial statements. 18 THE MIDLAND COMPANY AND SUBSIDIARIES December 31, 1997 1996 - ------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Notes Payable Within One Year: Banks $ 24,000,000 $ 28,000,000 Commercial paper 5,791,000 4,700,000 --------------------------------- Total 29,791,000 32,700,000 --------------------------------- Insurance Commissions Payable 19,033,000 13,821,000 --------------------------------- Other Payables and Accruals 49,998,000 39,259,000 --------------------------------- Funds Held Under Reinsurance Agreements and Reinsurance Payables 15,443,000 26,949,000 --------------------------------- Unearned Insurance Premiums 240,340,000 208,417,000 --------------------------------- Insurance Loss Reserves 120,134,000 95,830,000 --------------------------------- Deferred Federal Income Tax 26,180,000 16,845,000 --------------------------------- Long-Term Debt 62,518,000 62,470,000 --------------------------------- Shareholders' Equity: Common stock (issued and outstanding: 3,111,000 shares at December 31, 1997 and 3,042,000 shares at December 31, 1996 after deducting treasury stock of 532,000 shares and 601,000 shares, respectively) 911,000 911,000 Additional paid-in capital 15,359,000 14,846,000 Retained earnings 153,797,000 138,423,000 Net unrealized gain on marketable securities 44,123,000 23,587,000 Treasury stock (at cost) (14,704,000) (16,621,000) Unvested restricted stock awards (2,460,000) (1,458,000) --------------------------------- Total 197,026,000 159,688,000 --------------------------------- Total Liabilities and Shareholders' Equity $760,463,000 $655,979,000 ================================= 19 THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 17,550,000 $ 1,068,000 $ 9,552,000 Loss from discontinued operations 6,817,000 2,675,000 6,496,000 ------------------------------------------- Income from continuing operations 24,367,000 3,743,000 16,048,000 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 10,269,000 7,939,000 7,895,000 Increase in unearned insurance premiums 31,923,000 17,469,000 32,632,000 Increase in insurance loss reserves 24,304,000 27,483,000 10,632,000 Increase (decrease) in funds held under reinsurance agreements and reinsurance payables (11,506,000) 6,330,000 17,662,000 Increase in other accounts payable and accruals 11,240,000 5,905,000 498,000 Increase in deferred insurance policy acquisition costs (10,248,000) (2,196,000) (5,493,000) Increase (decrease) in insurance commissions payable 5,212,000 (1,935,000) 2,282,000 Increase in net accounts receivable (4,865,000) (3,474,000) (5,152,000) Decrease (increase) in reinsurance recoverables and prepaid reinsurance premiums 3,789,000 (14,000,000) (2,393,000) Increase in other assets (2,308,000) (2,335,000) (1,314,000) Increase (decrease) in deferred federal income tax (1,725,000) 519,000 (1,950,000) Other-net (427,000) 1,012,000 (536,000) ------------------------------------------- Net cash provided by continuing operations 80,025,000 46,460,000 70,811,000 Net cash used in discontinued operations (2,104,000) (8,973,000) (2,501,000) ------------------------------------------- Net cash provided by operating activities 77,921,000 37,487,000 68,310,000 ------------------------------------------- Cash Flows from Investing Activities: Purchase of marketable securities (207,474,000) (138,486,000) (152,166,000) Sale of marketable securities 84,517,000 84,887,000 44,503,000 Maturity of marketable securities 41,165,000 42,041,000 27,791,000 Acquisition of property, plant and equipment (19,538,000) (4,403,000) (28,130,000) Decrease (increase) in cash equivalent marketable securities 15,404,000 (17,445,000) 17,222,000 Proceeds from sale of discontinued operations 13,330,000 - - Sale of property, plant and equipment 1,561,000 1,453,000 1,159,000 ------------------------------------------- Net cash used in investing activities (71,035,000) (31,953,000) (89,621,000) ------------------------------------------- Cash Flows from Financing Activities: Issuance of long-term debt 3,712,000 - 20,800,000 Repayment of long-term debt (3,289,000) (2,647,000) (2,128,000) Decrease in net short-term borrowings (2,909,000) (2,920,000) 8,074,000 Dividends paid (2,677,000) (1,962,000) (1,844,000) Net issuance (purchase) of treasury stock 587,000 (545,000) (1,091,000) Payment of capitalized lease obligations (375,000) (339,000) (307,000) ------------------------------------------- Net cash provided by (used in) financing activities (4,951,000) (8,413,000) 23,504,000 ------------------------------------------- Net Increase (Decrease) in Cash 1,935,000 (2,879,000) 2,193,000 Cash at Beginning of Period 3,342,000 6,221,000 4,028,000 ------------------------------------------- Cash at End of Period $ 5,277,000 $ 3,342,000 $ 6,221,000 =========================================== Supplemental Disclosures: The Company paid interest of $6,148,000, $5,820,000, and $4,998,000 and income taxes of $4,655,000, $930,000 and $7,251,000 in 1997, 1996 and 1995, respectively. See notes to the consolidated financial statements. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1997, 1996 and 1995 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company operates in three business segments: Insurance, Transportation and Other, with the most significant business activities being in insurance. The Company writes insurance business throughout the nation with larger concentrations in the Southern and Southeastern states. Such business consists primarily of physical damage insurance on manufactured homes featuring coverages similar to conventional homeowners insurance policies. The accounting policies of the Company and its subsidiaries conform to generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with generally accepted accounting principles requires management to use numerous estimates and assumptions. The accompanying consolidated financial statements include estimates for items such as insurance loss reserves, income taxes and various other liability accounts. Actual results could differ from those estimates. Policies that affect the more significant elements of the consolidated financial statements are summarized below. Principles of Consolidation--The consolidated financial statements include the accounts of the Company and all subsidiary companies. Material intercompany balances and transactions have been eliminated. Marketable Securities--Marketable securities are categorized as debt securities (cash equivalents, debt instruments and preferred stocks having scheduled redemption provisions) and equity securities (common and preferred stocks which do not have redemption provisions). The Company classifies all debt and equity securities as available-for-sale and carries such investments at market value. Unrealized gains or losses on investments, net of related income taxes, are included in shareholders' equity. Realized gains and losses on sales of investments are recognized in income on a specific identification basis. Property and Depreciation--Property, plant and equipment are recorded at cost. Depreciation and amortization are generally calculated using accelerated methods over the estimated useful lives of the respective properties (buildings and equipment - 15 to 35 years, furniture and equipment - 5 to 7 years, and vessels and barges - 20 to 30 years). Federal Income Tax--Deferred federal income taxes are recognized to reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. Investment tax credits previously allowed on property and equipment additions were deferred in the year of tax benefit and are being amortized against future operations over the estimated useful lives of the related properties. The Company files a consolidated federal income tax return which includes all subsidiaries. Insurance Income--Premiums for physical damage and credit accident and health insurance, net of premiums ceded to reinsurers, are recognized as income on a pro-rata basis over the lives of the policies. Credit life premiums are recognized as income over the lives of the policies using a sum-of-the-digits method. The Company does not consider anticipated investment income in determining premium deficiencies (if any) on short-term contracts. Policy acquisition costs, primarily commission expenses and premium taxes, are capitalized and expensed over the terms of the related policies on the same basis as the related premiums are earned. Selling and administrative expenses which are not primarily related to premiums written are expensed as incurred. Insurance Loss Reserves--Unpaid insurance losses and loss adjustment expenses include an amount determined from reports on individual cases and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates and, while management believes that the amounts are fairly stated, the ultimate liability may be in excess of or less than the amounts provided. The methods of making such estimates and for establishing the resulting liabilities are continually reviewed and any adjustments resulting therefrom are included in earnings currently. Insurance loss reserves also include an amount for claim drafts issued but not yet paid. Allowance for Losses--Provisions for losses on receivables are made in amounts deemed necessary to maintain adequate reserves to cover possible future losses. 21 Statements of Cash Flows--For purposes of the statements of cash flows, the Company defines cash as cash held in operating accounts at financial institutions. The amounts reported in the statements of cash flows for the purchase, sale or maturity of marketable securities do not include cash equivalents. Fair Value of Financial Instruments--The book values of cash, receivables, short-term notes payable, trade accounts payable and any financial instruments included in other assets and accrued liabilities approximate their fair values principally because of the short-term maturities of these instruments. The fair value of investments is considered to be the market value which is based on quoted market prices. The fair value of long-term debt is estimated using interest rates that are currently available to the Company for issuance of debt with similar terms and maturities. Stock Option and Award Plans--The Company has various plans which provide for granting options and common stock to certain employees and independent directors of the Company and its subsidiaries. The Company accounts for compensation expense related to such transactions using the "intrinsic value" based method under the provisions of Accounting Principles Board Opinion No. 25. Recently Issued Accounting Standards--The Financial Accounting Standards Board issued Statements of Financial Accounting Standards Nos. 130 and 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information", respectively, during 1997. These statements are effective and will be adopted by the Company for fiscal years beginning after December 15, 1997. Adoption of these standards will not impact the reported results of operations or financial position of the Company but will require additional disclosure. Reclassifications--Certain previously reported amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year's classifications. 2. DISCONTINUED OPERATIONS On September 29, 1997, the Company's sportswear subsidiary, CS Crable Sportswear, Inc., sold substantially all of its assets to Brazos, Inc., a subsidiary of Brazos Sportswear, Inc. The assets were sold for approximately $13.3 million in cash resulting in an after-tax loss on the disposal of approximately $3.3 million. The results of operations and the related loss on disposal for these operations are categorized in the consolidated financial statements as "Discontinued Operations" and reported separately from continuing operations. There have been no material financial results from this discontinued unit since the aforementioned date of sale. Revenues related to the discontinued operations amounted to $22.8 million, $32.8 million and $37.7 million for 1997, 1996 and 1995, respectively. 3. MARKETABLE SECURITIES Thousands of Dollars Gross Unrealized Market 1997 Cost Gains Losses Value - ------------------------------------------------------------------- Debt Securities: Governments $195,577 $ 2,965 $ 168 $198,374 Municipals 83,997 2,890 10 86,877 Corporates 76,459 1,418 90 77,787 Cash Equivalents 35,532 - - 35,532 ---------------------------------------------- Total 391,565 7,273 268 398,570 Equity Securities 33,711 61,672 809 94,574 Accrued Interest and Dividends 5,685 - - 5,685 ---------------------------------------------- Total Marketable Securities $430,961 $68,945 $1,077 $498,829 ============================================== Thousands of Dollars Gross Unrealized Market 1996 Cost Gains Losses Value - ------------------------------------------------------------------- Debt Securities: Governments $169,020 $ 1,437 $ 974 $169,483 Municipals 68,675 1,807 98 70,384 Corporates 40,219 340 97 40,462 Cash Equivalents 50,936 - - 50,936 ---------------------------------------------- Total 328,850 3,584 1,169 331,265 Equity Securities 30,770 34,283 426 64,627 Accrued Interest and Dividends 4,570 - - 4,570 ---------------------------------------------- Total Marketable Securities $364,190 $37,867 $1,595 $400,462 ============================================== 22 At December 31, 1997 and 1996, the market value of the Company's investment in the common stock of Star Banc Corporation, which exceeded 10% of the Company's shareholders' equity, was $47.1 million and $25.1 million, respectively. Included in the determination of net income are the following (amounts in 000's): 1997 1996 1995 ---------------------------------------- Gross Realized Gains $ 6,165 $ 5,024 $ 3,045 Gross Realized Losses (1,995) (2,335) (672) Other Investment Income 22,268 19,338 17,038 Investment Expenses (836) (891) (639) ---------------------------------------- Net Investment Income and Realized Gains $25,602 $21,136 $18,772 ======================================== The cost and approximate market value of debt securities held at December 31, 1997, summarized by contractual maturities, are shown below. Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or without call or prepayment penalties (amounts in 000's). Market Cost Value ------------------------ Under 1 year $ 70,783 $ 70,864 1-5 years 181,102 183,698 6-10 years 114,861 118,299 Over 10 years 24,819 25,709 ------------------------ Total $391,565 $398,570 ======================== 4. RECEIVABLES Accounts receivable at December 31, 1997 and 1996 are generally due within one year and consist of the following (amounts in 000's): 1997 1996 --------------------- Insurance $49,975 $45,273 Transportation 5,912 4,102 Other 3,605 5,298 --------------------- Total $59,492 $54,673 ===================== 5. PROPERTY, PLANT AND EQUIPMENT At December 31, 1997 and 1996, property, plant and equipment stated at original cost consist of the following (amounts in 000's): 1997 1996 ----------------------- Land $ 1,241 $ 1,241 Buildings, Improvements, Fixtures, etc. 52,860 49,713 Transportation Equipment 57,317 44,702 ----------------------- Total $111,418 $95,656 ======================= Total rent expense related to the rental of equipment included in the accompanying consolidated statements of income is $4,582,000 in 1997, $4,867,000 in 1996 and $3,470,000 in 1995. Future rentals under non-cancelable operating leases will be approximately $2,008,000 in 1998. 6. INVESTMENTS IN REAL ESTATE Investments in real estate relate to the former corporate headquarters of the Company and the manufacturing facilities of CS Crable Sportswear, Inc., the Company's discontinued operations. Such headquarters and facilities are subject to leasing arrangements with options to purchase. These properties are carried at their estimated net realizable value. After-tax impairment provisions of $975,000 and $991,000 were recognized (based on estimated current market values) in the 1997 consolidated income statement and were included in "Other Operating and Administrative Expenses" and "Discontinued Operations - Loss on Disposal of Assets...", respectively. 7. DEFERRED INSURANCE POLICY ACQUISITION COSTS Acquisition costs incurred and capitalized during 1997, 1996 and 1995 amounted to $91.4 million, $83.7 million and $86.0 million, respectively. Amortization of deferred acquisition costs was $81.2 million, $81.5 million and $80.5 million for 1997, 1996 and 1995, respectively. 23 8. NOTES PAYABLE TO BANKS At December 31, 1997 and 1996, the Company had conventional lines of credit with commercial banks of $50,000,000 and $45,000,000, respectively. The lines of credit in use under these agreements at December 31, 1997 and 1996 amounted to $21,000,000 and $25,000,000, respectively. Borrowings under these lines of credit constitute senior debt. Commitment fees are currently required by the lending institutions to maintain these credit agreements. Additionally, at December 31, 1997 and 1996, the Company had other short-term bank borrowings outstanding of $3,000,000. These borrowings also constitute senior debt. The aforementioned notes payable, together with outstanding commercial paper, had weighted average interest rates of 5.73% and 5.95% at December 31, 1997 and 1996, respectively. 9. LONG-TERM DEBT Long-term debt at December 31, 1997 and 1996 is summarized as follows (amounts in 000's): 1997 1996 ------------------- Equipment Obligations, Due Through - 6.54% July 1, 2000 $ 2,090 $ 2,470 6.35% December 31, 1998 5,280 6,160 5.90% October 31, 1998 3,717 4,337 *7.01% December 31, 2003 1,355 -- 7.20% January 1, 2001 1,773 -- Mortgage Notes, Due Through - 6.92% December 20, 2005 19,768 20,304 5.82% December 1, 2003 7,898 8,187 Unsecured Notes Under a $40 million Credit Facility, Payments Beginning 2000 - *6.81% November 1, 2004 20,000 20,000 Capitalized Lease Obligations 637 1,012 ------------------- Total obligations 62,518 62,470 Less current maturities 11,420 3,079 ------------------- Total $51,098 $59,391 =================== *Rates in effect on December 31, 1997. The interest rates on the borrowings are adjusted quarterly to the LIBOR rate plus a margin ranging from 1% to 1.2%. Equipment and real estate obligations are collateralized by transportation equipment and real estate with a net book value of approximately $51,900,000. The aggregate amount of repayment requirements on long-term debt and capitalized leases for the five years subsequent to 1997 are (amounts in 000's): 1998 - $11,420; 1999 - $2,345; 2000 - $3,203; 2001 - $6,321; 2002 - $6,412. At December 31, 1997 and 1996, the carrying value approximated the fair value of the Company's long-term debt. 10. FEDERAL INCOME TAX The provision for federal income tax is summarized as follows (amounts in 000's): 1997 1996 1995 ----------------------------------------- Current provision (credit) $12,061 $ (945) $ 7,974 Deferred provision (credit) (1,725) 519 (1,533) Total continuing operations 10,336 (426) 6,441 Discontinued operations (3,671) (1,411) (3,477) ----------------------------------------- Total $ 6,665 $(1,837) $ 2,964 ========================================= The federal income tax provision related to income from continuing operations for the years ended December 31, 1997, 1996 and 1995 is different from amounts derived by applying the statutory tax rates to income before federal income tax as follows (amounts in 000's): 1997 1996 1995 ----------------------------------------- Federal income tax at statutory rate $12,146 $ 1,161 $ 7,871 Tax effect of: Tax exempt interest and excludable dividend income (1,793) (1,574) (1,392) Business meals and entertainment expenses 106 151 144 Investment tax credits (366) (169) (175) Other--net 243 5 (7) ----------------------------------------- Provision (credit) for federal income tax $10,336 $ (426) $ 6,441 ========================================= 24 Significant components of the Company's net deferred federal income tax liability are summarized as follows (amounts in 000's): 1997 1996 ------------------- Deferred tax liabilities: Deferred insurance policy acquisition costs $18,450 $14,970 Unrealized gain on marketable securities 23,745 12,685 Accelerated depreciation 7,585 6,808 Investment tax credits 590 955 Other 271 1,005 ------------------- Sub-total 50,641 36,423 ------------------- Deferred tax assets: Unearned insurance premiums 14,808 12,187 Pension expense 3,383 3,022 Insurance loss reserves 3,136 2,009 Other 3,134 2,360 ------------------- Sub-total 24,461 19,578 ------------------- Deferred federal income tax $26,180 $16,845 =================== 11. REINSURANCE The Company reinsures certain levels of risk with other insurance companies and cedes varying portions of its written premiums to such reinsurers. Failure of reinsurers to honor their obligations could result in losses to the Company as reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. In addition, the Company pays a percentage of earned premiums to reinsurers in return for coverage against catastrophic losses. The Company also assumes a limited amount of business on certain reinsurance contracts. Related premiums and loss reserves are recorded based on records supplied by the ceding companies. A reconciliation of direct to net premiums, on both a written and an earned basis for the property and casualty companies, is as follows (amounts in 000's): Direct Assumed Ceded Net --------------------------------------------- 1997 Written $388,484 $34,497 $(80,673) $342,308 Earned 375,610 27,994 (98,406) 305,198 1996 Written $357,207 $28,747 $(96,810) $289,144 Earned 346,919 21,284 (92,674) 275,529 1995 Written $348,187 $27,320 $(91,022) $284,485 Earned 301,388 18,046 (60,567) 258,867 12. INSURANCE LOSS RESERVES Activity in the liability for unpaid insurance losses and loss adjustment expenses (excluding claim checks issued but not yet paid) for the property and casualty companies is summarized as follows (amounts in 000's): 1997 1996 1995 --------------------------------- Balance at January 1 $ 88,992 $61,497 $52,078 Less reinsurance recoverables 24,208 13,785 14,597 --------------------------------- Net Balance at January 1 64,784 47,712 37,481 --------------------------------- Incurred related to: Current year 163,035 166,554 141,887 Prior years 5,230 3,771 (7,347) --------------------------------- Total incurred 168,265 170,325 134,540 --------------------------------- Paid related to: Current year 113,841 121,782 105,269 Prior years 37,307 31,471 19,040 --------------------------------- Total paid 151,148 153,253 124,309 --------------------------------- Net balance at December 31 81,901 64,784 47,712 Plus reinsurance recoverables 26,433 24,208 13,785 --------------------------------- Balance at December 31 $108,334 $88,992 $61,497 ================================= The amounts of recoveries pertaining to reinsurance contracts that were deducted from losses incurred during 1997, 1996 and 1995 were $52,182,000, $71,133,000 and $47,152,000, respectively. 25 13. BENEFIT PLANS The Company has a qualified pension plan which provides for the payment of annual benefits to substantially all employees upon retirement. Such benefits are based on years of service and the employee's highest compensation during five consecutive years of employment. The Company's funding policy is to contribute annually an amount sufficient to satisfy ERISA funding standards. Contributions are intended to provide not only for benefits attributed to service to date but also for benefits expected to be earned in the future. The following table sets forth the plan's funded status (amounts in 000's): 1997 1996 ----------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $15,904 in 1997 and $13,949 in 1996 $16,637 $14,773 ======================= Projected benefit obligation for service rendered to date $22,461 $20,849 Plan assets at fair value, primarily U.S. bonds and listed stocks 22,588 19,774 ----------------------- Plan assets more (less) than projected benefit obligation 127 (1,075) Unrecognized net assets at January 1, 1987 being recognized over 18 years (1,113) (1,278) Unrecognized prior service cost 408 529 Unrecognized net loss (gain) (3,988) (2,162) ----------------------- Pension liability included in Other Payables and Accruals $(4,566) $(3,986) ======================= Net pension cost included the following (amounts in 000's): 1997 1996 1995 -------------------------------- Service cost--benefits earned during the year $ 1,124 $ 1,037 $ 843 Interest cost on projected benefit obligation 1,588 1,469 1,381 Actual return on plan assets--(gain) (3,628) (2,691) (3,144) Net amortization and deferral 1,530 1,289 1,836 -------------------------------- Net periodic pension plan cost $ 614 $ 1,104 $ 916 ================================ Total pension cost was $1,222,000 in 1997, $1,956,000 in 1996 and $1,365,000 in 1995. Included in the above amounts is a supplemental pension plan expense of $608,000 in 1997, $852,000 in 1996 and $449,000 in 1995. These amounts represent expenses accrued for supplemental pension benefits in excess of Internal Revenue Code Section 415 limitations. The supplemental pension plan is unfunded. The Company has recognized a liability of $3,363,000 related to this plan and the plan has an accumulated benefit obligation of $4,905,000 and a projected benefit obligation of $6,268,000 at December 31, 1997 (1996: $2,800,000; $3,900,000 and $7,200,000). The discount rates used in determining the plans' actuarial present value of the projected benefit obligation were 7-1/2% in 1997 and 1996 and 7-1/4% in 1995. The rate of increase in future compensation levels used in determining the actuarial present value of the plans' projected benefit obligation was 5 1/2% in 1997, 1996 and 1995. The expected long-term rate of return on assets was 8% in all three years. 26 14. STOCK OPTION AND AWARD PLANS Under the Company's stock option plans, all of the outstanding stock options at December 31, 1997 were exercisable non-qualified options and had an exercise price of not less than 100% of the fair market value of the common stock on the date of grant. A summary of stock option transactions follows: 1997 1996 1995 -------------- -------------- --------------- Avg. Avg. Avg. (000's) Option (000's) Option (000's) Option Shares Price Shares Price Shares Price Outstanding, beginning of year 152 $29.31 219 $25.76 216 $24.69 Exercised (12) 25.02 (67) 17.72 (2) 21.16 Expired (9) 26.78 -- -- (4) 26.94 Granted 9 37.88 -- -- 9 50.75 ------------------------------------------------ Outstanding, end of year 140 $30.39 152 $29.31 219 $25.76 ================================================ Information regarding such outstanding options at December 31, 1997 follows: Weighted Average Outstanding Weighted Remaining Life Options Average Price - -------------------------------------------------------- One year 46,400 $26.01 Three years 75,400 29.76 Seven years 18,000 44.31 ------------------------- Total 139,800 $30.39 ========================= The Company implemented a restricted stock award program during 1993. Under this program, grants of the Company's common stock will vest after an incentive period, conditioned upon the recipient's employment throughout the period. During the vesting period, shares issued are nontransferable, but the shares are entitled to all of the rights of outstanding shares. In 1993, 1995 and 1997, 32,000, 49,000 and 65,000 shares, respectively, were awarded under the program and 24,000, 42,000 and 58,000 shares, respectively, remain outstanding at December 31, 1997. The value of the awards is being amortized as compensation expense over a five year vesting period. The difference in net income for 1997, 1996 or 1995 computed using APB Opinion No. 25 and using Financial Accounting Standards No. 123 for options granted after 1994 (9,000 in 1997 and 9,000 in 1995) is insignificant. 15. EARNINGS PER SHARE Statement of Financial Accounting Standards No. 128 "Earnings per Share" (the "Statement") was issued and adopted in 1997 and requires companies to change the method of calculating earnings per share (EPS). The Statement requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of shares issuable under the Company's stock option plan and issued under the award plan. Diluted EPS amounts reported herein equal previously reported EPS amounts. The following table is a reconciliation of the number of shares used to compute Basic and Diluted earnings per share. There was no adjustment necessary to the income used in the Basic or Diluted calculations for the years ended December 31, 1997, 1996 or 1995. Shares in 000's --------------------------- 1997 1996 1995 --------------------------- Shares used in basic EPS calculation (shares outstanding) 2,985 2,948 2,952 Effect of dilutive stock options 55 53 100 Effect of dilutive restricted stock grants 57 32 20 --------------------------- Shares used in diluted EPS calculation 3,097 3,033 3,072 =========================== Options to purchase 18,000 shares of common stock at prices ranging from $50.13 to $50.75 per share were outstanding as of December 31, 1997, 1996 and 1995. Such options were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common stock. 16. CONTINGENCIES Various litigation and claims against the Company and its subsidiaries are in process and pending. Based upon a review of open matters with legal counsel, Management believes that the outcome of such matters would not have a material effect upon the Company's consolidated financial position or results of operations. 27 17. INDUSTRY SEGMENTS Listed below is financial information required to be reported for each industry segment. In 1997, revenues from one customer amounted to $41,011,000. No single customer accounted for 10% or more of consolidated revenues in either 1996 or 1995. Interest expense includes intercompany interest not eliminated for purposes of segment reporting. Thousands of Dollars 1997 1996 1995 ----------------------------------- Total segment revenues Insurance $340,871 $303,986 $283,141 Transportation 35,326 34,910 31,385 Other 617 2,250 3,647 Intersegment revenues (1,384) (3,408) (4,946) ----------------------------------- Total continuing operations $375,430 $337,738 $313,227 =================================== Operating profit Insurance $ 39,410 $ 8,649 $ 26,930 Transportation 5,247 3,747 3,352 Other (2,641) (842) 191 Interest expense (4,983) (4,829) (3,037) Intersegment interest expense (2,330) (3,408) (4,947) ----------------------------------- Total continuing operations $ 34,703 $ 3,317 $ 22,489 =================================== Acquisition of fixed assets Insurance $ 3,555 $ 2,440 $ -- Transportation 13,366 6,326 170 Corporate and other 2,617 1,603 27,960 ----------------------------------- Total continuing operations $ 19,538 $ 10,369 $ 28,130 =================================== Depreciation and amortization Insurance $ 2,442 $ 2,903 $ -- Transportation 3,157 2,488 3,004 Corporate and other 4,670 2,548 4,891 ----------------------------------- Total continuing operations $ 10,269 $ 7,939 $ 7,895 =================================== Identifiable assets Insurance $660,464 $551,498 $494,638 Transportation 44,544 41,458 48,375 Corporate and other 62,055 94,924 87,203 Intersegment receivables (6,600) (31,901) (29,311) ----------------------------------- Total $760,463 $655,979 $600,905 =================================== 18. SHAREHOLDERS' EQUITY The Midland Company has 5,000,000 shares of common stock authorized without par value (stated value of $.25 a share), including 646,000 shares at December 31, 1997 reserved for future issuance under the Company's stock option and award plans. The Company also has 500,000 shares of preferred stock authorized, without par value, none of which have been issued. Covenants included in the borrowing agreements of M/G Transport Services, Inc. limit its payment of dividends to The Midland Company. Under the most restrictive of such covenants, $11,552,000 of its $18,500,000 of shareholder's equity was not available for distribution to the Company at December 31, 1997. The insurance subsidiaries are subject to state regulations which limit by reference to statutory investment income and policyholders' surplus the dividends that can be paid to their parent company without prior regulatory approval. Dividend restrictions vary between the companies as determined by the laws of the domiciliary states. Under these restrictions, the maximum dividends that may be paid to the Company from its insurance subsidiaries in 1998 without regulatory approval total approximately $22,000,000; such subsidiaries paid cash dividends of $1,240,000 in 1997, $4,375,000 in 1996 and $1,060,000 in 1995. Net income as determined in accordance with statutory accounting practices for the Company's insurance subsidiaries was $17,538,000, $5,396,000 and $13,367,000 for 1997, 1996 and 1995, respectively. Shareholders' equity on the same basis was $173,181,000 and $131,913,000 at December 31, 1997 and 1996. 28 Activity in the Shareholders' equity accounts is summarized as follows (amounts in 000's): Net Unrealized Unvested Additional Gain on Restricted Common Paid-In Retained Marketable Treasury Stock Stock Capital Earnings Securities Stock Awards Total ------------------------------------------------------------------- Balance, January 1, 1995 $911 $14,607 $131,675 $ 2,754 $(16,648) $ (862) $132,437 Net income 9,552 9,552 Purchase of treasury stock (1,143) (1,143) Cash dividends declared (1,877) (1,877) Exercise of stock options (12) 64 52 Changes in unrealized gain on investments, net of tax 16,962 16,962 Restricted stock awards 855 1,262 (2,117) -- Amortization and cancellation of unvested restricted stock awards (88) (110) 810 612 ------------------------------------------------------------------- Balance, December 31, 1995 911 15,362 139,350 19,716 (16,575) (2,169) 156,595 Net income 1,068 1,068 Purchase of treasury stock, net 111 (1,810) (1,699) Cash dividends declared (1,995) (1,995) Exercise of stock options (620) 1,774 1,154 Changes in unrealized gain on investments, net of tax 3,871 3,871 Amortization and cancellation of unvested restricted stock awards (7) (10) 711 694 ------------------------------------------------------------------- Balance, December 31, 1996 911 14,846 138,423 23,587 (16,621) (1,458) 159,688 Net income 17,550 17,550 Purchase of treasury stock, net 124 160 284 Cash dividends declared (2,176) (2,176) Exercise of stock options (32) 335 303 Changes in unrealized gain on investments, net of tax 20,536 20,536 Restricted stock awards 626 1,808 (2,434) -- Amortization and cancellation of unvested restricted stock awards (205) (386) 1,432 841 ------------------------------------------------------------------- Balance, December 31, 1997 $911 $15,359 $153,797 $44,123 $(14,704) $(2,460) $197,026 =================================================================== 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS THE MIDLAND COMPANY AND SUBSIDIARIES Deloitte & Touche LLP Cincinnati, Ohio To the Shareholders of The Midland Company: We have audited the accompanying consolidated balance sheets of The Midland Company and its subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income and of cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Midland Company and its subsidiaries at December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. S/ Deloitte & Touche LLP Deloitte & Touche LLP February 12, 1998 MANAGEMENT'S REPORT The consolidated financial statements and accompanying notes of The Midland Company and its subsidiaries are the responsibility of the Company's management, and have been prepared in conformity with generally accepted accounting principles. They necessarily include amounts that are based on management's best estimates and judgments. Other financial information contained in this annual report is presented on a basis consistent with the financial statements. In order to maintain the integrity, objectivity and fairness of data in these financial statements, the Company has developed and maintains a comprehensive internal control structure which is supplemented by a program of internal audits. Management believes that the Company's internal control structure is adequate to provide reasonable, but not absolute, assurance that assets are safeguarded and the objectives of accuracy and fair presentation of financial data are met in all material respects. The financial statements have been audited by Deloitte & Touche LLP, Certified Public Accountants, in accordance with generally accepted auditing standards, including sufficient tests of the accounting records to enable them to express an informed opinion as to whether the financial statements, considered in their entirety, present fairly the Company's financial position and results of operations in conformity with generally accepted accounting principles. Deloitte & Touche LLP reviews the results of its audit both with management and with the Audit Committee. The Audit Committee, comprised entirely of outside Directors, meets periodically with management, internal auditors and independent auditors (separately and jointly) to assure that each is fulfilling its responsibilities. 30 OFFICERS AND DIRECTORS THE MIDLAND COMPANY AND SUBSIDIARIES BOARD OF DIRECTORS George R. Baker u J. P. Hayden, Jr. Corporate Director / Advisor Chairman and Chief Executive Officer James E. Bushman n Michael J. Conaton President and Chief Executive Officer President and Chief Operating Officer Cast-Fab Technologies, Inc. J. P. Hayden, III James H. Carey u n Senior Executive Vice President Corporate Director/Advisor John W. Hayden Michael J. Conaton Senior Executive Vice President President and Chief Operating Officer John I. Von Lehman J. P. Hayden, Jr. Executive Vice President Chairman and Chief Executive Officer and Chief Financial Officer J. P. Hayden, III John R. LaBar Senior Executive Vice President Vice President and Secretary John W. Hayden Robert W. Hayden Senior Executive Vice President Vice President Robert W. Hayden W. Todd Gray Vice President Treasurer William T. Hayden Charles J. Jenkins Attorney Vice President-Management Information Systems William J. Keating u Formerly Chairman, Chief Executive Michael L. Flowers Officer and Publisher-Cincinnati Vice President, Assistant Enquirer and Formerly Chairman of Secretary and Chief In-House the Board-Associated Press Counsel William McD. Kite Paul T. Brizzolara Member Assistant Vice President, Cohen, Todd, Kite & Stanford, LLC Assistant Chief In-House Counsel and Assistant Secretary John R. LaBar Vice President and Secretary Henry N. Thoman Assistant Vice President and John M. O'Mara n Assistant Chief In-House Counsel Corporate Director/Financial Consultant Mark E. Burke John R. Orther n Director of Taxation Certified Public Accountant Ronald L. Gramke William F. Plettner Assistant Treasurer Formerly Vice Chairman and President of the Company Edward J. Heskamp Assistant Treasurer Glenn E. Schembechler n Professor Emeritus Mary Ann C. Pettit University of Michigan Assistant Secretary John I. Von Lehman Geraldine M. Stigall Executive Vice President Assistant Secretary and Chief Financial Officer n Member of Audit Committee u Member of Compensation Committee 31 SUBSIDIARY OFFICERS OF THE MIDLAND COMPANY AMERICAN MODERN INSURANCE GROUP, INC. Vice Chairman John W. Hayden President and Chief Operating Officer Kurt R. Schwamberger Executive Vice President and Chief Financial Officer Kenneth G. Boberg Executive Vice President Ronald L. Crippin Senior Vice President Patrick M. Gallagher Robert E. Hilliard Charles J. Jenkins Thomas A. Knighten Werner E. Kruck James P. Romerill Vice President and Treasurer James P. Tierney M/G TRANSPORT SERVICES, INC. President and Chief Operating Officer J. P. Hayden, III Vice President Jack L. Lordo Treasurer Raymond R. Ludmann MGT SERVICES, INC. President Thomas C. Terrell, III Executive Vice President J. Kevin Jennings Vice President James R. Jarvis Robbie M. Uvanni OTHER INFORMATION TRANSFER AGENT AND REGISTRAR INDEPENDENT AUDITORS GENERAL AND TAX COUNSEL Fifth Third Bank Deloitte & Touche LLP Cohen, Todd, Kite & 38 Fountain Square, 250 East Fifth Street Stanford, LLC Mail Drop #1090F5 Cincinnati, Ohio 45202 525 Vine Building Cincinnati, Ohio 45263 Cincinnati, Ohio 45202 SHAREHOLDERS' MEETING The next meeting of the shareholders will be held at 10:00 a.m. on Thursday, April 9, 1998 at the Company's offices, 7000 Midland Boulevard, Amelia, Ohio 45102. DIVIDEND REINVESTMENT PLAN The Plan provides for the acquisition of additional shares of the Company without brokerage fees through automatic dividend reinvestment. Enrollment forms and information about the Plan are available from Fifth Third Bank (1-800-837-2755). FORM 10-K A copy of the Company's 1997 Annual Report to the Securities and Exchange Commission on Form 10-K may be obtained by writing to the Company - Attention: Chief Financial Officer. 32 EX-21 4 Exhibit (21) THE MIDLAND COMPANY AND SUBSIDIARIES Exhibit (21) - Subsidiaries of the Registrant December 31, 1997 The subsidiaries of the Registrant as of December 31, 1997, all of which are included in the consolidated financial statements, are as follows: Percentage State of of Voting Incorporation Stock Owned ------------------------------- M/G Transport Services, Inc. Ohio 100 Midland-Guardian Co. Ohio 100 MGT Services, Inc. Ohio 100 M/G Sportswear, Inc. Ohio 100 SUBSIDIARY OF M/G TRANSPORT SERVICES, INC. MGA Transport Company Ohio 100 SUBSIDIARIES OF MIDLAND-GUARDIAN CO. American Modern Insurance Group, Inc. Ohio 100 Marbury Agency, Inc. Ohio 100 SUBSIDIARIES OF AMERICAN MODERN INSURANCE GROUP, INC. American Modern Home Insurance Company Ohio 100 American Family Home Insurance Company Florida 100 The Atlas Insurance Agency, Inc. Ohio 100 American Modern Life Insurance Company Ohio 100 Midwest Enterprises, Inc. Florida 100 Lloyds Modern Corporation Texas 100 American Modern Home Service Company Ohio 100 SUBSIDIARIES OF AMERICAN MODERN HOME INSURANCE CO. American Modern Lloyds Insurance Company Texas 100 American Southern Home Insurance Company Florida 100 American Western Home Insurance Company Oklahoma 100 G.U.I.C. Insurance Company Pennsylvania 100 SUBSIDIARY OF AMERICAN WESTERN HOME INSURANCE CO. Modern Life Insurance Company of Arizona, Inc. Arizona 100 SUBSIDIARY OF MIDWEST ENTERPRISES, INC. Sunbelt General Agency, Inc. Alabama 100 The names of two wholly-owned subsidiaries of The Midland Company are not shown above as such individual listing is not required. 24 EX-27 5
7 12-MOS DEC-31-1997 DEC-31-1997 368,506,000 0 0 94,791,000 0 0 498,829,000 40,809,000 26,433,000 55,590,000 760,463,000 120,134,000 240,340,000 0 34,476,000 92,309,000 911,000 0 0 196,115,000 760,463,000 311,159,000 21,332,000 4,170,000 38,769,000 171,163,000 81,180,000 49,118,000 34,703,000 10,336,000 24,367,000 (6,817,000) 0 0 17,550,000 5.88 5.67 88,992,000 163,038,000 5,230,000 113,841,000 37,307,000 108,334,000 (7,182,000)
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