-----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, No3iROrId0FQriFT1E2ZHwjfrlfRg4y/4zY2pQSh6N0DvB+95ugJpRmPmQwkpYeM ZYXASmGjcX1ORPBmYX0Cow== 0000066025-00-000003.txt : 20000328 0000066025-00-000003.hdr.sgml : 20000328 ACCESSION NUMBER: 0000066025-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 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: 579397 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, 1999 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. - NASDAQ 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 20, 2000 was $203,208,000. Number of shares of common stock outstanding as of March 20, 2000 - 9,451,517. Documents Incorporated by Reference Annual Report to Shareholders for the year ended December 31, 1999 is incorporated by reference into Parts I, II and IV. Registrant's Proxy Statement dated March 17, 2000 is incorporated by reference into Parts III and IV. THE MIDLAND COMPANY FORM 10-K DECEMBER 31, 1999 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) adverse weather conditions, fluctuations in the investment markets, changes in the retail marketplace, or fluctuations in interest rates; 2) changes in the laws or regulations affecting the operations of the Company or any of its subsidiaries; 3) changes in the business tactics or strategies of the Company or any of its subsidiaries; 4) 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 and 5) changing market forces or litigation which necessitate, in management's judgment, changes in plans, strategy or tactics of the Company or its subsidiaries or fluctuations in interest rates, any one of which might materially affect the operations of the Company and/or its subsidiaries. PART I ITEM 1. Business. Incorporated by reference from the inside cover and pages 2 through 17 and 37 and 38 (Note 17) of the Registrant's 1999 Annual Report to Shareholders. The number of persons employed by the Registrant was approximately 980 at December 31, 1999. 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 receivables 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. The principle reason for 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") relates to the reporting of reinsurance recoverables as receivables for GAAP purposes and as a reduction in reserves for SAP purposes. The following table provides an analysis of changes in loss and LAE reserves for 1999, 1998 and 1997 (net of reinsurance amounts) for the Company. Based on the information available during and at the end of 1999 and 1998, operations were credited $10,178,000 in 1999 and $2,120,000 in 1998, respectively, as a result of a decrease in the estimated amounts needed to settle prior years' claims. Based on information available during and at the end of 1997, operations were charged $5,230,000 in 1997 as a result of increases in such estimates. Such reserve adjustments, which affected reported results of 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. Changes in Loss and LAE Reserves: (amounts in 000's) 1999 1998 1997 ----------------------------------- Balance at January 1 $108,697 $108,334 $ 88,992 Less reinsurance recoverables 20,430 26,433 24,208 ----------------------------------- Net balance at January 1 88,267 81,901 64,784 ----------------------------------- Incurred related to: Current year 211,066 208,811 163,035 Prior years (10,178) (2,120) 5,230 ----------------------------------- Total incurred 200,888 206,691 168,265 ----------------------------------- Paid related to: Current year 159,045 157,530 113,841 Prior years 40,785 42,795 37,307 ----------------------------------- Total paid 199,830 200,325 151,148 ----------------------------------- Net balance at December 31 89,325 88,267 81,901 Plus reinsurance recoverables 24,114 20,430 26,433 ----------------------------------- Balance at December 31 $113,439 $108,697 $108,334 =================================== Analysis of Loss and LAE Reserve Development The next table presents the development of the estimated liability for the ten years prior to 1999. The top line of the table illustrates the estimated liability for unpaid losses and LAE recorded at the balance sheet date at the end of 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 table shows the cumulative redundancy (deficiency) developed with respect to the previously recorded liability for all years as of the end of 1999. For example, the Company's 1992 reserve of $20,405,000 has been re-estimated as of year-end 1999 to be $16,441,000, indicating a redundancy of $3,964,000. 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, 1999, the Company had paid $16,435,000 of the currently estimated $16,441,000 of losses and LAE that had been incurred as of the end of 1992; thus an estimated $6,000 of losses incurred as of the end of 1992 remain unpaid as of the current financial statement date. In using this information, it should be noted that this table does not present accident or policy year development data which readers may be more accustomed to analyzing. Each amount in each column includes amounts applicable to the year over the column and all prior years. For example, the amounts included in the 1993 column include amounts related to 1993 and all prior years. The Company's reserve development is unfavorable for 1995 and 1996 due to the Company's expansion into certain areas of commercial lines insurance. However, reserve development is favorable for 1997 and 1998 due to a reduction in the aforementioned commercial lines business combined with an overall strengthening of reserves. Analysis of Loss and Loss Adjustment Expense Development (Amounts in 000's) Year Ended December 31 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ------------------------------------------------------------------------------------------------- Reserve for Unpaid Losses, Net of Reinsurance $15,732 $16,570 $19,089 $20,405 $27,744 $37,481 $47,712 $64,784 $81,901 $88,267 $89,325 Net Reserve Re-estimated as of: One Year Later 15,167 15,492 17,160 18,425 25,668 30,134 51,483 70,014 79,781 78,089 Two Years Later 15,043 14,859 15,699 18,451 22,686 32,074 53,467 67,310 77,148 Three Years Later 14,397 13,841 15,202 16,871 21,154 31,880 52,418 66,442 Four Years Later 13,773 13,929 14,497 16,616 20,966 31,734 51,688 Five Years Later 13,758 13,663 14,393 16,505 20,688 31,155 Six Years Later 13,754 13,598 14,373 16,445 20,629 Seven Years Later 13,722 13,589 14,361 16,441 Eight Years Later 13,741 13,579 14,354 Nine Years Later 13,732 13,576 Ten Years Later 13,727 Net Cumulative Redundancy (Deficiency) $ 2,005 $ 2,994 $ 4,735 $ 3,964 $ 7,115 $ 6,326 $(3,976) $(1,658) $ 4,753 $10,178 ========================================================================================= Net Cumulative Amount of Reserve Paid Through: One Year Later $11,210 $11,117 $10,937 $11,730 $ 9,684 $19,040 $31,471 $37,307 $42,795 $40,785 Two Years Later 12,902 12,488 12,685 14,397 18,445 26,471 41,785 51,461 57,677 Three Years Later 13,355 12,965 13,588 15,923 19,930 29,237 47,434 58,716 Four Years Later 13,465 13,208 14,171 16,312 20,427 30,425 49,596 Five Years Later 13,595 13,471 14,307 16,381 20,558 30,770 Six Years Later 13,689 13,530 14,331 16,420 20,598 Seven Years Later 13,704 13,550 14,356 16,435 Eight Years Later 13,703 13,574 14,354 Nine Years Later 13,727 13,576 Ten Years Later 13,727 Net Reserve - December 31 $20,405 $27,744 $37,481 $47,712 $64,784 $ 81,901 $ 88,267 $ 89,325 Reinsurance Recoverables 2,780 6,220 14,597 13,785 24,208 26,433 20,430 24,114 ---------------------------------------------------------------------- Gross Reserve-December 31 $23,185 $33,964 $52,078 $61,497 $88,992 $108,334 $108,697 $113,439 ====================================================================== Net Re-estimated Reserve $16,441 $20,629 $31,155 $51,668 $66,442 $ 77,148 $ 78,089 Re-estimated Reinsurance 2,240 4,625 12,133 14,928 24,828 24,899 18,074 ------------------------------------------------------------- Gross Re-estimated Reserve $18,681 $25,254 $43,288 $66,596 $91,270 $102,047 $ 96,163 ============================================================= Gross Cumulative Redundancy (Deficiency) $ 4,504 $ 8,710 $ 8,790 $(5,099) $(2,278) $ 6,287 $ 12,534 =============================================================
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. For 1999, the Company decided to cede less business to it reinsurers than in prior years. This was significantly accomplished by a change in a quota share reinsurance contract for manufacturing housing insurance. The related terms were changed, applicable with business written in 1999, from 12.5% of written premium with a maximum of $25 million to 8.0% with the same maximum. At year end, the Company terminated the quota share reinsurance agreement. Significant Customer As indicated in Note 17 to the Company's 1999 consolidated financial statements, in 1999 and 1998, respectively, revenues (including amounts that are ultimately ceded to reinsurers) from one customer amounted to $64,621,000 and $61,865,000. That customer is Conseco Inc. which merged with Greentree Financial Corporation during 1999. ITEM 2. Properties. The Company owns its 275,000 square foot principal offices located in Amelia, Ohio. The Company's insurance subsidiaries lease office space in Montgomery, Alabama, St. Louis, Missouri, Auburn Hills, Michigan and Grand Rapids, Michigan. The Company's transportation subsidiaries lease offices in Metairie, Louisiana. 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. (M/G), a subsidiary of Registrant. On April 22, 1999, a three judge panel of the Sixth Circuit Court of Appeals issued an opinion reversing the earlier ruling of the trial court that dismissed six of the eight counts against M/G and several counts against individual defendants formerly employed by M/G. All of the verdicts against M/G on the six counts that had been dismissed by the trial court were reinstated by the Court of Appeals. On January 20, 2000, M/G was sentenced to a fine of $150,000 and two years probation concerning the 6 reinstated counts. The January 20, 2000 sentencing concluded the case against M/G. Registrant had established and maintained adequate accruals relating to the fines connected with the M/G litigation and such fines did not have a material adverse effect on the financial condition or the results of Registrant's operations. 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 37 (Note 16) and 40 of the Registrant's 1999 Annual Report to Shareholders. The number of holders of the Company's common stock at December 31, 1999 was approximately 1,530. The Company's common stock is registered on the NASDAQ (MLAN). ITEM 6. Selected Financial Data. Incorporated by reference to pages 18 and 19 of the Registrant's 1999 Annual Report to Shareholders. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference to pages 20 through 25 of the Registrant's 1999 Annual Report to Shareholders. PART II (Continued) ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Incorporated by reference to page 24 of the Registrant's 1999 Annual Report to Shareholders. ITEM 8. Financial Statements and Supplementary Data. Incorporated by reference to pages 26 through 40 of the Registrant's 1999 Annual Report to Shareholders. ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures. None. PART III ITEM 10. Directors and Executive Officers of the Registrant. Incorporated by reference to the Registrant's Proxy Statement dated March 17, 2000. Executive Officers of the Company - J. P. Hayden, Jr. - Age 70 - Chairman of the Executive Committee of the Board Michael J. Conaton - Age 66 - Vice Chairman of the Company and Vice Chairman of the Board J. P. Hayden III - Age 47 - Chairman of the Board and Chief Operating Officer John W. Hayden - Age 42 - President, Chief Executive Officer and a Director John I. Von Lehman - Age 47 - Executive Vice President, Chief Financial Officer, Secretary and a Director Paul T. Brizzolara - Age 42 - Senior Vice President and Chief Legal Officer W. Todd Gray - Age 32 - Treasurer The officers listed above have served in the positions indicated for the past five years (except as noted below or in the Company's proxy statement). During 1998, Paul T. Brizzolara was elected Senior Vice President and Chief Legal Officer of The Midland Company. Mr. Brizzolara was previously the Company's Assistant Vice President, Assistant Chief Counsel and Assistant Secretary of The Midland Company and will continue as Assistant Secretary in his new position. Also in 1998, (i) J.P. Hayden III was elected Chairman and Chief Operating Officer of the Company, (ii) John W. Hayden was elected President and Chief Executive Officer, (iii) J.P. Hayden, Jr. was elected Chairman of the Executive Committee of the Board and (iv) Michael J. Conaton was elected Vice Chairman of the Company and 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 employed by 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. J. P. Hayden III and John W. Hayden are brothers and are sons of J.P. Hayden, Jr. PART III (Continued) ITEM 11. Executive Compensation. Incorporated by reference to the Registrant's Proxy Statement dated March 17, 2000. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference to the Registrant's Proxy Statement dated March 17, 2000. ITEM 13. Certain Relationships and Related Transactions. Incorporated by reference to the Registrant's Proxy Statement dated March 17, 2000. 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: Independent Auditors' Report. Consolidated Balance Sheets, December 31, 1999 and 1998. Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997. Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. (a) 2. Financial Statement Schedules. Included in Part IV of this report: Page ---- Independent Auditors' Consent and Report on Schedules. 12 Schedule I - Summary of Investments - Other Than Investments in Related Parties - December 31, 1999 13 Schedule II - Condensed Financial Information of Registrant 14-18 Schedule III - Supplementary Insurance Information for the Years Ended December 31, 1999, 1998 and 1997 19 Schedule IV - Reinsurance for the Years Ended December 31, 1999, 1998 and 1997 20 Schedule V - Valuation and Qualifying Accounts for the Years Ended December 31, 1999, 1998 and 1997 21 Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations for the Years Ended December 31, 1999, 1998 and 1997 22 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because such schedules are not required under the related instructions, are inapplicable or the information is included in the financial statements or notes thereto. PART IV (Continued) Page ---- (a) 3. Exhibits. 3. Articles of Incorporation and Code of Regulations - Filed as Exhibits 3(i) and 3(ii) to the Registrant's Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference. 10. 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. 13. Annual Report to security holders - Incorporated by reference to the Registrant's 1999 Annual Report to Shareholders. 21. Subsidiaries of the Registrant. 23 22. Published Report Regarding Matters Submitted to Vote of Security Holders - Incorporated by Reference to the Registrant's Proxy Statement dated March 17, 2000. 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 - None during 1999. 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, III Chairman of the Board and March 20, 2000 - -------------------------- Chief Operating Officer (J. P. Hayden, III) S/ John W. Hayden President and March 20, 2000 - -------------------------- Chief Executive Officer (John W. Hayden) S/ John I. Von Lehman Executive Vice President, March 20, 2000 - -------------------------- Chief Financial and (John I. Von Lehman) Accounting Officer and Secretary 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 20, 2000 - -------------------------- (George R. Baker) S/ James E. Bushman Director and Member March 20, 2000 - -------------------------- of Audit Committee (James E. Bushman) S/ James H. Carey Director and Member March 20, 2000 - -------------------------- of Audit Committee (James H. Carey) S/ Michael J. Conaton Vice Chairman March 20, 2000 - -------------------------- (Michael J. Conaton) S/ Jerry A. Grundhofer Director March 20, 2000 - -------------------------- (Jerry A. Grundhofer) S/ J. P. Hayden, Jr. Chairman of the Executive March 20, 2000 - -------------------------- Committee of the Board (J. P. Hayden, Jr.) S/ J. P. Hayden, III Chairman and March 20, 2000 - -------------------------- Chief Operating Officer (J. P. Hayden, III) S/ John W. Hayden President and March 20, 2000 - -------------------------- Chief Executive Officer (John W. Hayden) S/ Robert W. Hayden Director March 20, 2000 - -------------------------- (Robert W. Hayden) S/ William T. Hayden Director March 20, 2000 - -------------------------- (William T. Hayden) S/ William J. Keating Director March 20, 2000 - -------------------------- (William J. Keating) S/ John R. LaBar Director March 20, 2000 - -------------------------- (John R. LaBar) S/ David B. O'Maley Director March 20, 2000 - -------------------------- (David B. O'Maley) S/ John M. O'Mara Director and Member March 20, 2000 - -------------------------- of Audit Committee (John M. O'Mara) S/ Glenn E. Schembechler Director and Member March 20, 2000 - -------------------------- and Member Committee (Glenn E. Schembechler) S/ John I. Von Lehman Executive Vice President, March 20, 2000 - -------------------------- Chief Financial and (John I. Von Lehman) Accounting Officer, Secretary and Director 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 10, 2000, 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, 1999. 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 20, 2000 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule I - Summary of Investments Other than Investments in Related Parties December 31, 1999 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 $ 91,020,000 $ 90,006,000 $ 90,006,000 States, municipalities and political subdivisions 171,926,000 168,415,000 168,415,000 Mortgage-backed securities 55,269,000 54,092,000 54,092,000 Foreign governments 3,633,000 3,526,000 3,526,000 Public utilities 8,832,000 8,373,000 8,373,000 All other corporate bonds 104,173,000 101,721,000 101,721,000 --------------------------------------------------- Total 434,853,000 426,133,000 426,133,000 --------------------------------------------------- Equity securities, available-for-sale: Common stocks: Public utilities 732,000 818,000 818,000 Banks, trusts and insurance companies 8,629,000 60,682,000 60,682,000 Industrial, miscellaneous and all other 34,126,000 66,795,000 66,795,000 Nonredeemable preferred stocks 2,483,000 2,362,000 2,362,000 --------------------------------------------------- Total 45,970,000 130,657,000 130,657,000 --------------------------------------------------- Accrued interest and dividends 6,740,000 XXXXXXX 6,740,000 --------------------------------------------------- Mortgage loans on real estate 8,655,000 XXXXXXX 8,655,000 --------------------------------------------------- Short-term investments 38,674,000 XXXXXXX 38,674,000 --------------------------------------------------- Total Investments $534,892,000 XXXXXXX $610,859,000 ===================================================
13 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Condensed Balance Sheet Information December 31, 1999 and 1998 ASSETS 1999 1998 ------------- ------------- Cash $ 148,000 $ 96,000 ------------- ------------- Marketable Securities Available for Sale (at market value): Debt Securities (cost, $122,000 in 1999 and $497,000 in 1998) 122,000 497,000 Equity (cost, $342,000 in 1999 and $341,000 in 1998) 2,696,000 3,937,000 ------------- ------------- Total 2,818,000 4,434,000 ------------- ------------- Receivables - Net 11,042,000 8,932,000 ------------- ------------- Intercompany Receivables 9,637,000 -- ------------- ------------- Property, Plant and Equipment (at cost): 37,315,000 37,314,000 Less Accumulated Depreciation 7,289,000 5,439,000 ------------- ------------- Net 30,026,000 31,875,000 ------------- ------------- Other Assets 5,558,000 13,562,000 ------------- ------------- Investments in Subsidiaries (at equity) 250,179,000 247,569,000 ------------- ------------- Total Assets $309,408,000 $306,468,000 ============= ============= 14 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Condensed Balance Sheet Information December 31, 1999 and 1998 LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 ------------- ------------- Notes Payable Within One Year: Banks (including current portion of long-term debt) $ 21,297,000 $ 16,710,000 Commercial Paper 5,550,000 6,522,000 ------------- ------------- Total 26,847,000 23,232,000 ------------- ------------- Other Payables and Accruals 6,634,000 4,664,000 ------------- ------------- Intercompany Payables -- 3,469,000 ------------- ------------- Long - Term Debt 17,925,000 26,271,000 ------------- ------------- Shareholders' Equity: Common Stock - No Par (issued and outstanding: 9,516,000 shares at December 31, 1999 and 9,352,000 shares at December 31, 1998 after deducting treasury stock of 1,412,000 shares and 1,576,000 shares, respectively) 911,000 911,000 Additional Paid - in Capital 18,583,000 15,947,000 Retained Earnings 207,005,000 178,398,000 Accumulated Other Comprehensive Income 49,388,000 70,507,000 Treasury Stock (at cost) (15,786,000) (15,293,000) Unvested Restricted Stock Awards (2,099,000) (1,638,000) ------------- ------------- Total 258,002,000 248,832,000 ------------- ------------- Total Liabilities and Shareholders' Equity $309,408,000 $306,468,000 ============= ============= 15 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Condensed Statements of Income Information For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 ------------- ------------- ------------- Revenues: Dividends from Subsidiaries $ 9,000,000 $ 3,000,000 $ 8,900,000 All Other Income, Primarily Charges to Subsidiaries 6,359,000 6,934,000 7,746,000 ------------- ------------- ------------- Total Revenues 15,359,000 9,934,000 16,646,000 ------------- ------------- ------------- Expenses: Interest Expense 3,391,000 3,971,000 4,775,000 Depreciation and Amortization 3,973,000 2,701,000 6,195,000 All Other Expenses 1,786,000 2,303,000 833,000 ------------- ------------- ------------- Total Expenses 9,150,000 8,975,000 11,803,000 ------------- ------------- ------------- Income Before Federal Income Tax 6,209,000 959,000 4,843,000 Provision (Credit) for Federal Income Tax (1,023,000) (1,023,000) (1,599,000) ------------- ------------- ------------- Income Before Change in Undistributed Income of Subsidiaries 7,232,000 1,982,000 6,442,000 Change in Undistributed Income of Subsidiaries: From Continuing Operations 23,947,000 24,950,000 17,925,000 From Discontinued Operations - - (6,817,000) ------------- ------------- ------------- Net Income $ 31,179,000 $ 26,932,000 $ 17,550,000 ============= ============= ============= 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, 1999, 1998 and 1997 1999 1998 1997 ------------- ------------- ------------- Cash Flows from Operating Activities: Net income $ 31,179,000 $ 26,932,000 $ 17,550,000 Loss from discontinued operations - - 6,817,000 ------------- ------------- ------------- Income from continuing operations 31,179,000 26,932,000 24,367,000 Adjustments to reconcile net income to net cash provided by operating activities: Increase in undistributed income of subsidiaries (23,947,000) (24,950,000) (17,925,000) Decrease (increase) in other assets 8,004,000 (1,142,000) (1,286,000) Depreciation and amortization 3,973,000 2,701,000 6,195,000 Increase in other payables and accruals 2,422,000 153,000 1,575,000 Decrease (increase) in receivables (1,170,000) (1,922,000) 134,000 Other - net 19,000 251,000 36,000 ------------- ------------- ------------- Net Cash Provided by Operating Activities 20,480,000 2,023,000 13,096,000 ------------- ------------- ------------- Cash Flows from Investing Activities: Change in investments (excluding unrealized appreciation/ depreciation) 373,000 1,943,000 (1,991,000) Capital contributions to subsidiaries - - (12,326,000) Acquisition of property, plant and equipment (279,000) (1,657,000) (2,617,000) Sale of property, plant and equipment and other real estate - net 214,000 5,969,000 535,000 ------------- ------------- ------------- Net Cash Provided by (Used in) Investing Activities 308,000 6,255,000 (16,399,000) ------------- ------------- ------------- Cash Flows from Financing Activities: Net change in intercompany accounts (12,080,000) 2,968,000 7,323,000 Increase (decrease) in long - term debt (8,760,000) (1,458,000) 948,000 Increase (decrease) in short - term borrowings 4,028,000 (8,269,000) (2,909,000) Purchase of treasury stock (3,709,000) (1,271,000) (17,000) Dividends paid (2,515,000) (1,746,000) (2,677,000) Issuance of treasury stock 2,300,000 1,358,000 604,000 ------------- ------------- ------------- Net Cash Provided by (Used in) Financing Activities (20,736,000) (8,418,000) 3,272,000 ------------- ------------- ------------- Net Increase (Decrease) in Cash 52,000 (140,000) (31,000) Cash at Beginning of Year 96,000 236,000 267,000 ------------- ------------- ------------- Cash at End of Year $ 148,000 $ 96,000 $ 236,000 ============= ============= ============= 17 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Notes to Condensed Financial Information For the Years Ended December 31, 1999 and 1998 The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes included in the Registrant's 1999 Annual Report to Shareholders. Total debt of the Registrant (parent only) consists of the following: DECEMBER 31, 1999 1998 ------------ ------------ Short - Term Bank Borrowings $20,000,000 $15,000,000 Commercial Paper 5,550,000 6,522,000 Mortgage Notes: 7.10% - Due January 1, 2001 642,000 1,227,000 6.83% - Due December 20, 2005 18,580,000 19,195,000 5.40% - Due December 1, 2003 - 7,559,000 ------------ ------------ Total Debt $44,772,000 $49,503,000 ============ ============ See Notes 7 and 8 to the consolidated financial statements included in the 1999 Annual Report to Shareholders for further information on the Company's outstanding debt at December 31, 1999. The amount of debt that becomes due during each of the next five years is as follows: 2000 - $1,297,000; 2001 - $706,000; 2002 - $756,000; 2003 - $810,000; 2004 - $865,000. 18 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule III - Supplementary Insurance Information For the Years Ended December 31, 1999, 1998 and 1997 (Amounts in 000's) Column A Column B Column C Column D Column E Column F Column G Future Policy Deferred Benefits, Other Policy Policy Losses, Claims and Net Acquisition Claims and Unearned Benefits Premium Investment Cost Loss Expenses Premiums Payable Revenue Income (1) ---------------------------------------------------------------------------------------- 1999 Manufactured Housing $ 67,336 $ 8,170 $ 241,407 $283,332 $ 15,526 Other Insurance 17,832 125,543 71,431 117,659 10,631 Unallocated Amounts 19 Inter-segment Elimination (884) ---------------------------------------------------------------------------------------- Total $ 85,168 $ 133,713 $ 312,838 $ - $400,991 $ 25,292 ======================================================================================== 1998 Manufactured Housing $ 48,260 $ 48,939 $ 209,171 $258,638 $ 14,875 Other Insurance 15,702 76,557 45,944 116,840 9,923 Unallocated Amounts 34 Inter-segment Elimination (924) ---------------------------------------------------------------------------------------- Total $ 63,962 $ 125,496 $ 255,115 $ - $375,478 $ 23,908 ======================================================================================== 1997 Manufactured Housing $ 43,366 $ 42,430 $ 195,793 $219,394 $ 13,935 Other Insurance 12,224 77,704 44,547 91,765 8,359 Unallocated Amounts 24 Inter-segment Elimination (986) ---------------------------------------------------------------------------------------- Total $ 55,590 $ 120,134 $ 240,340 $ - $311,159 $ 21,332 ======================================================================================== Column H Column I Column J Column K Benefits, Amortization of Claims, Losses Deferred Policy Other and Settlement Acquisition Operating Premiums Expenses Costs Expenses (1) Written ------------------------------------------------ --------- 1999 Manufactured Housing $ 133,436 $ 82,302 $ 40,610 $306,446 Other Insurance 70,929 31,910 25,931 137,049 (2) Unallocated Amounts Inter-segment Elimination ------------------------------------------------ --------- Total $ 204,365 $ 114,212 $ 66,541 $443,495 ================================================ ========= 1998 Manufactured Housing $ 137,483 $ 71,288 $ 31,005 $283,020 Other Insurance 72,532 31,881 23,304 110,987 (2) Unallocated Amounts Inter-segment Elimination ------------------------------------------------ --------- Total $ 210,015 $ 103,169 $ 54,309 $394,007 ================================================ ========= 1997 Manufactured Housing $ 100,919 $ 64,265 $ 27,763 $247,704 Other Insurance 70,244 15,253 21,355 97,745 (2) Unallocated Amounts Inter-segment Elimination ------------------------------------------------ --------- Total $ 171,163 $ 79,518 $ 49,118 $345,449 ================================================ ========= Notes to Schedule III: - ---------------------- (1) Net investment income is allocated to insurance segments based upon a combination of premium cash flow and equity data. Other operating expenses include expenses directly related to the segments and expenses allocated to the segments based on historical usage factors. (2) Includes other property and casualty insurance and accident and health insurance ($3,632, $2,237 and $2,738 for 1999, 1998 and 1997, respectively).
19 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule IV - Reinsurance For the Years Ended December 31, 1999, 1998 and 1997 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 ----------------------------------------------------------------------------------- 1999 - ---- Life Insurance in Force $507,134,000 $233,506,000 $23,359,000 $296,987,000 7.9% =================================================================================== Insurance Premiums and Other Considerations: Life and Health Insurance $ 14,315,000 $ 6,346,000 $ 333,000 $ 8,302,000 4.0% Property & Liability Insurance 409,506,000 55,620,000 38,803,000 392,689,000 9.9% ----------------------------------------------------------------------------------- Total Premiums $423,821,000 $ 61,966,000 $39,136,000 $400,991,000 9.8% =================================================================================== 1998 - ---- Life Insurance in Force $416,892,000 $167,412,000 $ 1,895,000 $251,375,000 0.8% =================================================================================== Insurance Premiums and Other Considerations: Life and Health Insurance $ 10,374,000 $ 4,058,000 $ 111,000 $ 6,427,000 1.7% Property & Liability Insurance 394,166,000 60,573,000 35,458,000 369,051,000 9.6% ----------------------------------------------------------------------------------- Total Premiums $404,540,000 $ 64,631,000 $35,569,000 $375,478,000 9.5% =================================================================================== 1997 - ---- Life Insurance in Force $371,298,000 $170,668,000 $200,630,000 0.0% =================================================================================== Insurance Premiums and Other Considerations: Life and Health Insurance $ 9,761,000 $ 4,371,000 $ 214,000 $ 5,604,000 3.8% Property & Liability Insurance 375,967,000 98,406,000 27,994,000 305,555,000 9.2% ----------------------------------------------------------------------------------- Total Premiums $385,728,000 $102,777,000 $28,208,000 $311,159,000 9.1% ===================================================================================
20 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule V - Valuation and Qualifying Accounts For the Years Ended December 31, 1999, 1998 and 1997 ADDITIONS CHARGED BALANCE AT (CREDITED) TO BALANCE BEGINNING COSTS AND DEDUCTIONS AT END DESCRIPTION OF PERIOD EXPENSES (ADDITIONS) OF PERIOD - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1999: Allowance For Losses $753,000 $192,000 $138,000 (1) $807,000 YEAR ENDED DECEMBER 31, 1998: Allowance For Losses $753,000 $176,000 $176,000 (1) $753,000 YEAR ENDED DECEMBER 31, 1997: Allowance For Losses $799,000 $184,000 $230,000 (1) $753,000 NOTES: (1) Accounts written off are net of recoveries. 21 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations For the Years Ended December 31, 1999, 1998 and 1997 (Amounts in 000's) Column A Column B Column C Column D Column E Column F Column G Reserves for Deferred Unpaid Claims Discount, Affiliation Policy and Claim if any, Net with Acquisition Adjustment Deducted in Unearned Earned Investment Registrant Costs Expenses Column C Premiums Premiums Income - ------------------------------------------------------------------------------------------------------------ Consolidated Property-Casualty Subsidiaries 1999 $ 76,031 $ 128,467 $ - $ 281,442 $ 392,689 $ 23,746 =========== =========== ========== =========== ========== ============ 1998 $ 59,736 $ 121,154 $ - $ 236,171 $ 369,051 $ 22,468 =========== =========== ========== =========== ========== ============ 1997 $ 52,198 $ 116,898 $ - $ 222,530 $ 305,555 $ 20,018 =========== =========== ========== =========== ========== ============ Column H Column I Column J Column K Claims and Claim Adjustment Expenses Amortization Incurred of Deferred Paid Claims Related to Policy and Claim Current Prior Acquisition Adjustment Premiums Year Years Costs Expenses Written - --------------------------------------------------------------------------------------------- Consolidated Property-Casualty Subsidiaries 1999 $ 211,066 $ (10,178) $ 108,689 $ 199,830 $ 439,863 =========== ========== =========== =========== =========== 1998 $ 208,811 $ (2,120) $ 100,190 $ 200,325 $ 391,770 =========== ========== =========== =========== =========== 1997 $ 163,035 $ 5,230 $ 77,100 $ 151,148 $ 342,711 =========== ========== =========== =========== =========== Note: Certain amounts above will not agree with Schedule III because other insurance amounts in Schedule III include life and accident and health insurance.
22 EX-13 2 COMPANY PROFILE The Midland Company is a highly focused provider of specialty insurance products and services through its American Modern Insurance Group (AMIG) subsidiary, which contributes more than 90% of the company's revenues. AMIG is a leader in the manufactured housing insurance market, and also offers other specialty insurance products and services through diverse distribution channels. Innovative products, flexible coverage, expert claims management and superior underwriting make AMIG an indispensable partner to its customers. AMIG has a record of exceeding the insurance industry's rates of growth and profitability. Over the past five years, AMIG's gross written premium has expanded at an 11.4% rate, compared with 3.4% for the industry. For 1999, Midland reported that net operating income grew 27 percent to $28.9 million, or $3.06 per share (diluted), on a 6 percent increase in revenue to $469.1 million. Net income (including capital gains) reached a record $31.2 million, or $3.30 per share (diluted). The strong performance marked the third consecutive year that Midland posted record-breaking results from continuing operations. Management remains confident that the company's strategic plan, effectively executed, should result in an even greater future. Midland expects to continue to differentiate itself from the competition in 2000, making itself an indispensable partner to its customers. The company also is committed to expanding its non-insurance, fee-generating business to create a sustainable competitive advantage. In addition, Midland's M/G Transport subsidiary represents a lucrative investment in a niche river transportation business. The Midland Company's Mission To be an indispensable partner to customers within chosen markets by providing value-adding specialty products and services delivered by the best professionals in the industry. TABLE OF CONTENTS Financial Highlights 1 Letter to Shareholders 2-5 AMIG-Indispensable Partner 6-15 Focus on Investment Results 16 Focus on M/G Transport 17 Six Year Financial Summary Data 18-19 Management's Discussion and Analysis 20-25 Private Securities Reform Act of 1995- Forward Looking Statements Disclosure 25 Income Statements 26 Balance Sheets 27 Changes in Shareholders' Equity 28 Cash Flows 29 Notes to Financial Statements 30-38 Management's Report 39 Independent Auditors' Report 40 Officers and Directors 41 FINANCIAL HIGHLIGHTS THE MIDLAND COMPANY AND SUBSIDIARIES For the Years Ended December 31, (Amounts in thousands, except per share data) 1999 1998 % Change - -------------------------------------------------------------------------------- Operating Performance Revenues $ 469,126 $ 442,362 6.1% Income Before Federal Income Tax $ 43,713 $ 37,527 16.5% Operating Income (After-Tax) $ 28,913 $ 22,802 26.8% Capital Gains (After-Tax) $ 2,266 $ 4,130 (45.1%) Net Income $ 31,179 $ 26,932 15.8% Per Share Data Net Income-Basic $ 3.42 $ 2.99 14.4% Average Shares Outstanding-Basic 9,111 9,018 Operating Income (Excludes Capital Gains)-Diluted $ 3.06 $ 2.42 26.4% Net Income-Diluted $ 3.30 $ 2.86 15.4% Average Shares Outstanding-Diluted 9,463 9,412 Cash Dividends $ .27 $ .25 8.0% Book Value $ 27.11 $ 26.61 1.9% Financial Position Total Assets $ 888,057 $ 837,220 6.1% Shareholders' Equity $ 258,002 $ 248,832 3.7% Performance Ratios Combined Ratio (GAAP) (AMIG Property and Casualty Companies) 94.4% 96.9% Return on Beginning Equity 12.5% 13.7% This page includes three five year bar charts with the following data: REVENUES (Continuing Operations) dollars in millions 95 96 97 98 99 Revenues $313.2 $337.7 $373.8 $442.4 $469.1 Caption: Midland's revenue growth from continuing operations maintained a healthy pace in 1999, totaling $469.1 million. Non-insurance, fee-generating products and services within the Company's Modern Services Group subsidiary helped fuel top-line growth, producing three times as much gross fee income in 1999 as in 1998. NET INCOME AND NET OPERATING INCOME PER SHARE (Continuing Operations) 95 96 97 98 99 Operating Income $1.57 $0.22 $2.33 $2.42 $3.06 Net Income 1.74 .41 2.63 2.86 3.30 Caption: Midland enjoyed another year of record results in 1999, with net operating income rising 26.8 percent to $28.9 million compared with record 1998 operating earnings of $22.8 million. Net operating income per diluted share totaled $3.06 in 1999, up from $2.42 in 1998. BOOK VALUE PER SHARE 95 96 97 98 99 BOOK VALUE PER SHARE $17.28 $17.50 $21.11 $26.61 $27.11 Caption: Midland's Book Value Per Share has grown at a compounded rate of 13.0% over the last five years. 1 LETTER TO SHAREHOLDERS Nineteen ninety-nine was more than the end of an incredible millennium of an almost unimaginable worldwide technological revolution. It was the bridge between Midland's 61-year rise to leadership in the specialty insurance marketplace and the unparalleled promise of exhilarating new opportunities in the century ahead. It was a year that saw us remain clearly focused on the strategic directions we had mapped out for ourselves. And, it was a time that saw us defy the gravity of sustained growth by producing results that, once again, outperformed the industry while, at the same time, laying the framework for new products and services that will ensure a sustainable competitive advantage for your company in the future. The driving force behind The Midland Company's performance in 1999 was our goal to reaffirm our role as an indispensable partner for customers in the markets in which we choose to compete. Through the strong growth and performance of American Modern Insurance Group (AMIG), our specialty insurance subsidiary, we feel we have delivered on this goal and we are pleased with our financial results for the year. Our focus and expertise as a specialty insurer, coupled with a clear strategy for growth and expansion, will continue to position AMIG as a leader in its market segments in 2000 and beyond. We believe that implementation of our strategies will allow AMIG to continue to exceed the insurance industry's rates of growth and profitability in years to come. RECORD PERFORMANCE REFLECTS SOUND INSURANCE FUNDAMENTALS Our strategy of choosing select markets and applying our results-oriented market leadership has produced consistently strong financial gains for The Midland Company - and 1999 was no exception. Revenue for the year increased 6.1% to a record $469.1 million from $442.4 million in 1998, while net operating income (which excludes capital gains) rose 26.8% to a record $28.9 million, or $3.06 per share (diluted). Net income for the year was also a record $31.2 million, or $3.30 per share, with return on beginning equity at 12.5% in 1999. These solid results reflect the record underwriting profits that were derived from sound management and underwriting fundamentals and the performance of our investment portfolio. The success of American Modern Insurance Group draws upon our ability to effectively utilize our multi-faceted distribution network to cross-sell products and services and to understand the needs of our customers. We are committed to building relationships within each of our channels in a way that also leverages their market segment expertise to effectively deliver our products. It was a dynamic year for AMIG, with direct and assumed written premiums for our property and casualty operations growing 6.0% to $472.0 million in 1999 from $445.3 million in 1998, a rate of growth more than 2.5 times the industry average. Manufactured housing direct and assumed written premiums reached $324.4 million in 1999, an increase of 9.1% This page includes a bar chart with the following data: MIDLAND'S COMPOUNDED ANNUAL GROWTH RATE IN OPERATING EARNINGS PER SHARE 10 YR 12.3% 5 YR 22.5% 1 YR 26.3% 2 from 1998. Including the net impact of weather-related catastrophe losses, such as Hurricane Floyd, the combined ratio for the year was 94.4% compared with 96.9% for 1998 (both well below industry averages). Excluding catastrophe losses, the combined ratio was 88.5% in 1999. M/G Transport, our transportation subsidiary, contributed total revenue in 1999 of $31.3 million. Because M/G's affreightment revenues and operating profits are partially dependent on the energy industry, pre-tax operating profits decreased to $1.8 million in 1999 from $4.4 million in 1998. Cash flow from M/G Transport operations was $4.1 million compared with $4.8 million in 1998. M/G's after-tax contribution to net income was $1.2 million, or $0.12 per share (diluted). M/G's historic financial performance and successful market niche make it a lucrative investment for The Midland Company. Midland and AMIG employ a conservative investment strategy that focuses on balancing current income and total return, with an emphasis on safety and liquidity. Over the course of 1999, AMIG increased its emphasis on tax-advantaged investments, which increase the net after-tax return on the portfolio. The value of AMIG's portfolio grew to $610.4 million in 1999 from $587.0 million in 1998. The Ward Financial Group recognized AMIG's long-term financial strength in 1999 by selecting AMIG as one of the Top 50 property and casualty companies in America. Reflecting the insurance group's record underwriting performance and the contribution of the investment portfolio, Midland's balance sheet remained strong, with total shareholders' equity reaching $258.0 million in 1999. Book value per share was $27.11, up 1.9% from $26.61 in 1998. Book value per share has grown at a compounded annual rate of 13% over the last five years. Total return on beginning shareholders' equity was 12.5% in 1999, which significantly outpaced the property and casualty industry as a whole. REACH OUR OBJECTIVES IN 2000 AND BEYOND Understanding our customers' needs and reacting to marketplace opportunities necessitate we build relationships that transcend competitive pressures. We are committed to advancing our momentum in specialty markets by continuing to provide superior services to current customers and by forming partnerships and strategic alliances with key players in those markets. Pooling expert resources, creating new distribution methods and expanding our customer base are just a few of the benefits we gain from partnering with our primary constituencies. We also look to continued internal growth and expansion of our fee income businesses as means of reaching our performance objectives. In 1999, we implemented several business decisions designed to further reinforce these core growth strategies, including new strategic partnerships and selective acquisitions. For example, during the year we developed key business relationships with four influential managing general agencies: Arlington Roe in Indiana, Southern Insurance Underwriters in Georgia, Texas Specialty Underwriters and Anderson & Murison in California. These relationships further solidified the commitment we've made to grow profitably within the MGA channel of distribution. We will continue to pursue joint venture and strategic alliance partnerships that enable the placement of our products within new distribution channels and to meet the ever-changing insurance needs of our customers. In 1999 we acquired Manufactured Homes Acceptance Corporation (MHAC), North American Insurance and Acceptance Corporation (NAIAC) and affiliates and, in early 2000, the operating assets of the Manufactured Housing Insurance Agency (MHIA). These acquisitions This page includes a bar chart with the following data: AMIG 10-YEAR AVERAGE RETURN ON BEGINNING EQUITY AMIG 14.8% Industry 9.6% Caption: Strong growth, a disciplined approach to underwriting and specialty products and services designed to meet the needs of its customers have helped AMIG achieve an industry-leading 10-year return on beginning equity of 14.8%. 3 leverage our knowledge of niche markets, underwriting skills and management experience, and they diversify the services we deliver. They also illustrate our plans to continue expanding into areas that strengthen our core competencies. Additionally, we recently have designed a new technological architecture for our business. While certain elements of the infrastructure have been put into place, others will be activated throughout the coming years. Our intent is to strategically deploy technology across all products, services and channels. We will also continue to utilize e-commerce to more efficiently meet the needs of our customers and business partners. Future uses of technology will facilitate policy and claims processing, as well as the gathering, analysis and application of data needed to respond to changing market needs with timely and competitive products and services. During 1999, Midland launched its investor relations Web site, www.midlandcompany.com, to establish an additional channel of communication to shareholders. The goal of the Web site is to deliver up-to-the-minute information to our shareholders and investment community. The site is an important part of our long-term commitment to add value to our shareholders. Midland also integrated Web home pages for American Modern Insurance Group and M/G Transport with the Midland site to enhance the value-added tool for customers and agents. The following pages of this report discuss in more detail the strategies we are using to enhance our relationships with our business partners and customers, leading to internal growth. To help our shareholders understand how we work in partnership with leaders in selected markets, we have included comments received from a cross-section of our customers. A STRATEGY TO ENHANCE SHAREHOLDER VALUE The principal measure of the success of our strategies is our ability to share the achievements of The Midland Company with our shareholders. While we generated excellent financial results in 1999 and rewarded shareholders with continued dividend increases in 1999 and early in 2000, our stock price did not perform to our satisfaction. That was due, in part, to the stock market seeing generally lower valuations for the entire property and casualty insurance industry over the course of the year. Steps were taken in 1999 to enhance the visibility of Midland's stock, while we continued to generate the financial results expected by our shareholders. For example, in June we moved to the Nasdaq National Market System (under a new symbol-MLAN) from the American Stock Exchange as a means of increasing stock liquidity and visibility. In October, the board authorized the repurchase of up to 500,000 shares of our outstanding common stock over a six-month period to illustrate our confidence in the company's long-term prospects. Management determined that one of the best ways to use our capital is to invest in ourselves at a time when the inherent long-term strength of the company is not believed to be fully recognized by the investment community. Midland's financial condition remains strong, and we have access to the capital necessary to fund future growth opportunities. This page includes a photo with the following caption: From left, John W. Hayden, President and Chief Executive Officer and Joseph P. Hayden III, Chairman and Chief Operating Officer 4 As you can see, Midland and American Modern Insurance Group dramatically and consistently are outperforming the remainder of the property and casualty industry, with a conscious and deliberate focus on profitable, sustained growth. Although challenges remain in 2000, we are encouraged by the progress we have made in helping the market better appreciate our unique position as a specialty insurance provider. By focusing on our businesses, and working to continue our record of industry-leading growth and profitability, we believe we have positioned The Midland Company to increase its book value for shareholders in the years ahead. OUR THANKS TO RETIRING DIRECTOR It is with deep appreciation that we pay tribute to George R. Baker, who will retire from The Midland Company's Board of Directors effective April 8, 2000 after 29 years of service to Midland shareholders. During that time, Mr. Baker helped provide the vision and leadership that have enabled The Midland Company to prosper and take its place as one of the leading specialty insurers in the country. We are grateful for his contributions to our success, and we wish him the very best in the future. LOOKING AHEAD As we move into the future, The Midland Company will remain unwavering in its dedication to facilitating the growth of our associates, our business enterprises and our relationships with key partners. As the insurance industry continues to consolidate and produce new competitive challenges, we will continue to be flexible in our product and service offerings and reliable in our marketplace expertise. Through careful planning, loyalty of management and a focused business plan, The Midland Company is on course for a successful future. We look forward to building that bright future on the strong foundation of business relationships that have enabled our past successes. As always, we will continue to share our success with our shareholders, whose support and trust we value. /s/Joseph P. Hayden III /s/John W. Hayden Joseph P. Hayden III John W. Hayden Chairman and President and Chief Operating Officer Chief Executive Officer February 10, 2000 This page includes a bar chart with the following data: AMIG PROPERTY & CASUALTY 10-YEAR COMPOUND ANNUAL PREMIUM GROWTH AMIG 15.9% Industry 3.6% Caption: Over the past 10 years, AMIG's direct and assumed written premiums have grown more than four times the industry average as the company focused on being an indispensable partner to customers in its chosen markets. 5 AMIG-INDISPENSABLE PARTNER The Midland Company derives more than 90 percent of its revenues from its American Modern Insurance Group (AMIG) subsidiary. Known as the "Specialty Lines Specialists," AMIG is a national leader in providing specialty insurance products and services. That focused mindset - along with a deep knowledge and understanding of niche markets - allows AMIG to be an indispensable partner within its chosen markets. FOCUS ON SPECIALTY MARKETS AMIG is widely recognized as an established leader in manufactured housing insurance. It's no wonder: AMIG has served the manufactured housing sector for more than 35 years. AMIG knows the product. It knows the people. It knows the risks. This kind of specialized knowledge results in a deep and unmatched understanding of policyholder needs. In 1999, AMIG used this understanding to develop a Land Home product to serve the growing number of people with multi-sectional homes on privately owned property. AMIG also was one of the first specialty insurers to provide convenient credit-card payment options to policyholders. Additionally, AMIG expanded its EZTEL service, which enables dealers to meet compliance requirements while helping customers meet insurance needs. This page includes a picture with the following caption: Dan Rolfes (Holiday Homes) "They create win/win relationships." Thirty years ago, I had no experience and had never even been in a mobile home. And yet, Midland took a chance on me by lending me the money to go into business. That kind of investment is typical of their long-term involvement in our industry. For those who have known them as I have, it's obvious that much of their success revolves around their commitment to establishing win/win relationships with retailers. Their positive impact on our industry is pervasive, including their participation in associations, their willingness to adapt products to our changing environment, the educational opportunities they provide for our employees and the quality of their staff. When I visit their offices, I see that same level of commitment to their community. And, I encounter a group of people who are openly positive, welcoming and proud of what they've accomplished. To me, that's the sign of an organization you want to be associated with. 6 Such innovative products and services have helped AMIG record a compounded annual premium growth rate of 17.7% over the past five years in the manufactured housing segment. In 1999, AMIG's manufactured housing insurance premiums rose 9.1 percent to $324.4 million. Yet manufactured housing insurance does not tell the whole story. Drawing on its history as a specialist in one market, AMIG has effectively reached into new ones and made an impact. AMIG has a growing presence in other specialty lines, including watercraft, recreational vehicle, homeowners, lower valued homes, warranty products, dwelling fire, mortgage fire, collateral protection, specialty automobile, credit life, long-haul truck, commercial and excess and surplus lines. Each of these markets represents a specialty area, as each has unique characteristics. In 2000, AMIG will focus on continued profitable growth in manufactured housing products, as well as new watercraft, recreational vehicle and homeowners programs that will provide new competitive advantages. For example, AMIG will introduce its "First Choice" watercraft program in the first quarter in response to agent requests for a more simplified, competitive product. A new "RV Guard" extended service contract also is coming in the dealer distribution channel. Additionally, new homeowner products will help meet the specialty needs of policyholders not adequately served by standard lines carriers. This page includes a picture with the following caption: Joe Stegmayer (Champion Homes) "Imaginative products and services." Client satisfaction is American Modern's number one priority. Everything they do supports their commitment to the customer...and to the needs of Champion Enterprises. We are continually impressed with their imaginative approach to the development of products and services that meet our customers' needs while increasing written premium among our retailers. For example, we believe that American Modern's EZTEL operation will enable Champion to further improve our sales of consumer protection products. Of course, products and services are only as good as the people behind them. At American Modern, the people are professional and always respond in a timely manner, with enthusiasm and a team attitude. It's impossible to overstate just how valuable those traits are in making a business relationship durable and enjoyable. We take pride in the relationship we have with American Modern, and we are pleased with the rewards we share with them while providing a valuable, worthwhile service to our customers. 7 MULTIPLE DISTRIBUTION CHANNELS Part of the reason AMIG has been so successful in serving niche markets is its ability to use and manage multiple distribution channels. AMIG is the leader in providing coverage at the point of sale, when customers are purchasing their manufactured homes. The company also works through a national network of agents, dealers, manufacturers, lenders and others. In addition to providing multiple sales opportunities and cross-sales opportunities, these many channels enable AMIG to build multi-layer relationships. That allows the company to gain a deeper understanding of the needs of the consumer and the marketplace. AMIG put that understanding to work in 1999 by testing a new fee-generating service that relieves lenders of claims-processing and payment disbursal responsibilities, duties they typically don't have the time or expertise to handle efficiently. This new service - the direct result of AMIG's relationship with a client bank - will be offered to other lenders in the second quarter of 2000. AMIG also used strategic partnerships to make inroads with its credit life company - American Modern Life. The company finished the year with eight consecutive months of record premium production and generated $21.2 million in credit life and accident and health premium in 1999 - up 72 percent over 1998. Products, services and results like this come about because of AMIG's unique relationship This page includes a picture with the following caption: Tom Sapinski (Firstar Insurance Services) "They're masters at communications." Communication is the driving force that sustains our close relationship with American Modern. In fact, we have dialogue almost daily. AMIG really listens and responds promptly to questions and problems in the course of doing business. Their experience gives them special insights into understanding our systems and culture. And, that makes a huge difference in the efficiency and effectiveness of our relationship. Flexibility and adaptability are hallmarks of the way AMIG does business. For example, they use bi-weekly conference calls to mutually identify issues and establish action plans to resolve them. That kind of proactive involvement exemplifies how they keep communication lines open to improve and maintain understanding between organizations. Another competitive advantage they offer us is their expertise in credit life insurance. Since compliance with the many variations in state laws is challenging and critical, their experience translates into confidence for us that we're doing the right thing for our customers. This page includes a pie chart with the following data (amounts in millions): AMIG PRODUCT MIX (Gross Written Premiums) Manufactured Homes $324.4 Park & Dealer 31.1 Site Built Dwelling 25.5 Colateral Protection 22.9 Watercraft 17.4 Mortgage Fire 10.3 Long Haul Truck 11.3 Credit Life & Related 21.2 All Other 35.4 Caption: AMIG is a leader in the manufactured housing insurance market. AMIG also offers customers many other specialty products and services. 8 with its business partners, at all points, within each specialty market area. AMIG talks to agents, to dealers, to lenders. And, more importantly, AMIG listens. In 1999, listening involved roundtable forums with key producers in various channels to identify needs and develop plans for the strategic deployment of technology, training and marketing to enhance effectiveness and improve efficiency. It involved the launch of the AMIG Web site, www.amig.com, which enabled agents to communicate with the company anytime, from any place. Listening involved bi-weekly conference calls with a key lender account. It involved going beyond trade-show and meeting attendance; it involved active involvement and support. Listening meant the launch of the company's Next Generation technology initiative, which will make AMIG even more policyholder-centric in its system design and will cut the time it takes to move new products and services from concept to reality. More efficient processes and systems mean that when business partners talk, AMIG can act on their suggestions quickly. Other ways AMIG strengthened partner relationships included alliances with organizations that matter to our customers. For example, AMIG joined with The Hartford to bring their workers' compensation coverage together with our dealer and park commercial programs. These actions, and others like them, have positively impacted new business results. This page includes a picture with the following caption: Thierry DeMascureau (Classic Car Customer) "Committed to doing right by me." As a classic car collector, I don't take anything for granted where my car is involved. And, that includes the choice of an insurance policy. In selecting Leland-West as my agent, it became obvious to me very quickly that they had formed a unique relationship with American Modern Insurance Group...the kind of relationship that is based on trust and freedom to truly meet customer needs. Leland-West and American Modern obviously know what kind of coverages and services car aficionados need. And, they work together to deliver a level of quality that I'd be hard pressed to find somewhere else. I don't know if I can adequately express how much it puts my mind at ease to know that I have a team of knowledgeable professionals behind me that is truly committed to doing right by me...and each other. 9 Perhaps more importantly, they have impacted retention. Retained premium rose $20.8 million in 1999, in part due to increased flexibility in payment options; rate stabilization; improved underwriting and risk selection; and overall improved customer service. In 2000, AMIG will implement a formal Customer Listening Outreach Program to encourage customer feedback in every step of the insurance process. AMIG also will continue to leverage the synergies created by its multiple company structure - four service companies, six property and casualty companies, four agencies and two life companies - to add value to its relationships with distribution channels. Such comprehensive products and services provide a sustainable competitive advantage for AMIG, and make the company an indispensable partner in its chosen markets. SUPERIOR CLAIMS MANAGEMENT AMIG also acts as a true business partner by helping agents strengthen relationships with policyholders. Valuable products, of course, are one way to speak to consumers. But what really earns their confidence and loyalty is superior claims service, and AMIG consistently is there in times of need. AMIG handles claims quickly, efficiently and personally with locally based, company-employed claims representatives. And, while AMIG is a leader in handling day-to-day losses, the company helps set the standard for fast and compassionate service in catastrophes. Special catastrophe teams are deployed to disaster areas within 24 hours; in the case of hurricanes, AMIG often beats the storm to the scene. One such 1999 storm - Hurricane Floyd - This page includes a picture with the following caption: Jim Potter (GreenPoint Credit) "Leading-edge technology means choices." Our relationship with American Modern Home Insurance is a true partnership. We've worked successfully toward common goals since 1987, even before our name became GreenPoint Credit. Our rapid expansion would have proven daunting to many companies, but not American Modern. They didn't miss a step in responding with highly effective homeowners and flood insurance tracking solutions in their Ameritrac operation. Using leading-edge technology, they're able to provide customer-friendly insurance alternatives for our clients. It's the kind of caring service that fosters a more solid relationship with our customers and, hopefully, more repeat business. Their "customer first" attitude was exemplified recently during Hurricane Floyd, when disaster claim centers were quickly established in devastated areas, and claims were settled quickly to get people's lives back on track. The bottom line is it's hard to find a company whose customer service philosophy can meet GreenPoint Credit's standards of excellence. We appreciate American Modern as one that can. This page includes a pie chart with the following data (amounts in millions): AMIG DISTRIBUTION MIX (Gross Written Premiums) Wholesale $ 89.1 Retail 96.8 Commercial 31.6 Banks/Credit Unions 47.1 Dealer 60.6 Lender 148.3 Manufactures 26.0 Caption: Working with partners in multiple distribution outlets, including independent agencies, lenders, dealers and others, provides AMIG with added insight into the needs of its specialty insurance markets. 10 is a good example of what AMIG accomplishes in the face of disaster. The storm struck the eastern seaboard in September. Floodwaters were slow to recede, which kept both homeowners and adjusters from damaged homes. Despite the challenges, AMIG settled 90 percent of the 9,653 Floyd claims in 30 days or less. AMIG's in-house staff adjuster training program is among the best in the industry. The company hires adjusters out of local markets, then brings them to AMIG headquarters for five weeks of rigorous training. Adjusters then return to the field for additional training. AMIG has approximately 150 employee field adjusters across the country who, together with Home Office Claims professionals, handled nearly 90% of all claims in 1999. Such in-house processing cuts the cost per claim and also speeds payments. AMIG settled 87.5% of property claims within 30 days in 1999, bringing relief and peace of mind quickly to our policyholders. Always looking to improve on excellence, AMIG will review service objectives in 2000 and how they are measured, with a clear focus on providing the best service possible to the company's one million policyholders. DISCIPLINED UNDERWRITING AMIG is able to pay claims quickly and efficiently because of its financial strength. It's a strength that has been attained through disciplined underwriting and disciplined exposure management. This page includes a picture with the following caption: Bill Fehr (Associates Insurance Group, Manufactured Housing Division) "They're our partners of choice." Not long ago, we were asked to recommend a company to provide insurance support products for two of our subsidiaries. So, we undertook a lengthy and arduous evaluation of the three companies providing those services to us at the time. When all had been scrutinized for efficiencies, field support, claims paying, product differentiation, ease of doing business and profitability, one company was the clear winner. American Modern Insurance Group and its Ameritrac Tracking Service were head and shoulders above the rest and continue to be our partners of choice. Even after many years, they continue to impress us with their professionalism and their willingness to improve already superior products and services while supporting our efforts to operate more efficiently and profitably. Based on customer feedback, we know our insurance and tracking providers are performing up to our expectations, letting us concentrate on other insurance activities. AMIG is an indispensable asset to our insurance operations. 11 All AMIG products are designed and priced to produce an underwriting profit of at least five percent. AMIG focuses on this pricing level because it targets markets where frequency of loss - rather than severity of loss - is the norm. In 1999, the statutory combined ratio for AMIG was 93.4 percent, compared with an estimated industry average of 107.5 percent. The company doubled its underwriting profit in 1999 over the previous year and had record underwriting results on operations for the third consecutive year. AMIG manages exposure across many levels: through geographic concentrations, business partner profiles and catastrophe modeling. Sophisticated tracking mechanisms analyze AMIG's exposure by zip code, by county, by contiguous zip code and county and by state, as well as by distribution channel, to ensure it has not assumed an unacceptable risk concentration. The strategic purchase of reinsurance, too, has been a valuable component of AMIG's risk management structure. This was dramatically demonstrated in 1999 when special "second event" coverage mitigated our Hurricane Floyd losses. This kind of protection, based on long-term relationships with strong reinsurers, provides AMIG with the flexibility it needs to serve the insurance needs of national lenders, with coastal exposures. AMIG's net loss ratio has been 56.1 percent or less in nine of the last ten years, with the 10-year average loss ratio for AMIG at 54.0 percent. This page includes a picture with the following caption: Joe Corona (Fleetwood Retail) "A shared commitment to quality." The manufactured housing industry has grown increasingly competitive as the result of nine successive years of industry growth. So, maintaining a competitive edge has never been more challenging. Fleetwood Retail Corporation is driven to become an industry leader by making a strong commitment to quality, service and customer satisfaction. In doing so, we realize that the strength of our business partnerships is also an important factor in building a successful future. American Modern Insurance Group, a leader in the insurance industry, has consistently shown that it shares these same beliefs. Together, we are developing creative products for our customers. American Modern has repeatedly proven its value as a very important partner to us by offering competitive insurance products and an extremely talented support staff. We take comfort in knowing that, despite the volatility of the manufactured housing industry, we have an insurance partner that is truly committed to our relationship and to our customers. This page contains a five year bar chart with the following data: AMIG POPERTY AND CASUALTY PREMIUM VOLUME (Direct and Assumed Written Premiums) dollars in millions 95 96 97 98 99 AMIG PROPERTY AND CASUALTY $376.3 $387.2 $423.0 $445.3 $472.0 Caption: AMIG's property and casualty direct and assumed written premiums grew 6.0 percent to $472.0 million in 1999, with manufactured housing direct and assumed written premiums increasing 9.1 percent to $324.4 million during the same period. By comparison, the property/casualty industry is estimated to have grown premiums at a 2.3 percent pace in 1999, according to A.M. Best. 12 NEW OPPORTUNITIES AMIG believes in the power of technology and in harnessing it to improve service. That was never more evident than in 1999, as AMIG utilized the tool of the masses - the Internet - to add value to business partners and policyholders. AMIG's Web site, www.amig.com, currently delivers up-to-the-minute information on products, services and career opportunities. Beginning in 2000 and in the years that immediately follow, Web site enhancements will allow claims-filing, quote fulfillment and numerous other interactive services for various customer groups. In addition to new products, services and relationships, new markets and new fee-based services also fulfill AMIG's strategy to remain an indispensable partner to customers. New markets present new opportunities, and AMIG has seized those opportunities with strategic acquisitions. In 1999, the company acquired the assets of Michigan-based Manufactured Homes Acceptance Corporation (MHAC), North American Insurance and Acceptance Corporation (NAIAC) and their affiliates. These acquisitions allow AMIG to better serve the manufactured housing industry with loan facilitation, warranty, insurance sales and telemarketing services. Additionally, in 1999 AMIG strengthened its presence in existing markets. For example, the company opened a specialized marine center based in St. Louis to quote, underwrite and process all marine business. The center utilizes the expertise of nine industry experts This page includes a picture with the following caption: Francis Johnson (Johnson & Johnson) "It's about personal relationships." The relationships we have built have truly come from the ground up. When I was still in college, their current CEO, John Hayden, was an American Modern field representative, calling on Johnson & Johnson. In fact, when he visited, he would sometimes stay in my parents' house with us. This personal relationship has grown and helped cement the business relationship we've developed over the years. There's something extra special about feeling that a friend is helping because he wants to...not because he has to. For example, when Hugo devastated Charleston back in 1989, John came down to help us dig out. He stayed with us, helping clean up our yards and houses, while making sure our business got great claims service. This type of relationship supersedes the small problems that sometimes get blown out of proportion in a business partnership. It allows both of us to become true strategic partners, knowing that each is looking out for the other's best interests. 13 with close to 175 years of combined underwriting experience and watercraft market knowledge; it operates as a branch of AMIG's Atlas Insurance Agency. In 1999, AMIG also built considerable momentum in its Modern Services Group subsidiary, which produced three times the revenue in 1999 compared to 1998 from its fee-generating services. Those services include Ameritrac, a loan and lease portfolio collateral tracking operation, which now tracks more than 1.7 million loan and lease accounts for 37 financial institutions, providing $1.8 million in third party revenues and $57.5 million in premiums to AMIG in 1999. AMIG expects to significantly expand fee-service operations in 2000 by aggressively marketing recreational vehicle and manufactured housing service contracts; expanding loan tracking and other Ameritrac services; originating manufactured housing loans through its MHAC subsidiary; and more. Such services add value to customers and help insulate the company from the risks inherent in the insurance business. New opportunities are where you find them, and AMIG is implementing programs to engage associates more than ever in the business, to help them think outside the box and develop the opportunities - as well as the tools - to help customers, policyholders and the company succeed. One example is the Total Rewards program, which was launched at the end of 1999 to more closely tie personal rewards to performance and to give each associate the opportunity to share in the company's success. This page includes a picture with the following caption: David Pietrowski (LoVullo Associates, Inc.) "The standard we judge others by." Growth and profitability define the success model for all of us in the insurance industry. LoVullo Associates has consistently achieved success because of the essential relationship we enjoy with American Modern Insurance Group...a relationship that clearly is based on their understanding that the success of one of our organizations is undeniably impacted by the success of the other. For that reason, their business decisions reflect the collaborative thinking of those who will be impacted by them, which is typical of the "partnership philosophy" that drives their company. American Modern's commitment to excellence, market expertise and innate willingness to listen and respond to the needs of their business partners are some of the traits that explain their unique position in our industry. Our 18-year relationship with American Modern has set a demanding standard by which we judge all of our partners. Mutual respect has engendered mutual success and is the primary reason why we consider them an indispensable partner. This page contains a bar chart with the following data: AMIG PROPERTY AND CASUALTY UNDERWRITING RESULTS (GAAP Combined Ratio) 95 97.2% 96 104.3% 97 95.8% 98 96.9% 99 94.4% Caption: AMIG's disciplined underwriting philosophy combined with strategic acquisition of reinsurance protection significantly mitigated the impact of Hurricane Floyd in 1999, producing a combined ratio of 94.4 percent. AMIG has generated an operating profit in nine of the past 10 years. 14 STRONG PAST, BRIGHT FUTURE Over the past 35 years, AMIG has consistently proven its value in the manufactured housing insurance market. The company has evolved with the market, constantly staying ahead of the changing needs of policyholders. In recent years, AMIG has taken that specialty expertise to other niche markets, building a credible portfolio of products and services for watercraft, recreational vehicles, specialty auto, long-haul truck, credit life, collateral protection, mortgage fire and commercial manufactured housing park and dealers. AMIG's specialty mindset, entrepreneurial spirit and philosophy of business partnership have enabled the company to outperform the industry time and time again. Over the past 10 years, AMIG's written premiums have grown at a compounded rate of 15.9%, more than four times the estimated industry average. Meanwhile, AMIG's disciplined approach to pricing, underwriting and risk management have enabled the company to be profitable on insurance alone. AMIG's statutory combined ratio over the past 10 years has averaged 95.5%, well below the industry average of 106.3%, and the company has recorded an underwriting profit in nine of ten years. That focus on adding value, specialty expertise and discipline to the insurance industry have made and will continue to make AMIG an indispensable partner to its customers. This page includes a picture with the following caption: John Harvey (Voyager Marine) "They deliver what we promise." Accessibility, communications and a commitment to claims excellence are just some of the many reasons why American Modern is easily one of the best partners we could hope for at Voyager Marine. If we have a need, they're right there to help us meet it. When they're considering developing a new product or enhancing an existing one, they keep us firmly in the loop. And, when it comes to delivering on the promise that we made to a customer, their amazing claims and customer service professionals redefine the word "excellence." It's hard to put into words, but we have more than a traditional "agency/company relationship." We enjoy a partnership based on mutual support and trust, in good times and bad. And, if you've ever experienced that kind of a relationship with a business partner, you know it's something you want to hold onto, because it's hard to find. 15 AMERICAN MODERN INSURANCE GROUP, INC. INVESTMENT PORTFOLIO This page contains three bar charts with the following data: MARKET VALUES (dollars in millions) 95 96 97 98 99 Government $155.6 $172.2 $201.4 $177.1 $140.5 Municipal 94.5 71.5 88.2 168.4 170.9 Corporate 36.0 41.1 79.0 79.3 121.0 Cash Equivalents 33.1 51.7 34.6 29.3 38.6 Equities 40.8 63.4 92.3 132.8 125.3 Other 0 0 0 0 11.8 INVESTMENT PORTFOLIO PRE-TAX INVESTMENT INCOME (dollars in millions) 95 96 97 98 99 Capital Gains $ 2.4 $ 2.7 $ 4.2 $ 6.4 $ 3.5 Operations 17.1 19.0 22.2 24.7 26.0 INVESTMENT PORTFOLIO UNREALIZED GAINS (dollars in millions) 95 96 97 98 99 Fixed Income $ 8.9 $ 2.4 $ 7.0 $ 9.4 $(8.7) Equities 21.4 33.9 60.9 99.0 84.7 Caption: AMIG manages its investment portfolio, with a focus on quality stocks and high quality fixed income securities. Market value for the portfolio increased to $608.0 million in 1999 from $587.0 million in 1998. Pre-tax investment income meanwhile rose 5.8 percent in 1999 to $25.3 million from $23.9 million in 1998. After-tax capital gains fell to $2.3 million, or 24 cents a diluted share, compared with $4.1 million, or 44 cents a diluted share. Net unrealized capital gains declined in 1999 to $76.0 million from $108.5 million in 1998. 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, 1999 -------------------------------- 1 Year 3 Year 5 Year -------------------------------- EQUITIES: AMIG-Composite -4.9% 27.6% 31.8% AMIG-Excluding Investment In Firstar 20.4% 25.3% 25.9% AMIG-Firstar Only -30.8% 29.4% 42.3% S&P 500 21.1% 27.6% 28.6% FIXED INCOME TOTAL RETURN: AMIG After Tax 1.2% 4.0% 4.7% After Tax Lehman Brothers Intermediate Government/Corporate Index 0.3% 3.5% 4.6% FIXED INCOME PRE-TAX YIELD AS OF DECEMBER 31, 1999* 5.96% AVERAGE MATURITY AS OF DECEMBER 31, 1999 4.5 years DURATION AS OF DECEMBER 31, 1999 3.4 years *Includes pre-tax yield on municipal securities which have a pre-tax yield that is lower than taxable securities, but which have a higher effective after-tax yield. 16 FOCUS ON M/G TRANSPORT M/G Transport Services and its sales and marketing arm, MGT Services Inc., have successfully filled a niche in the transportation marketplace for many years, and today account for about seven percent of Midland's total revenues. Collectively known as M/G, the barge affreightment company operates in New Orleans, Louisiana. In 1999 M/G generated $1.8 million in pre-tax income for Midland, as compared to $4.4 million in 1998, with much of the decrease caused by a disruption in operating patterns due to low oil prices. Among the disrupting factors were a drop in the short-term demand for barite-a lubricating mud used in oil drilling-and a disruption in shipping patterns for petroleum coke. Management is confident M/G can continue to contribute to the company's earnings and operating cash flow. With oil prices rising in late 1999, M/G expects a return to more normal operating patterns in 2000. A FOCUS ON SERVICE, FLEXIBILITY AND EFFICIENCY M/G provides superior service to large industrial clients, transporting dry cargo such as petroleum coke, barite, fertilizer, sugar, iron ore, grain and other commodities. The operations are concentrated on the Lower Mississippi River and westbound on the Gulf Intercoastal Waterway. As of December 31, 1999, M/G serves its customers with a fleet of 242 jumbo hopper barges, owned or leased by the company. During 1999, the company added 20 steel roll top barges to its fleet through an operating lease. M/G supplements its fleet by chartering equipment or renting space from other operators as necessary to meet customer needs, thus providing operating flexibility. M/G has been a lucrative investment for Midland, in particular because of its efficient operations. M/G generated $31.3 million in revenue and $4.1 million in operating cash flow in 1999, while operating with an experienced staff of 17 employees who know how to efficiently exploit the niche market in which they operate. M/G remains attuned to market conditions and will respond with acquisitions as necessary to meet customer demand. Management believes capital expenditures can be funded from internally generated cash or bank debt. 17 SIX YEAR FINANCIAL SUMMARY DATA THE MIDLAND COMPANY AND SUBSIDIARIES For the Years Ended December 31, (Amounts in thousands, except per share data) 1999 1998 1997 1996 1995 1994 - --------------------------------------------- ------------------------------------------------------------------- Income Statement Data Revenues: Insurance: Premiums earned $400,991 $375,478 $311,159 $280,614 $263,006 $206,339 Net investment income 25,292 23,908 21,332 18,269 16,107 10,090 Net realized investment gains 3,486 6,354 4,170 2,690 2,373 2,189 Other insurance income 6,793 2,508 1,557 1,602 618 844 Transportation(a) 31,327 33,059 34,933 34,064 30,371 53,163 Other 1,237 1,055 617 499 752 858 ------------------------------------------------------------------- Total 469,126 442,362 373,768 337,738 313,227 273,483 ------------------------------------------------------------------- Costs and Expenses: Insurance: Losses and loss adjustment expenses 204,365 210,015 171,163 172,426 136,211 113,096 Commissions and other policy acquisition costs 114,212 103,169 79,518 81,533 80,520 64,557 Operating and administrative expenses 66,541 54,309 49,118 41,355 39,475 26,103 Transportation operating expenses(a) 29,255 28,287 30,079 31,163 28,033 47,820 Interest expense 4,067 4,991 4,983 4,829 3,037 3,800 Other operating and administrative expenses 6,973 4,064 4,204 3,115 3,462 2,807 ------------------------------------------------------------------- Total 425,413 404,835 339,065 334,421 290,738 258,183 ------------------------------------------------------------------- Income from Continuing Operations Before Federal Income Tax 43,713 37,527 34,703 3,317 22,489 15,300 Provision (Credit) for Federal Income Tax 12,534 10,595 10,336 (426) 6,441 3,663 ------------------------------------------------------------------- Income from Continuing Operations 31,179 26,932 24,367 3,743 16,048 11,637 Loss from Discontinued Operations(b) -- -- (6,817) (2,675) (6,496) (2,218) ------------------------------------------------------------------- Net Income $ 31,179 $ 26,932 $ 17,550 $ 1,068 $ 9,552 $ 9,419 =================================================================== Basic Earnings (Loss) Per Share of Common Stock(d): Continuing operations $ 3.42 $ 2.99 $ 2.72 $ .42 $ 1.81 $ 1.31 Discontinued operations -- -- (.76) (.30) (.73) (.25) ------------------------------------------------------------------- Total $ 3.42 $ 2.99 $ 1.96 $ .12 $ 1.08 $ 1.06 =================================================================== Diluted Earnings (Loss) Per Share of Common Stock(d): Continuing operations $ 3.30 $ 2.86 $ 2.63 $ .41 $ 1.74 $ 1.27 Discontinued operations -- -- (.74) (.29) (.70) (.24) ------------------------------------------------------------------- Total $ 3.30 $ 2.86 $ 1.89 $ .12 $ 1.04 $ 1.03 =================================================================== Cash Dividends Per Share of Common Stock(d): $ .27 $ .25 $ .23 $ .22 $ .21 $ .19 =================================================================== 18 THE MIDLAND COMPANY AND SUBSIDIARIES For the Years Ended December 31, (Amounts in thousands, except per share data) 1999 1998 1997 1996 1995 1994 - --------------------------------------------- ------------------------------------------------------------------- Balance Sheet Data Total Cash and Marketable Securities $620,957 $593,857 $504,106 $403,804 $373,275 $282,116 Total Assets 888,057 837,220 760,463 655,979 600,905 479,497 Total Debt 69,838 76,085 92,309 95,170 101,076 74,637 Unearned Insurance Premiums 312,838 255,115 240,340 208,417 190,948 158,316 Insurance Loss Reserves 133,713 125,496 120,134 95,830 68,347 57,715 Shareholders' Equity 258,002 248,832 197,026 159,688 156,595 132,437 Book Value Per Share(d) $ 27.11 $ 26.61 $ 21.11 $ 17.50 $ 17.28 $ 14.73 Common Shares Outstanding(d) 9,516 9,352 9,334 9,126 9,060 8,991 Other Data Midland Consolidated Operating Income from Continuing Operations(c) $ 28,913 $ 22,802 $ 21,657 $ 1,995 $ 14,506 $ 10,214 =================================================================== Operating Income Per Share from Continuing Operations(Diluted)(c,d) $ 3.06 $ 2.42 $ 2.33 $ .22 $ 1.57 $ 1.12 =================================================================== AMIG's Property and Casualty Operations Direct and Assumed Written Premiums $472,041 $445,286 $422,982 $387,165 $376,330 $275,509 Net Written Premium 439,863 390,831 342,310 290,355 285,306 235,821 Loss and Loss Adjustment Expense Ratio (GAAP) 51.2% 56.1% 55.1% 61.8% 52.0% 55.0% Underwriting Expense Ratio (GAAP) 43.2% 40.8% 40.7% 42.5% 45.2% 43.5% Combined Ratio (GAAP) 94.4% 96.9% 95.8% 104.3% 97.2% 98.5% Statutory Capital and Surplus 220,080 217,091 164,128 124,131 113,189 89,910 Net Written Premium to Statutory Surplus 2.0x 1.8x 2.1x 2.3x 2.5x 2.6x M/G Transport's Transportation Operations(a) Net Revenues $ 31,327 $ 33,059 $ 34,933 $ 34,064 $ 30,371 $ 53,163 Net Income 1,169 2,994 3,126 1,938 1,585 2,000 Total Assets 31,683 41,576 44,544 41,458 48,375 52,534 Shareholders' Equity 11,245 19,075 19,081 15,658 34,219 32,736 Footnotes: (a) M/G Transport sold approximately 66% of its assets in December 1994. (b) On September 29, 1997, the Company's sportswear subsidiary 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. (c) Represents income from continuing operations excluding net realized investment gains or losses, net of federal income taxes. (d) Previously reported share information has been adjusted to reflect a three-for-one common stock split effective May 21, 1998.
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Midland Company (the Company or Midland), through its wholly owned subsidiaries, is primarily a specialty property and casualty insurance company, with more than 60 percent of its premium volume related to insuring manufactured housing. In addition, Midland owns a barge chartering and freight brokerage operation that accounts for less than 10 percent of its consolidated revenues. LINES OF BUSINESS AND REPORTABLE SEGMENTS The discussions of Results of Operations and Liquidity and Capital Resources are grouped according to Midland's two primary lines of business and three reportable segments: manufactured housing insurance, other insurance and transportation. A description of the operations of each of these lines of business, is included below. Insurance (Manufactured Housing and Other Insurance) The Company's specialty insurance operations are conducted through American Modern Insurance Group, Inc. (AMIG), a wholly-owned subsidiary of the Company and a holding company for six property and casualty insurance companies, two credit life insurance companies and four licensed insurance agencies. Other subsidiaries of AMIG offer warranty and extended service products and loan origination services and operate Ameritrac, AMIG's proprietary loan and lease tracking service. AMIG is licensed, through its subsidiaries, to write insurance in all 50 states and the District of Columbia. The majority of AMIG's business relates to physical damage insurance and related coverages on manufactured homes, generally written for a term of 12 months with coverages similar to conventional homeowner's insurance policies. Other insurance products include Homeowner's, Lower Valued Homes, Dwelling Fire, Mortgage Fire, Collateral Protection, Watercraft, Specialty Automobile, Credit Life, Recreational Vehicle, Long-Haul Truck, Commercial Park and Dealer, Excess and Surplus Lines and Extended Service Contracts. Transportation M/G Transport Services, Inc. and MGT Services, Inc. (collectively M/G Transport), the Company's transportation subsidiaries, charter barges and broker freight for the movement of dry bulk commodities such as petroleum coke, ores, barite, fertilizers, sugar and other dry cargos primarily on the lower Mississippi River and its tributaries. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Insurance Insurance Premiums Direct and assumed written premiums generated from AMIG's property and casualty and life insurance subsidiaries for the year ended December 31, 1999 increased 7.8% to $493.2 million from $457.6 million in 1998. Net earned premiums for the year increased 6.8% to $401.0 million from $375.5 million in 1998. The difference in growth rates between the direct and assumed written premiums and net earned premiums is due primarily to the growth in the amount of multi-year credit life insurance premium produced in 1999 compared to 1998. The growth in direct and assumed written premiums is primarily the result of volume increases in manufactured home and related coverages premium. Manufactured home and related coverages direct and assumed written premium increased 9.1% to $324.4 million in 1999 from $297.3 million in 1998. Direct and assumed written premiums of all other specialty insurance products (both property and casualty and life) increased approximately 5.3% to $168.8 million in 1999 from $160.3 million in 1998. This increase is due primarily to an overall increase in the volume of direct and assumed written premium produced by AMIG's credit life companies. In total, direct and assumed written credit life premium increased 72.2% to $21.2 million in 1999 from $12.3 million in 1998. Premium rate increases also contributed to AMIG's overall direct and assumed premium growth, but to a lesser degree than volume increases. 20 Other Insurance Income (Fee Income) AMIG's other insurance income increased to $6.8 million in 1999 from $2.5 million in 1998. The increase is primarily the result of the continued growth of AMIG's warranty, loan facilitation and agency fee businesses. This increase is consistent with AMIG's ongoing strategy to develop its fee income revenue opportunities. Investment Income and Realized Capital Gains AMIG's net investment income (before taxes and excluding net realized capital gains) increased 5.8% to $25.3 million in 1999 from $23.9 million in 1998. The increase in investment income was primarily the result of the investment of positive cash flow generated from underwriting activities and the continued growth of AMIG's investment portfolio. AMIG's investment portfolio increased $23.4 million to $610.4 million in market value at December 31, 1999. This increase in the market value of the investment portfolio was the result of the investment of positive cash flow from underwriting activities and investment income and net realized capital gains generated from the portfolio, offset, in part, by a $31.2 million decrease in the unrealized appreciation in the market value of securities held. The decrease in unrealized appreciation was primarily the result of a significant decline in the market value of AMIG's investment in the common stock of Firstar Corporation. The market value of AMIG's investment in Firstar Corporation declined to $49.3 million at December 31, 1999 from $72.4 million at December 31, 1998. After-tax net realized capital gains decreased to $2.3 million, $0.24 per share (diluted) in 1999, from $4.1 million, $0.44 per share (diluted) in 1998. Losses and Loss Adjustment Expenses (LAE) Insurance Losses and LAE decreased 2.7% to $204.4 million in 1999 from $210.0 million in 1998. This decrease was achieved despite the increase in earned premium and is due primarily to a decrease in the level of weather-related catastrophe losses, net of reinsurance, in 1999 compared to 1998. Although the number of weather-related catastrophes dropped to 27 in 1999 from 37 in 1998, their gross impact was much more severe in 1999, primarily because of Hurricane Floyd. The Company's catastrophe reinsurance program, however, substantially mitigated the financial impact of Hurricane Floyd and other catastrophes in 1999. Net weather-related catastrophe losses (after the effects of reinsurance recoveries and related reinstatement premiums) amounted to $19.8 million, on a pre-tax basis, representing 5.9 percentage points of the 94.4% combined ratio (ratio of losses and expenses as a percent of earned premiums) for the property and casualty operations in 1999. This compares to net weather-related catastrophe losses in 1998 totaling $33.9 million, on a pre-tax basis, representing approximately 9.2 percentage points of the 96.9% combined ratio for the property and casualty operations. Commissions, Other Policy Acquisition Costs and Other Operating and Administration Expenses Commissions, other policy acquisition costs and other operating and administrative expenses increased 14.8% to $180.8 million in 1999 from $157.5 million in 1998. This increase is due primarily to the aforementioned continued growth in net earned premiums and other insurance income coupled with the effects of improvements in the underlying loss experience and changes in the level of reinsurance activities. Overall Property and Casualty Underwriting Results AMIG's property and casualty operations generated a pre-tax underwriting income (property and casualty insurance premiums less losses, commissions and operating expenses) of $22.1 million in 1999 compared to $11.1 million in 1998. This resulted in a combined ratio of 94.4% in 1999 compared to 96.9% in 1998. Transportation Transportation revenues decreased 5.2% to $31.3 million in 1999 from $33.1 million in 1998. The decrease was primarily the result of a reduced demand for the petroleum coke and barite (a drilling mud used by offshore refineries) products that affected shipping patterns in 1999 compared to 1998. In total, transportation's pre-tax profits decreased to $1.8 million in 1999 from $4.4 million in 1998. 21 YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Insurance Insurance Premiums Direct and assumed written premiums generated from AMIG's property and casualty and life insurance subsidiaries for the year ended December 31, 1998 increased 5.2% to $457.6 million from $435.0 million in 1997. Net earned premiums for the year increased 20.7% to $375.5 million from $311.2 million in 1997. The disparity in growth rates between the direct and assumed written premiums and net earned premiums is due primarily to changes in a quota-share reinsurance agreement in 1998 compared to 1997. The growth in direct and assumed written premiums is primarily the result of volume increases in manufactured home and related coverages premium. Manufactured home and related coverages direct and assumed written premium increased 13.2% to $297.3 million in 1998 from $262.7 million in 1997. Volume decreases in the production of certain other specialty property and casualty insurance programs partially offset the increase in manufactured home and related coverages in 1998 compared to 1997. Premium rate increases also contributed to AMIG's overall direct and assumed premium growth, but to a lesser degree than the aforementioned volume increases. Investment Income and Realized Capital Gains AMIG's net investment income (before taxes and excluding net realized capital gains) increased 12.2% to $23.9 million in 1998 from $21.3 million in 1997. The increase in investment income was primarily the result of the investment of positive cash flow generated by underwriting activities and the continued growth of AMIG's investment portfolio. AMIG's investment portfolio increased by $91.5 million to $587 million in market value at December 31, 1998. The portfolio increase was due primarily to three factors: 1) investment of cash flow from underwriting activities, 2) investment income and net realized capital gains generated from the portfolio and 3) unrealized appreciation in the market value of the securities held. This increase was driven by the relatively strong stock market in 1998 which caused a significant increase in the value of AMIG's equity investments, including its investment in the common stock of Firstar Corporation that increased in market value from $44.6 million at December 31, 1997 to approximately $72.4 million at December 31, 1998. After-tax net realized capital gains increased to $4.1 million, $0.44 per share (diluted) in 1998, from $2.7 million, $0.30 per share (diluted) in 1997. Losses and Loss Adjustment Expenses (LAE) Insurance Losses and LAE increased 22.7% to $210.0 million in 1998 from $171.2 million in 1997. This increase is due primarily to an increase in the level of weather-related catastrophe losses, net of reinsurance, compared to the prior year and a change in a quota-share reinsurance agreement that occurred in 1998. Weather-related catastrophe losses amounted to $33.9 million, on a pre-tax basis, representing approximately 9.2 percentage points of the 96.9% combined ratio (ratio of losses and expenses as a percent of earned premiums) for the property and casualty operations in 1998. This compares to weather-related catastrophe losses in 1997 totaling $13.8 million, on a pre-tax basis, representing approximately 4.5 percentage points of the 95.8% combined ratio for the property and casualty operations. Commissions, Other Policy Acquisition Costs and Other Operating and Administration Expenses Commissions, other policy acquisition costs and other operating and administrative expenses increased 22.5% to $157.5 million in 1998 from $128.6 million in 1997. This increase is due primarily to the continued growth in net earned premiums and other insurance income coupled with a change in the level of reinsurance activities. Overall Property and Casualty Underwriting Results AMIG's property and casualty operations generated a pre-tax underwriting income of $11.4 million in 1998 compared to $12.9 million in 1997. This resulted in a combined ratio of 96.9% in 1998 compared to 95.8% in 1997. Transportation Transportation revenues decreased 5.2% to $33.1 million in 1998 from $34.9 million in 1997. This fluctuation was due primarily to decreases in the loadings of barite, a drilling mud used by offshore refineries. Transportation's pre-tax profits amounted to $4.4 million in both 1998 and 1997. 22 1997 Discontinued Operations On September 29, 1997, the Company's sportswear subsidiary sold substantially all of its assets 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 are reported separately from continuing operations. Financial results have not been affected by this discontinued subsidiary since the date of sale. LIQUIDITY AND CAPITAL RESOURCES Holding Company Operations Midland and AMIG are holding companies which rely primarily on dividends and management fees from their subsidiaries to assist in servicing their debt, paying their operating expenses and paying dividends to their respective stockholders. The payment of dividends to these holding companies from many of AMIG's insurance subsidiaries is restricted by state regulatory agencies. Such restrictions, however, have not had, and are not expected to have, a significant impact on the Company's or AMIG's liquidity or their ability to meet their long or short-term operating, financing or capital obligations. Midland issues commercial paper, generally below the bank prime borrowing rates, and has $47 million of conventional short-term credit lines available at costs, not exceeding prime borrowing rates. Additional short-term borrowing lines are available at the discretion of various lending institutions with comparable rates. Outstanding interest bearing debt, not allocable to either the insurance or transportation operations, as of December 31, 1999 amounted to approximately $47.1 million. The December 31, 1999 balance of outstanding interest bearing debt consisted of short-term borrowings on conventional lines of credit of $18.0 million, $5.5 million in commercial paper, $0.6 million related to a collateralized equipment obligations, $18.6 million in mortgage obligations and $2.0 million in other short-term borrowings. Expenditures for the acquisition of business, property, plant and equipment, other than for barge acquisitions discussed below, amounted to $3.2 million, $4.9 million and $7.6 million for years ended December 31, 1999, 1998 and 1997, respectively. The Company declared $2.6 million in dividends payable to its shareholders during 1999 compared to $2.3 million in 1998. In October 1999, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of the Company's common stock over a six-month period. Insurance AMIG generates cash inflows primarily from insurance premiums, investment income and proceeds from sale of marketable securities and maturities of debt security investments. The principal cash outflows for the insurance operations relate to the payment of claims, commissions, premium taxes, operating expenses, income taxes, dividends to the Company and the purchase of marketable securities. 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. The insurance products written by the Company's insurance subsidiaries are primarily property-related coverages that result in relatively rapid claim payments. The average maturity and duration of AMIG's debt security investment portfolio as of December 31, 1999 was approximately 4.5 and 3.4 years, respectively, which management believes provides adequate asset/liability matching. AMIG also has a $40 million long-term credit facility available on a revolving basis at various rates. As of December 31, 1999, $20 million was outstanding on this credit facility. Cash flow from the insurance operations is expected to remain sufficiently positive to meet AMIG's future operating requirements and to provide for reasonable dividends to the Company. As of December 31, 1999, AMIG's property and casualty statutory surplus was $220.1 million resulting in a premium to surplus ratio of 2.0 for the year ended December 31, 1999. 23 Transportation M/G Transport generates its cash inflows primarily from affreightment revenue. The primary outflows of cash relate to the payment of barge charter costs, debt service obligations, operating expenses, income taxes, dividends to the Company 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 requirements while providing for reasonable dividends to the Company. The transportation subsidiaries entered into a fifteen-year operating lease for 20 new steel roll-top barges in the third quarter of 1999. Aggregate rental payments over the next fifteen years will approximate $8.2 million. There were no barge acquisitions during 1998. However, M/G Transport acquired 41 steel roll-top barges in 1997. The total cost of these barges was approximately $11.9 million. The 1997 acquisitions were financed primarily with internally generated capital and short-term bank borrowings. There are currently no additional acquisition commitments outstanding. Any additional acquisitions will likely be generated through a combination of internally financed funds, external borrowings or lease transactions. As of December 31, 1999, the transportation subsidiaries had $5.1 million of collateralized equipment obligations outstanding. OTHER MATTERS Market Risk Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. The Company's market risk exposures are substantially related to AMIG's investment portfolio and changes in interest rates and equity prices. Each risk is defined in more detail as follows: Interest rate risk is the risk that AMIG will incur economic losses due to adverse changes in interest rates. The risk arises from many of AMIG's investment activities, as AMIG invests substantial funds in interest-sensitive assets. AMIG manages the interest rate risk inherent in its investment assets relative to the interest rate risk inherent in its liabilities. One of the measures AMIG uses to quantify this exposure is duration. By definition, duration is a measure of the sensitivity of the fair value of a fixed income portfolio to changes in interest rates. Based upon the 3.4 year duration of AMIG's fixed income portfolio at December 31, 1999, management estimates that a 100 basis point increase in interest rates ("rate shock") would decrease the net fair value of its $482.0 million debt security portfolio by approximately 3.4% or $16.4 million. Equity price risk is the risk that AMIG will incur economic losses due to adverse changes in a particular stock or stock index. AMIG's equity exposure consists primarily of declines in the value of its equity security holdings. At December 31, 1999, AMIG had approximately $128.4 million in equity holdings, including $49.3 million of Firstar Corporation common stock. A 10% decrease in the market value of Firstar Corporation's common stock would decrease the fair value of its equity portfolio by approximately $4.9 million. At December 31, 1999, AMIG's portfolio of equity securities has a beta coefficient (a measure of stock price volatility) of approximately 1.07. This means that, in general, if the S&P Index decreases by 10%, management estimates that the fair value of its equity portfolio will decrease by approximately 10.7%. The active management of market risk is integral to AMIG's operations. AMIG has investment guidelines that define the overall framework for managing market and other investment risks, including the accountabilities and controls over these activities. 24 Other Comprehensive Income For the Company, the only difference between net income and comprehensive income is the net change in unrealized gain on marketable securities. As discussed above, the primary component of the net change in unrealized gains on marketable securities was the change in the market value of the Company's equity investments during each of the years presented. For the year ended December 31, 1999, such net unrealized gains decreased (net of income tax effects) by $21.1 million. For the years ended December 31, 1998 and 1997, the net unrealized gains increased (net of income tax effects) by $26.4 million and $20.5 million, respectively. Year 2000 The Year 2000 Issue arises from the common computer programming convention of using a two digit shorthand to represent a calendar year (i.e., "99" means 1999). Some computer systems and embedded chips may not recognize the entry "00" as the two digit shorthand for calendar year 2000. This could lead to erroneous results or, in the worst case, to system shutdowns. The Company successfully completed its Year 2000 Work Plan and has not experienced material adverse consequences on its operations resulting from non-compliance of either its information technology or non-information technology systems. To date, Midland has not experienced material adverse consequences related to the operations of customers or vendors, nor is it aware of exposures related to customers or vendors. However, there can be no assurance that future system failures of other companies on which the Company relies would not have an adverse impact on Midland's operations. Cost associated with any such failure cannot be reasonably estimated. Through December 31, 1999, the Company had expended approximately $1.1 million on the Year 2000 Work Plan. 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 2000 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. Any forward-looking statement speaks only as of the date made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made. 25 CONSOLIDATED STATEMENTS OF INCOME THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, (Amounts in thousands, except per share data) 1999 1998 1997 - ---------------------------------------- -------------------------------------- Revenues: Insurance: Premiums earned $400,991 $375,478 $311,159 Net investment income 25,292 23,908 21,332 Net realized investment gains 3,486 6,354 4,170 Other insurance income 6,793 2,508 1,557 Transportation 31,327 33,059 34,933 Other 1,237 1,055 617 -------------------------------------- Total 469,126 442,362 373,768 -------------------------------------- Costs and Expenses: Insurance: Losses and loss adjustment expenses 204,365 210,015 171,163 Commissions and other policy acquisition costs 114,212 103,169 79,518 Operating and administrative expenses 66,541 54,309 49,118 Transportation operating expenses 29,255 28,287 30,079 Interest expense 4,067 4,991 4,983 Other operating and administrative expenses 6,973 4,064 4,204 -------------------------------------- Total 425,413 404,835 339,065 -------------------------------------- Income from Continuing Operations Before Federal Income Tax 43,713 37,527 34,703 Provision for Federal Income Tax 12,534 10,595 10,336 -------------------------------------- Income from Continuing Operations 31,179 26,932 24,367 -------------------------------------- Discontinued Operations: Loss from discontinued operations less related income tax credit of $1,881 -- -- (3,492) Loss on disposal of assets less related income tax credit of $1,790 -- -- (3,325) -------------------------------------- Loss from Discontinued Operations -- -- (6,817) -------------------------------------- Net Income $ 31,179 $ 26,932 $ 17,550 ====================================== Basic Earnings (Loss) Per Share of Common Stock: Continuing operations $ 3.42 $ 2.99 $ 2.72 Discontinued operations -- -- (.76) -------------------------------------- Total $ 3.42 $ 2.99 $ 1.96 ====================================== Diluted Earnings (Loss) Per Share of Common Stock: Continuing operations $ 3.30 $ 2.86 $ 2.63 Discontinued operations -- -- (.74) -------------------------------------- Total $ 3.30 $ 2.86 $ 1.89 ====================================== Cash Dividends Per Share of Common Stock $ .27 $ .25 $ .23 ====================================== See notes to consolidated financial statements. 26 CONSOLIDATED BALANCE SHEETS THE MIDLAND COMPANY AND SUBSIDIARIES December 31, (Amounts in thousands) 1999 1998 - ------------------------------------------------- ---------------------- ASSETS Marketable Securities: Fixed income (cost, $488,492 in 1999 and $443,975 in 1998 ) $479,772 $453,422 Equity (cost, $46,400 in 1999 and $37,736 in 1998) 131,087 136,748 ---------------------- Total 610,859 590,170 ---------------------- Cash 10,098 3,687 ---------------------- Accounts Receivable-Net 60,426 59,341 ---------------------- Reinsurance Recoverables and Prepaid Reinsurance Premiums 43,151 33,955 ---------------------- Property, Plant and Equipment-Net 62,585 67,837 ---------------------- Deferred Insurance Policy Acquisition Costs 85,168 63,962 ---------------------- Other Assets 15,770 18,268 ---------------------- Total Assets $888,057 $837,220 ====================== LIABILITIES AND SHAREHOLDERS' EQUITY Unearned Insurance Premiums $312,838 $255,115 ---------------------- Insurance Loss Reserves 133,713 125,496 ---------------------- Insurance Commissions Payable 20,291 20,272 ---------------------- Funds Held Under Reinsurance Agreements and Reinsurance Payables 3,097 14,624 ---------------------- Long-Term Debt 44,288 54,563 ---------------------- Other Notes Payable: Banks 20,000 15,000 Commercial paper 5,550 6,522 ---------------------- Total 25,550 21,522 ---------------------- Deferred Federal Income Tax 28,171 39,305 ---------------------- Other Payables and Accruals 62,107 57,491 ---------------------- Commitments and Contingencies -- -- ---------------------- Shareholders' Equity: Common stock (issued and outstanding: 9,516 shares at December 31, 1999 and 9,352 shares at December 31, 1998 after deducting treasury stock of 1,412 shares and 1,576 shares, respectively) 911 911 Additional paid-in capital 18,583 15,947 Retained earnings 207,005 178,398 Accumulated other comprehensive income 49,388 70,507 Treasury stock (at cost) (15,786) (15,293) Unvested restricted stock awards (2,099) (1,638) ---------------------- Total 258,002 248,832 ---------------------- Total Liabilities and Shareholders' Equity $888,057 $837,220 ====================== See notes to consolidated financial statements. 27 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands) Years Ended December 31, 1999, 1998, and 1997 - ----------------------------------------------------------------------------------------------------------------------- Accumulated Unvested Additional Other Compre- Restricted Compre- Common Paid-In Retained hensive Treasury Stock hensive Stock Capital Earnings Income Stock Awards Total Income - ----------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 $911 $14,846 $138,423 $23,587 $(16,621) $(1,458) $159,688 Comprehensive income: Net income 17,550 17,550 $17,550 Increase in unrealized gain on marketable securities, net of related income tax effect of $11,060 20,536 20,536 20,536 -------- Total comprehensive income $38,086 ======== Purchase of treasury stock (17) (17) Issuance of treasury stock for options exercised and employee savings plan 92 512 604 Cash dividends declared (2,176) (2,176) 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 Comprehensive income: Net income 26,932 26,932 $26,932 Increase in unrealized gain on marketable securities, net of related income tax effect of $14,207 26,384 26,384 26,384 -------- Total comprehensive income $53,316 ======== Purchase of treasury stock (1,271) (1,271) Issuance of treasury stock for options exercised and employee savings plan 620 738 1,358 Cash dividends declared (2,331) (2,331) Amortization and cancellation of unvested restricted stock awards (32) (56) 822 734 ---------------------------------------------------------------------------- Balance, December 31, 1998 911 15,947 178,398 70,507 (15,293) (1,638) 248,832 Comprehensive income: Net income 31,179 31,179 $31,179 Decrease in unrealized gain on marketable securities, net of related income tax effect of $(11,373) (21,119) (21,119) (21,119) -------- Total comprehensive income $10,060 ======== Purchase of treasury stock (3,709) (3,709) Issuance of treasury stock for options exercised and employee savings plan 315 1,985 2,300 Cash dividends declared (2,572) (2,572) Federal income tax benefit related to exercise of stock options 940 940 Restricted stock awards 1,411 1,266 (2,677) Amortization and cancellation of unvested restricted stock awards (30) (35) 2,216 2,151 ---------------------------------------------------------------------------- Balance, December 31, 1999 $911 $18,583 $207,005 $49,388 $(15,786) $(2,099) $258,002 ============================================================================ See notes to consolidated financial statements.
28 CONSOLIDATED STATEMENTS OF CASH FLOWS THE MIDLAND COMPANY AND SUBSIDIARIES (Amounts in thousands, except Years Ended December 31, per share data) 1999 1998 1997 - ---------------------------------------- -------------------------------------- Cash Flows from Operating Activities: Net income $ 31,179 $ 26,932 $ 17,550 Loss from discontinued operations -- -- 6,817 -------------------------------------- Income from continuing operations 31,179 26,932 24,367 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 10,287 8,798 10,269 Net gains from sale of investments (3,486) (6,354) (4,170) Increase in unearned insurance premiums 57,723 14,775 31,923 Increase in deferred insurance policy acquisition costs (21,206) (8,372) (10,248) Decrease in funds held under reinsurance agreements and reinsurance payables (11,527) (819) (11,506) Decrease (increase) in reinsurance recoverables and prepaid reinsurance premiums (9,196) 15,061 3,789 Increase in insurance loss reserves 8,217 5,362 24,304 Decrease (increase) in other assets 5,402 (2,947) (2,308) Increase in other accounts payable and accruals 4,002 7,417 11,240 Increase in net accounts receivable (632) (602) (4,865) Increase (decrease) in deferred federal income tax 239 (1,082) (1,725) Increase in insurance commissions payable 19 1,239 5,212 Other-net 1,725 698 (427) -------------------------------------- Net cash provided by continuing operations 72,746 60,106 75,855 Net cash used in discontinued operations -- -- (2,104) -------------------------------------- Net cash provided by operating activities 72,746 60,106 73,751 -------------------------------------- Cash Flows from Investing Activities: Purchase of marketable securities (207,321) (277,853) (207,474) Sale of marketable securities 130,296 191,014 88,687 Maturity of marketable securities 35,913 35,034 41,165 Decrease (increase) in cash equivalent marketable securities (9,588) 6,937 15,404 Acquisition of property, plant and equipment (3,173) (4,948) (19,538) Net cash used in business acquisition (2,636) -- -- Proceeds from sale of property, plant and equipment 345 6,003 1,561 Proceeds from sale of discontinued operations -- -- 13,330 -------------------------------------- Net cash used in investing activities (56,164) (43,813) (66,865) -------------------------------------- Cash Flows from Financing Activities: Repayment of long-term debt (10,275) (8,358) (3,664) Increase (decrease) in net short-term borrowings 4,028 (8,269) (2,909) Purchase of treasury stock (3,709) (1,271) (17) Dividends paid (2,515) (1,746) (2,677) Issuance of treasury stock 2,300 1,358 604 Issuance of long-term debt -- 403 3,712 -------------------------------------- Net cash used in financing activities (10,171) (17,883) (4,951) -------------------------------------- Net Increase (Decrease) in Cash 6,411 (1,590) 1,935 Cash at Beginning of Period 3,687 5,277 3,342 -------------------------------------- Cash at End of Period $ 10,098 $ 3,687 $ 5,277 ====================================== Interest Paid $ 4,008 $ 4,946 $ 6,148 Income Taxes Paid $ 11,500 $ 10,690 $ 4,655 See notes to consolidated financial statements. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1999, 1998 and 1997 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company operates generally in two industries -insurance and transportation with the most significant business activities being in insurance. The accounting policies of the Company and its subsidiaries conform to generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to use numerous estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The accompanying consolidated financial statements include estimates for items such as insurance loss reserves, income taxes, various other liability accounts and deferred insurance policy acquisition costs. 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 fixed income 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 fixed income 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 as an item of accumulated other comprehensive income. 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 barges - 20 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. The Company continually reviews deferred tax assets to determine the necessity of a valuation allowance. 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 that 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 probable future losses. 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 30 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. Transportation Revenues-Revenues for river transportation activities are recognized when earned based on contractual rates and the stage of transportation on inland waterway. 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. New Accounting Standards-The Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" during 1998. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. Adoption of SFAS 133 is not expected to have a material impact on the reported results of operations or financial position of the Company. In October 1998, the AICPA issued SOP 98-7 "Deposit Accounting for Insurance and Reinsurance Contracts that Do Not Transfer Risk". SOP 98-7 is effective for fiscal years beginning after June 15, 1999. Adoption of SOP 98-7 is not expected to have a material impact on the reported results of operations or financial position of the Company. 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 in 1997. 31 3. MARKETABLE SECURITIES Thousands of Dollars ------------------------------------------- Gross Unrealized Market 1999 Cost Gains Losses Value - ----------------------------------------------------------------------- Governments $140,514 $ 255 $ 2,323 $138,446 Municipals 171,926 658 4,169 168,415 Corporates 122,413 16 3,157 119,272 Cash Equivalents 38,674 -- -- 38,674 Other-Notes Receivable 8,655 -- -- 8,655 Accrued Interest 6,310 -- -- 6,310 ------------------------------------------- Total 488,492 929 9,649 479,772 ------------------------------------------- Equity Securities 45,970 85,980 1,293 130,657 Accrued Dividends 430 -- -- 430 ------------------------------------------- Total 46,400 85,980 1,293 131,087 ------------------------------------------- Total Marketable Securities $534,892 $ 86,909 $10,942 $610,859 =========================================== Thousands of Dollars ------------------------------------------- Gross Unrealized Market 1998 Cost Gains Losses Value - ----------------------------------------------------------------------- Debt Securities: Governments $170,539 $ 4,320 $ 320 $174,539 Municipals 161,699 4,366 99 165,966 Corporates 77,000 1,496 316 78,180 Cash Equivalents 28,594 -- -- 28,594 Accrued Interest 6,143 -- -- 6,143 ------------------------------------------- Total 443,975 10,182 735 453,422 ------------------------------------------- Equity Securities 37,445 99,537 525 136,457 Accrued Dividends 291 -- -- 291 ------------------------------------------- Total 37,736 99,537 525 136,748 ------------------------------------------- Total Marketable Securities $481,711 $109,719 $ 1,260 $590,170 =========================================== At December 31, 1999 and 1998, the market value of the Company's investment in the common stock of Firstar Corporation, which exceeded 10% of the Company's shareholders' equity, was $52.0 million and $76.3 million, respectively. The following is investment information summarized by investment category (amounts in 000's): 1999 1998 1997 ------------------------------ Investment Income: Interest on Fixed Maturities $ 26,152 $24,565 $21,626 Dividends on Equity Securities 2,132 1,624 1,493 Other (1,719) (1,221) (731) ------------------------------ Total 26,565 24,968 22,388 Less Investment Expenses (1,117) (884) (837) ------------------------------ Net Investment Income $ 25,448 $24,084 $21,551 ============================== Net Realized Investment Gains: Fixed Income: Gross Realized Gains $ 404 $ 4,420 $ 306 Gross Realized Losses (1,956) (371) (169) Equity Securities: Gross Realized Gains 7,290 5,683 5,859 Gross Realized Losses (2,252) (3,378) (1,826) ------------------------------ Net Realized Investment Gains $ 3,486 $ 6,354 $ 4,170 ============================== Change in Unrealized Investment Gains: Fixed Income $(18,167) $ 2,443 $ 4,590 Equity Securities (14,325) 38,148 27,006 ------------------------------ Change in Unrealized Investment Gains $(32,492) $40,591 $31,596 ============================== The cost and approximate market value of debt securities held at December 31, 1999, 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 ----------------------- One year or less $ 98,391 $ 98,182 After one year through five years 174,166 172,194 After five years through ten years 192,407 186,593 After 10 years 23,528 22,803 ----------------------- Total $488,492 $479,772 ======================= 32 4. RECEIVABLES-NET Accounts receivable at December 31, 1999 and 1998 are generally due within one year and consist of the following (amounts in 000's): 1999 1998 --------------------- Insurance $55,509 $53,764 Transportation 4,453 4,687 Other 1,271 1,643 --------------------- Total 61,233 60,094 Less Allowance for Losses 807 753 --------------------- Receivables-Net $60,426 $59,341 ===================== 5. PROPERTY, PLANT AND EQUIPMENT-NET At December 31, 1999 and 1998, property, plant and equipment stated at original cost consist of the following (amounts in 000's): 1999 1998 ------------------------ Land $ 1,341 $ 1,366 Buildings, Improvements, Fixtures, etc. 59,933 56,944 Transportation Equipment 51,214 56,156 ------------------------ Total 112,488 114,466 Less Accumulated Depreciation and Amortization 49,903 46,629 ------------------------ Property, Plant and Equipment-Net $ 62,585 $ 67,837 ======================== Total rent expense related to the rental of equipment included in the accompanying consolidated statements of income is (amounts in 000's) $6,566 in 1999, $5,496 in 1998 and $4,582 in 1997. Future rentals under non-cancelable operating leases are approximately (amounts in 000's): $3,329 - 2000; $2,850 - 2001; $2,552 - 2002; $1,040 - 2003; $478 - 2004 and $5,756 - thereafter. 6. DEFERRED INSURANCE POLICY ACQUISITION COSTS Acquisition costs incurred and capitalized during 1999, 1998 and 1997 amounted to $135.4 million, $111.5 million and $89.8 million, respectively. Amortization of deferred acquisition costs was $114.2 million, $103.2 million and $79.5 million for 1999, 1998 and 1997, respectively. 7. NOTES PAYABLE TO BANKS At December 31, 1999 and 1998, the Company had conventional lines of credit with commercial banks of $47 million and $50 million, respectively. The lines of credit in use under these agreements at December 31, 1999 and 1998 amounted to $18 million and $11 million, respectively. Borrowings under these lines of credit constitute senior debt. Annual commitment fees of $81,000 are currently paid to the lending institutions to maintain these credit agreements. Additionally, at December 31, 1999 and 1998, the Company had other short-term bank borrowings outstanding of $2 million and $4 million, respectively. These borrowings also constitute senior debt. The aforementioned notes payable, together with outstanding commercial paper, had weighted average interest rates of 6.69% and 6.06% at December 31, 1999 and 1998, respectively. 8. LONG-TERM DEBT Long-term debt at December 31, 1999 and 1998 is summarized as follows (amounts in 000's): 1999 1998 ---------------------- Equipment Obligations, Due Through- 6.45% July 1, 2000 $ 1,330 $ 1,710 7.10% January 1, 2001 642 1,227 6.79% September 30, 2003 936 1,149 6.50% October 31, 2003 2,800 3,500 Mortgage Notes, Due Through- 5.40% December 1, 2003 -- 7,559 6.83% December 20, 2005 18,580 19,195 Unsecured Notes Under a $40 million Credit Facility, Payments Beginning 2003- *7.32% November 1, 2006 20,000 20,000 Capitalized Lease Obligations -- 223 ---------------------- Total Obligations 44,288 54,563 Current Maturities 3,554 3,225 ---------------------- Non Current Portion $40,734 $51,338 ====================== *Rate in effect on December 31, 1999. The interest rate on this borrowing is adjusted quarterly to the LIBOR rate plus a margin of 1%. Equipment and real estate obligations are collateralized by transportation equipment and real estate with a net book value of $34,366,000 at December 31, 1999. The aggregate amount of repayment requirements on long-term debt for the five years subsequent to 1999 are (amounts in 000's): 2000 - $3,554; 2001 - $1,650; 2002 - $1,717; 2003 - $6,713; 2004 - $5,865. At December 31, 1999 and 1998, the carrying value approximated the fair value of the Company's long-term debt. 33 9. FEDERAL INCOME TAX The provision for federal income tax is summarized as follows (amounts in 000's): 1999 1998 1997 -------------------------------- Current provision $12,295 $11,677 $12,061 Deferred provision (credit) 239 (1,082) (1,725) -------------------------------- Total continuing operations 12,534 10,595 10,336 Discontinued operations -- -- (3,671) -------------------------------- Total $12,534 $10,595 $ 6,665 ================================ The federal income tax provision related to income from continuing operations for the years ended December 31, 1999, 1998 and 1997 is different from amounts derived by applying the statutory tax rates to income before federal income tax as follows (amounts in 000's): 1999 1998 1997 -------------------------------- Federal income tax at statutory rate $15,300 $13,134 $12,146 Tax effect of: Tax exempt interest and excludable dividend income (3,131) (2,354) (1,793) Other-net 365 (185) (17) -------------------------------- Provision for federal income tax $12,534 $10,595 $10,336 ================================ Significant components of the Company's net deferred federal income tax liability are summarized as follows (amounts in 000's): 1999 1998 --------------------- Deferred tax liabilities: Deferred insurance policy acquisition costs $26,876 $21,123 Unrealized gain on marketable securities 26,579 37,952 Accelerated depreciation 7,274 6,968 Other 319 407 --------------------- Sub-total 61,048 66,450 --------------------- Deferred tax assets: Unearned insurance premiums 19,744 16,402 Pension expense 5,099 4,197 Insurance loss reserves 3,141 3,465 Other 4,893 3,081 --------------------- Sub-total 32,877 27,145 --------------------- Deferred federal income tax $28,171 $39,305 ===================== For 1999, $940,000 of income tax benefits applicable to deductible compensation related to stock options exercised were credited to shareholders' equity. 10. REINSURANCE A reconciliation of direct to net premiums, on both a written and an earned basis for the property and casualty companies, is as follows (amount in 000's): Direct Assumed Ceded Net -------------------------------------------- 1999 - ---- Written $432,263 $39,778 $(32,178) $439,863 Earned 409,506 38,803 (55,620) 392,689 1998 - ---- Written $409,812 $36,436 $(54,478) $391,770 Earned 394,166 35,458 (60,573) 369,051 1997 - ---- Written $389,467 $34,497 $(81,253) $342,711 Earned 375,967 27,994 (98,406) 305,555 The amounts of recoveries pertaining to reinsurance contracts that were deducted from losses incurred during 1999, 1998 and 1997 were (amounts in 000's): $62,003, $28,674 and $52,182, respectively. 11. 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): 1999 1998 1997 ------------------------------------ Balance at January 1 $108,697 $108,334 $ 88,992 Less reinsurance recoverables 20,430 26,433 24,208 ------------------------------------ Net balance at January 1 88,267 81,901 64,784 ------------------------------------ Incurred related to: Current year 211,066 208,811 163,035 Prior years (10,178) (2,120) 5,230 ------------------------------------ Total incurred 200,888 206,691 168,265 ------------------------------------ Paid related to: Current year 159,045 157,530 113,841 Prior years 40,785 42,795 37,307 ------------------------------------ Total paid 199,830 200,325 151,148 ------------------------------------ Net balance at December 31 89,325 88,267 81,901 Plus reinsurance recoverables 24,114 20,430 26,433 ------------------------------------ Balance at December 31 $113,439 $108,697 $108,334 ==================================== 34 12. 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 Company also has a supplemental, unfunded pension plan. The following tables, which include amounts related to both the qualified and supplemental pension plans, illustrate (1) a reconciliation of the plans' benefit obligation, assets and funded status, (2) the weighted average assumptions used and (3) the components of the net periodic benefit cost (amounts in 000's except for percentages): 1999 1998 ----------------------- Qualified Plan Change in benefit obligation: Benefit obligation at beginning of year $ 25,864 $22,460 Service cost 1,475 1,159 Interest cost 1,961 1,734 Actuarial (gain)/loss (2,045) 1,777 Benefits paid (807) (1,266) ----------------------- Benefit obligation at end of year $ 26,448 $25,864 ======================= Change in plan assets: Fair value of plan assets at beginning of year $ 25,937 $22,587 Actual return on plan assets 7,238 4,616 Benefits paid (807) (1,266) ----------------------- Fair value of plan assets at end of year $ 32,368 $25,937 ======================= Funded status: Funded status at end of year $ 5,920 $ 73 Unrecognized net actuarial (gain)/loss (13,938) (5,317) Unrecognized prior service cost 1,296 379 Unrecognized net transition asset (783) (948) ----------------------- Accrued benefit cost $ (7,505) $(5,813) ======================= 1999 1998 ----------------------- Supplemental Plan Benefit obligation at beginning of year $ 7,985 $ 6,268 Service cost 139 210 Interest cost 566 600 Plan amendments (658) -- Actuarial (gain)/loss (848) 970 Gross benefits paid (89) (63) ----------------------- Benefit obligation at end of year (accumulated benefit obligation of $ 6,321 and $6,648, respectively) $ 7,095 $ 7,985 ======================= Funded status $ (7,095) $ (7,985) Unrecognized actuarial (gain)/loss 1,563 3,202 Unrecognized prior service cost 413 443 ------------------------ Accrued benefit cost $ (5,119) $ (4,340) ======================== 1999 1998 1997 ---------------------------- Qualified and Supplemental Plans Weighted-average assumptions as of December 31: Discount rate 7.75% 7.00% 7.25% Expected return on plan assets 8.00% 8.00% 8.00% Rate of compensation increase 5.50% 5.50% 5.50% Components of net periodic benefit cost: Service cost $ 1,614 $ 1,369 $ 1,224 Interest cost 2,527 2,334 1,984 Expected return on assets (1,663) (1,510) (1,367) Amortization of: Transition asset (165) (165) (165) Prior service cost 114 106 112 Actuarial (gain)/loss 133 152 34 ---------------------------- Net periodic benefit cost 2,560 2,286 1,822 Curtailment credit -- -- (559) ---------------------------- Total net periodic benefit cost $ 2,560 $ 2,286 $ 1,263 ============================ 35 13. STOCK OPTION AND AWARD PLANS Under the Company's stock option plans, all of the outstanding stock options at December 31, 1999 were 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. 216,000 of these stock options were exercisable at December 31, 1999 and 30,000 options become exercisable in 2000. A summary of stock option transactions follows: 1999 1998 1997 ------------------------------------------------------------ Wtd. Wtd. Wtd. Avg. Avg. Avg. (000's) Option (000's) Option (000's) Option Shares Price Shares Price Shares Price ------------------------------------------------------------ Outstanding, beginning of year 380 $10.07 420 $10.13 456 $ 9.77 Exercised (164) 9.38 (40) 10.65 (36) 8.34 Expired -- -- -- -- (27) 8.93 Granted 30 26.09 -- -- 27 12.63 -------- -------- -------- Outstanding, end of year 246 $12.49 380 $10.07 420 $10.13 ============================================================ Weighted avg. fair value of options granted $ 8.64 $ 4.74 ======== ======== Information regarding such outstanding options at December 31, 1999 follows: Outstanding Remaining Options Life (000's) Price - ------------------------------------------ One year 162 $ 9.00 Three years 18 16.71 Five years 18 16.92 Seven years 18 12.63 Nine years 30 26.09 ------ Total outstanding 246 ====== Weighted average price $12.49 ======== The Company implemented a restricted stock award program during 1993. Under this program, grants of the Company's common stock will vest after a five-year 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, 96,000 shares were initially awarded under the program and 71,000 shares were eventually distributed in 1998. In 1995, 1997 and 1999, 147,000, 195,000 and 119,500 shares, respectively, were also awarded and 124,000, 171,000 and 117,000 shares, respectively, remain outstanding at December 31, 1999. The value of the awards is being amortized as compensation expense over a five year vesting period. The Company applies APB opinion 25 and related interpretations in accounting for the stock option plans. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under these plans consistent with the method of SFAS No. 123, the Company's 1999 and 1997 net income and earnings per share would have been reduced to the pro forma amounts indicated below (1998 would not have been affected) (amounts in 000's, except per share data): 1999 1997 --------------------- Net Income As reported $31,179 $17,550 Pro forma $31,011 $17,467 Net Income per Common Share-basic As reported $3.42 $1.96 Pro forma $3.40 $1.95 Net Income per Common Share-diluted As reported $3.30 $1.89 Pro forma $3.28 $1.88 The fair values of the 1999 and 1997 option grants were estimated on the date of the grant using the Black-Scholes option-pricing model with the following (weighted average) assumptions: dividend yields of 1.3%, expected volatility of 26.6% and 26.7%, risk-free interest rates of 4.7% and 6.4% and expected lives of 7 years, respectively. At December 31, 1999, 1,129,000 common shares are authorized for future option award or stock grants. 36 14. EARNINGS PER SHARE The following table is a reconciliation of the number of shares used to compute Basic and Diluted earnings per share. No adjustments are necessary to the income used in the Basic or Diluted calculations for the years ended December 31, 1999, 1998 or 1997. Shares in 000's ------------------------ 1999 1998 1997 ------------------------ Shares used in basic EPS calculation (shares outstanding) 9,111 9,018 8,956 Effect of dilutive stock options 122 228 164 Effect of dilutive restricted stock grants 230 166 172 ------------------------ Shares used in diluted EPS calculation 9,463 9,412 9,292 ======================== On April 9, 1998, the Company approved a three-for-one stock split effective May 21, 1998 for holders of record on April 30, 1998. Accordingly, the number of shares have been adjusted for the prior periods to reflect the impact of this stock split and previously reported per share amounts have been restated. At December 31, 1999, 30,000 stock options at a price of $26.09 were outstanding and were not comprehended in the computation of diluted earnings per share because their price was greater than the average market value of the common stock. All outstanding stock options at December 31, 1998 had exercise prices that were less than the average market price of the Company's common stock and, therefore, were included in the computation of diluted earnings per share. Options to purchase 54,000 shares of common stock at prices ranging from $16.71 to $16.92 per share were outstanding as of December 31, 1997 and 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. 15. 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 will not have a material effect upon the Company's consolidated financial position or results of operations. 16. SHAREHOLDERS' EQUITY In 1998, The Midland Company effected a three-for-one stock split and increased its number of shares of common stock authorized without par value (stated value of $.083 a share) to 20,000,000 shares from 5,000,000 shares. The Company also has 500,000 shares of preferred stock authorized, without par value, none of which have been issued. In October 1999 the Company's Board of Directors authorized the repurchase of up to 500,000 shares of the Company's common stock over a six-month period. 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 by the insurance subsidiaries in 2000 without regulatory approval total approximately $20,888,000; such subsidiaries paid cash dividends of $5,990,000 in 1999, $4,725,000 in 1998 and $1,240,000 in 1997. Net income as determined in accordance with statutory accounting practices, which differ in certain respects from generally accepted accounting principles, for the Company's insurance subsidiaries was $21,652,000, $22,583,000 and $17,538,000 for 1999, 1998 and 1997, respectively. Shareholders' equity on the same basis was $229,710,000 and $227,647,000 at December 31, 1999 and 1998. 17. INDUSTRY SEGMENTS The Company operates in several industries and Company management reviews operating results by several different classifications (e.g., product line, legal entity, distribution channel). Reportable segments are determined based upon revenues and/or operating profits and include manufactured housing insurance, all other insurance and transportation. Manufactured housing insurance includes primarily insurance similar to homeowners insurance for manufactured houses. All other insurance includes various personal lines such as site-built dwelling, collateral protection and watercraft insurance, as well as commercial lines such as manufactured housing park and dealer insurance. The Company writes insurance throughout the United States with larger concentrations in the southern and southeastern states. Transportation includes barge chartering and freight brokerage operations primarily on the lower Mississippi River and its tributaries. 37 Listed below is financial information required to be reported for each industry segment. Certain amounts are allocated and certain amounts are not allocated (e.g., assets and investment gains) to each segment for management review. Operating segment information based upon how it is reviewed by the Company is as follows for the years ended December 31, 1999, 1998 and 1997 (amounts in 000's): Manufactured Unallocated Corporate Housing Other Insurance and All Intersegment Insurance Insurance Amounts Transportation Other Elimination Total - ------------------------------------------------------------------------------------------------------------------------ 1999 - ---- Revenues-External customers $283,332 $124,452 $31,327 $ 1,081 $440,192 Net investment income 15,526 10,631 $ 19 177 391 $ (1,296) 25,448 Net realized investment gains n/a n/a 3,486 3,486 Interest expense n/a n/a 1,406 517 3,490 (1,346) 4,067 Depreciation and amortization 2,120 931 2,945 4,291 10,287 Income-Continuing operations before taxes 45,370 6,678 (1,122) 1,806 (9,019) 43,713 Income tax expense 14,219 1,169 (304) 637 (3,187) 12,534 Acquisition of fixed assets and businesses n/a n/a 5,452 84 273 5,809 Identifiable assets n/a n/a 812,791 31,683 58,021 (14,438) 888,057 1998 - ---- Revenues-External customers $258,638 $119,348 $33,059 $ 879 $411,924 Net investment income 14,875 9,923 $ 34 323 262 $ (1,333) 24,084 Net realized investment gains n/a n/a 6,354 6,354 Interest expense n/a n/a 1,461 795 4,097 (1,362) 4,991 Depreciation and amortization 1,989 918 3,190 2,701 8,798 Income-Continuing operations before taxes 31,609 11,207 (2,598) 4,389 (7,080) 37,527 Income tax expense 10,039 2,774 (909) 1,395 (2,704) 10,595 Acquisition of fixed assets n/a n/a 2,805 561 1,582 4,948 Identifiable assets n/a n/a 747,451 41,576 57,165 (8,972) 837,220 1997 - ---- Revenues-External customers $219,394 $ 93,322 $34,933 $ 398 $348,047 Net investment income 13,935 8,359 $ 24 286 318 $ (1,371) 21,551 Net realized investment gains n/a n/a 4,170 4,170 Interest expense n/a n/a 1,417 849 5,084 (2,367) 4,983 Depreciation and amortization 1,704 738 3,157 4,670 10,269 Income-Continuing operations before taxes 36,764 3,819 (2,590) 4,399 (7,689) 34,703 Income tax expense 12,100 629 (906) 1,300 (2,787) 10,336 Acquisition of fixed assets n/a n/a 3,555 13,366 2,617 19,538 Identifiable assets n/a n/a 660,464 44,544 62,055 (6,600) 760,463 The amounts shown for manufactured housing insurance, other insurance and unallocated insurance comprise the consolidated amounts for Midland's insurance operations subsidiary, American Modern Insurance Group, Inc. Amounts for 1997 do not include amounts related to discontinued sportswear operations (a separate segment that, as discussed elsewhere herein, was sold in 1997). Intersegment revenues were not significant for 1999, 1998 or 1997. In 1999, 1998 and 1997, revenues from one customer amounted to $64,621,000, $61,865,000 and $41,011,000, respectively.
38 INDEPENDENT AUDITORS' REPORT 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, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/Deloitte & Touche LLP Deloitte & Touche LLP Cincinnati, Ohio February 10, 2000 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, independent auditors, 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. 39 QUARTERLY DATA THE MIDLAND COMPANY AND SUBSIDIARIES 1999 1998 - ----------------------------------------------------------------------------- ----------------------------------------- (Amounts in thousands, First Second Third Fourth First Second Third Fourth except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------- ----------------------------------------- Revenues $114,084 $116,347 $117,845 $120,850 $107,237 $110,431 $112,538 $112,156 ======================================= ========================================= Net income $ 7,860 $ 5,211 $ 7,250 $ 10,858 $ 6,040 $ 3,638 $ 7,299 $ 9,955 ======================================= ========================================= Basic earnings per common share $ .86 $ .57 $ .80 $ 1.19 $ .67 $ .40 $ .81 $ 1.11 ======================================= ========================================= Diluted earnings per common share $ .83 $ .55 $ .77 $ 1.15 $ .64 $ .39 $ .77 $ 1.06 ======================================= ========================================= Dividends per common share $ .0675 $ .0675 $ .0675 $ .0675 $ .0625 $ .0625 $ .0625 $ .0625 ======================================= ========================================= Price range of common stock (Nasdaq): High $ 27.75 $ 29.31 $ 26.88 $ 23.50 $ 27.13 $ 31.67 $ 30.75 $ 22.50 ======================================= ========================================= Low $ 22.13 $ 19.25 $ 21.00 $ 19.88 $ 19.42 $ 22.88 $ 22.50 $ 20.00 ======================================= ========================================= Note: The Company's stock began trading on the Nasdaq National Market on June 2, 1999 under the symbol "MLAN". Prior to that date Midland shares traded on the American Stock Exchange under the symbol "MLA". Previously reported share information has been adjusted to reflect a three-for-one common stock split effective May 21, 1998.
OTHER INFORMATION TRANSFER AGENT AND REGISTRAR INDEPENDENT AUDITORS Fifth Third Bank Deloitte & Touche LLP 38 Fountain Square, Mail Drop #1090FS 250 East Fifth Street 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 13, 2000 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 1999 Annual Report to the Securities and Exchange Commission on Form 10-K may be obtained by writing to the Company - Attention: Chief Financial Officer or from the Company's website www.midlandcompany.com. 40 OFFICERS AND DIRECTORS THE MIDLAND COMPANY AND SUBSIDIARIES BOARD OF DIRECTORS George R. Baker Corporate Director/Advisor James E. Bushman (a) (b) (c) President and Chief Executive Officer Cast-Fab Technologies, Inc. James H. Carey (a) (b) Corporate Director/Advisor Michael J. Conaton (c) Vice Chairman Jerry A. Grundhofer (d) President and Chief Executive Officer Firstar Corporation J. P. Hayden, Jr. (c) Chairman of the Executive Committee of the Board J. P. Hayden III (c) Chairman and Chief Operating Officer John W. Hayden (c) President and Chief Executive Officer Robert W. Hayden Formerly Vice President of the Company William T. Hayden (d) Attorney William J. Keating (b) (c) Formerly Chairman, Chief Executive Officer and Publisher-Cincinnati Enquirer and Formerly Chairman of the Board-Associated Press John R. LaBar Formerly Vice President and Secretary of the Company David B. O'Maley (b) (d) Chairman, President and CEO Ohio National Financial Services John M. O'Mara (a) (c) Corporate Director/Financial Consultant Glenn E. Schembechler (a) Professor Emeritus University of Michigan John I. Von Lehman Executive Vice President, Chief Financial Officer and Secretary (a) Member of Audit Committee (b) Member of Compensation Committee (c) Member of Executive Committee (d) Member of Governance Committee OFFICERS J. P. Hayden III Chairman and Chief Operating Officer John W. Hayden President and Chief Executive Officer J. P. Hayden, Jr. Chairman of the Executive Committee of the Board Michael J. Conaton Vice Chairman John I. Von Lehman Executive Vice President, Chief Financial Officer and Secretary Paul T. Brizzolara Senior Vice President and Chief Legal Officer and Assistant Secretary W. Todd Gray Treasurer Charles J. Jenkins Vice President-Management Information Systems Michael L. Flowers Vice President and Assistant Secretary Mark E. Burke Director of Taxation Ronald L. Gramke Assistant Treasurer Edward J. Heskamp Assistant Treasurer Mary Ann C. Pettit Assistant Secretary Geraldine M. Stigall Assistant Secretary EX-21 3 THE MIDLAND COMPANY AND SUBSIDIARIES Exhibit (21) - Subsidiaries of the Registrant December 31, 1999 The subsidiaries of the Registrant as of December 31, 1999, 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 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 American Modern Life Insurance Company Ohio 100 Lloyds Modern Corporation Texas 100 American Modern Home Service Company Ohio 100 Modern Services Group, Inc. 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 MODERN SERVICES GROUP, INC.: Sunbelt General Agency, Inc. Alabama 100 The Atlas Insurance Agency, Inc. Ohio 100 Midwest Enterprises, Inc. Florida 100 Manufactured Homes Acceptance Corporation Ohio 100 MHAC Insurance Agency, Inc. Ohio 100 Service Sentry Warranty Corporation Ohio 100 North American Insurance Agency Corporation Michigan 100 The name of one wholly - owned subsidiary of The Midland Company is not shown above as such individual listing is not required. EX-27 4
7 12-MOS DEC-31-1999 DEC-31-1999 479,772,000 0 0 131,087,000 0 0 610,859,000 10,098,000 24,114,000 85,168,000 888,057,000 133,713,000 312,838,000 0 23,388,000 69,838,000 0 0 911,000 257,091,000 888,057,000 400,991,000 25,292,000 3,486,000 39,357,000 204,365,000 114,212,000 66,541,000 43,713,000 12,534,000 31,179,000 0 0 0 31,179,000 3.42 3.30 88,267,000 211,066,000 (10,178,000) 159,045,000 40,785,000 89,325,000 (10,178,000)
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