10-K405 1 l93271ae10-k405.txt THE MIDLAND COMPANY 10-K405 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, 2001 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: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value. 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. [ X ] The aggregate market value of the voting and non-voting common stock held by nonaffiliates, which includes shares held by executive officers and directors, of the registrant as of March 11, 2002 was $372,410,000 based on a closing price of $42.50 per share. As of March 11, 2002, 8,762,577 shares of no par value common stock were issued and outstanding. Documents Incorporated by Reference Portions of the Annual Report to Shareholders for the year ended December 31, 2001 are incorporated by reference into Parts I, II and IV. Portions of the Registrant's Proxy Statement dated March 12, 2002 to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 11, 2002 are incorporated by reference into Part III. 1 THE MIDLAND COMPANY FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2001 Certain statements made in this report are forward-looking and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These statements include certain discussions relating to underwriting, premium and investment income volume, business strategies, profitability and business relationships, as well as any other statements concerning the year 2002 and beyond. The forward-looking statements involve risks and uncertainties that may cause results to differ materially from those anticipated in those statements. Factors that might cause results to differ from those anticipated include, without limitation, adverse weather conditions, changes in underwriting results affected by adverse economic conditions, fluctuations in the investment markets, changes in the retail marketplace, changes in the laws or regulations affecting the operations of Midland or its subsidiaries changes in the business tactics or strategies of Midland, its subsidiaries or its current or anticipated business partners, the financial condition of Midland's business partners, acquisitions or divestitures, changes in market forces, litigation and the other risk factors that have been identified in Midland's filings with the SEC, any one of which might materially affect the operations of Midland or its subsidiaries. Any forward-looking statements speak 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. PART I ITEM 1. Business. Midland hereby incorporates by reference the inside cover and pages 2 through 13, 16 through 21 and 33 and 34 (Note 16) of the its 2001 Annual Report to Shareholders. Midland was incorporated in Ohio in 1968 with its original predecessor company dating back to 1938. The number of persons employed by Midland was 1,032 at December 31, 2001. Property and Casualty Loss Reserves Midland'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. Midland establishes reserves for losses that have been reported and certain legal expenses on the "case basis" method. Claims incurred but not reported ("IBNR") and other adjustment expenses are estimated using statistical procedures. Salvage and subrogation recoveries are accrued using the "case basis" method for large claims and statistical procedures for smaller claims. Midland'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 property and casualty divisions' 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. 2 Management reviews the 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. Management 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 accounting principles generally accepted in the United States of America ("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 2001, 2000 and 1999 (net of reinsurance amounts) for the property and casualty insurance subsidiaries. Based on the information available during and at the end of 2001, 2000 and 1999, operations were credited $4,179,000, $6,952,000 and $10,178,000 in 2001, 2000 and 1999, respectively, as a result of a decrease in the estimated amounts needed to settle prior years' claims. Such reserve adjustments, which effected 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) 2001 2000 1999 ------------------------------------------------- Balance at January 1 $111,742 $113,439 $ 108,697 Less reinsurance recoverables 16,720 24,114 20,430 ------------------------------------------------- Net balance at January 1 95,022 89,325 88,267 ------------------------------------------------- Incurred related to: Current year 291,502 242,689 211,066 Prior years (4,179) (6,952) (10,178) -------------------------------------------------- Total incurred 287,323 235,737 200,888 ------------------------------------------------- Paid related to: Current year 226,853 186,498 159,045 Prior years 52,634 43,542 40,785 ------------------------------------------------- Total paid 279,487 230,040 199,830 ------------------------------------------------- Net balance at December 31 102,858 95,022 89,325 Plus reinsurance recoverables 19,309 16,720 24,114 ------------------------------------------------- Balance at December 31 $122,167 $111,742 $113,439 =================================================
3 Analysis of Loss and LAE Reserve Development The next table presents the development of Midland's property and casualty insurance subsidiaries estimated liability for the ten years prior to 2001. 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. 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 developed with respect to the previously recorded liability for all years as of the end of 2001. For example, the 1994 reserve of $37,481,000 has been re-estimated as of year-end 2001 to be $31,113,000, indicating a redundancy of $6,368,000. 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, 2001, the Company had paid $30,971,000 of the currently estimated $31,113,000 of losses and LAE that had been incurred as of the end of 1994; thus an estimated $142,000 of losses incurred as of the end of 1994 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 reserve development is unfavorable for 1995 and 1996 due to the expansion into certain areas of commercial liability lines insurance in those years. However, reserve development is favorable for 1997 through 2000 due to a reduction in the aforementioned commercial lines business combined with an overall strengthening of reserves. Midland ceased offering commercial liability products in September 2001. 4 ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (AMOUNTS IN 000'S)
Year Ended December 31 1991 1992 1993 1994 1995 1996 1997 1998 1999 ---------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- Reserve for Unpaid Losses, Net of Reinsurance $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 17,160 18,425 25,668 30,134 51,483 70,014 79,781 78,089 82,373 Two Years Later 15,699 18,451 22,686 32,074 53,467 67,310 77,148 77,774 80,928 Three Years Later 15,202 16,871 21,154 31,880 52,418 66,442 76,110 76,477 Four Years Later 14,497 16,616 20,966 31,734 51,688 66,060 76,620 Five Years Later 14,393 16,505 20,688 31,155 51,087 65,674 Six Years Later 14,373 16,445 20,629 31,130 51,298 Seven Years Later 14,361 16,441 20,962 31,113 Eight Years Later 14,354 16,542 20,913 Nine Years Later 14,414 16,488 Ten Years Later 14,414 Net Cumulative Redundancy (Deficiency) $4,675 $3,917 $6,831 $6,368 $ (3,586) $ (890) $ 5,281 $ 11,790 $ 8,397 =============================================================================================== Net Cumulative Amount of Reserve Paid Through: One Year Later $10,937 $11,730 $9,684 $19,040 $31,471 $37,307 $42,795 $ 40,785 $ 43,532 Two Years Later 12,685 14,397 18,445 26,471 41,785 51,461 57,677 55,959 57,381 Three Years Later 13,588 15,923 19,930 29,237 47,434 58,716 65,610 63,511 Four Years Later 14,171 16,312 20,427 30,425 49,596 61,913 69,376 Five Years Later 14,307 16,381 20,558 30,770 50,051 63,728 Six Years Later 14,331 16,420 20,598 30,846 50,685 Seven Years Later 14,356 16,435 20,953 30,971 Eight Years Later 14,354 16,542 20,968 Nine Years Later 14,414 16,540 Ten Years Later 14,414 Net Reserve - December 31 $27,744 $37,481 $47,712 $64,784 $ 81,901 $ 88,267 $ 89,325 Reinsurance Recoverables 6,220 14,597 13,785 24,208 26,433 20,430 24,114 --------------------------------------------------------------------------- Gross Reserve-December 31 $33,964 $52,078 $61,497 $88,992 $108,334 $ 108,697 $113,439 =========================================================================== Net Re-estimated Reserve $20,913 $31,113 $51,298 $65,674 $76,620 $ 76,477 $ 80,928 Re-estimated Reinsurance $4,689 $12,117 $14,821 $24,541 $24,729 $ 17,701 $ 21,847 --------------------------------------------------------------------------- Gross Re-estimated Reserve $25,602 $43,230 $66,119 $90,215 $101,349 $ 94,178 $102,775 =========================================================================== Gross Cumulative Redundancy (Deficiency) $8,362 $8,848 $ (4,622) $ (1,223) $ 6,985 $ 14,519 $ 10,664 =========================================================================== Year Ended December 31 2000 2001 ---------------------------- ---- ---- Reserve for Unpaid Losses, Net of Reinsurance $ 95,022 $ 102,858 Net Reserve Re-estimated as of: One Year Later 90,843 Two Years Later Three Years Later Four Years Later Five Years Later Six Years Later Seven Years Later Eight Years Later Nine Years Later Ten Years Later Net Cumulative Redundancy (Deficiency) $ 4,179 ============= Net Cumulative Amount of Reserve Paid Through: One Year Later $ 52,634 Two Years Later Three Years Later Four Years Later Five Years Later Six Years Later Seven Years Later Eight Years Later Nine Years Later Ten Years Later Net Reserve - December 31 $ 95,022 $ 102,858 Reinsurance Recoverables 16,720 19,309 ------------------------- Gross Reserve-December 31 $ 111,742 $ 122,167 ========================= Net Re-estimated Reserve $ 90,843 Re-estimated Reinsurance $ 15,985 ------------ Gross Re-estimated Reserve $ 106,828 ============ Gross Cumulative Redundancy (Deficiency) $ 4,914 =============
5 Seasonality and Reinsurance Incurred losses, and thus the results of operations, for Midland are dependent in some respect on seasonal weather patterns. Midland attempts to mitigate its risk to such unpredictable weather patterns by diversifying the geographic areas covered and by reinsuring certain levels of risk with other insurance companies. By reinsuring certain levels and types of insurable risk with other insurance companies, Midland limits its exposure to losses to that portion of the insurable risk it retains. However, failure of the reinsurer to honor their obligation could result in losses to Midland, as the reinsurance contracts do not relieve Midland of its obligations to policyholders. Midland continually evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies and does not believe it holds any significant concentration of credit risk arising from any single reinsurer or any similar geographic region, activity or economic characteristic associated with its reinsurers. Midland fully expects its reinsurers to honor their obligations. As of December 31, 2001 Midland is owed $3.9 million from reinsurers for claims that have been paid and for which a contractual obligation to collect from a reinsurer exists. Midland has not experienced any uncollectible reinsurance amounts or coverage disputes with its reinsurers historically and the composition of its reinsurers has not changed significantly in recent years. Significant Customer As indicated in Industry Segments, Note 16 to Midland's 2001 consolidated financial statements, in 2001 and 2000, revenues (earned premiums net of amounts ultimately ceded to reinsurers) received for sales through one customer, Conseco, Inc., amounted to $80,674,000 and $77,395,000, respectively. At December 31, 2001, the Company's wholly owned subsidiary, American Modern Insurance Group, had a receivable on business placed through Conseco Agency, a subsidiary of Conseco, Inc., in the amount of $20,748,000, all of which is current. Of this amount, a significant portion is subject to a trust arrangement and the entire receivable balance is secured by other collateral and rights. In the third quarter of 2001, American Modern discontinued writing a portion of Conseco's insurance business that related to multi-year term policies where the insurance premiums are remitted to American Modern as the policyholder makes monthly payments to Conseco. This method of payment resulted in an increase in American Modern's receivable balance from Conseco in 2001. As a result of the discontinuance of issuing these multi-year policies, the receivable balance from Conseco is expected to decrease during 2002 and the amount of premiums written through Conseco is also projected to be less in 2002 than in 2001. Of the premiums projected to be written through Conseco in 2002, approximately 20 percent is projected to be generated in connection with the financing of new manufactured homes and 80 percent is projected to be generated from renewals of existing policies. ITEM 2. Properties. Midland owns its 275,000 square foot principal offices located in Amelia, Ohio. Midland's insurance subsidiaries lease office space in Montgomery, Alabama, Atlanta, Georgia, St. Louis, Missouri, Grand Rapids, Michigan and West Des Moines, Iowa. Midland's transportation subsidiaries lease offices in Metairie, Louisiana. ITEM 3. Legal Proceedings. None. 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 33 (Note 15) and 36 of Midland's 2001 Annual Report to Shareholders. The number of holders of Midland's common stock at December 31, 2001 was approximately 2,100. Midland's common stock is registered on the NASDAQ National Market (MLAN). ITEM 6. Selected Financial Data. Incorporated by reference to "Six Year Financial Summary Data" on pages 14 and 15 of Midland's 2001 Annual Report to Shareholders. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference to pages 16 through 21 of Midland's 2001 Annual Report to Shareholders. 6 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Incorporated by reference to "Market Risk" section of Management's Discussion and Analysis of Financial Conditions and Results from Operations on pages 20 and 21 of Midland's 2001 Annual Report to Shareholders. ITEM 8. Financial Statements and Supplementary Data. Incorporated by reference to pages 22 through 36 of Midland's 2001 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 Midland's Proxy Statement dated March 12, 2002. ITEM 11. Executive Compensation. Incorporated by reference to Midland's Proxy Statement dated March 12, 2002. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference to Midland's Proxy Statement dated March 12, 2002. ITEM 13. Certain Relationships and Related Transactions. Incorporated by reference to Midland's Proxy Statement dated March 12, 2002. 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, 2001 and 2000. Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999. Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999. 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. 11 Schedule I - Summary of Investments - Other Than Investments in Related Parties - December 31, 2001 12 Schedule II - Condensed Financial Information of Registrant 13-17 Schedule III - Supplementary Insurance Information for the Years Ended December 31, 2001, 2000 and 1999 18 Schedule IV - Reinsurance for the Years Ended December 31, 2001, 2000 and 1999 19 Schedule V - Valuation and Qualifying Accounts for the Years Ended December 31, 2001, 2000 and 1999 20 Schedule VI - Supplemental Information Concerning Property- Casualty Insurance Operations for the Years Ended December 31, 2001, 2000 and 1999 21
7
PAGE ---- (a) 3. Exhibits. 3.1 Articles of Incorporation - Filed as Exhibit 3(i) to the Registrant's Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference. 3.2 Code of Regulations (Amended and Restated) - Filed as Exhibit 3(ii) to the Registrant's Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference. 10.1 The Midland Company 2002 Employee Incentive Stock Plan* - Incorporated by Reference to Registrant's Proxy Statement dated March 12, 2002. 10.2 The Midland Company 2002 Restricted Stock and Stock Option Plan for Non-Employee Directors - Incorporated by Reference to the Registrant's Proxy Statement dated March 12, 2002. 10.3 The Midland Company 1992 Employee Incentive Stock Plan (Amended and Restated)* - Filed as Exhibit 10.1 to the Registrant's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. 10.4 Annual Incentive Plan* - Filed as Exhibit 10.3 to the Registrant's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. 10.5 Consulting Agreements with J. P. Hayden, Jr., Michael J. Conaton, John R. LaBar and Robert W. Hayden - Filed as Exhibits 10.4(a)*, 10.4(b)*, 10.4(c)* and 10.4(d)* to the Registrant's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. 10.6 Employee Retention Agreements with Joseph P. Hayden III, John W. Hayden, John I. Von Lehman and Paul T. Brizzolara - Filed as Exhibits 10.5(a)*, 10.5(b)*, 10.5(c)* and 10.5(d)* to the Registrant's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. 10.7 The Midland-Guardian Co. Salaried Employees 401(k) Savings Plan, The Midland Company 2000 Associate Discount Stock Purchase Plan and The Midland Company Stock Option Plan for Non-Employee Directors - Incorporated by Reference to Registrant's Registration Statement No. 333-40560 on Form S-8. 10.8 The Midland Company Dividend Reinvestment Plan - Incorporated by Reference to Registrant's Registration Statement No. 033-64821 on Form S-3. 10.9 The Midland Company Non-Employee Director Deferred Compensation Plan, The Midland Company Supplemental Retirement Plan*, Midland-Guardian Co. Salaried Employees' Non-Qualified Savings Plan*, Midland-Guardian Co. Non-Qualified Self-Directed Retirement Plan*, The Midland Company Stock Option Plan for Non-Employee Directors as Amended January 2000 filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 to the Registrant's Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference. 13. 2001 Annual Report to Shareholders filed herewith. 21. Subsidiaries of the Registrant. 22 23. Independent Auditors' Consent - Included in Consent and Report on Schedules referred to under Item 14(a)2 above. * Management Compensatory Plan or Arrangement (b) Reports on Form 8-K - None during 2001.
8 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 15, 2002 ------------------------------------------- Chief Operating Officer (J. P. Hayden, III) /s/ John W. Hayden President and March 15, 2002 ------------------------------------------- Chief Executive Officer (John W. Hayden) /s/ John I. Von Lehman Executive Vice President, March 15, 2002 ------------------------------------------- Chief Financial and (John I. Von Lehman) Accounting Officer and Secretary
9 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/ James E. Bushman Director and Member March 15, 2002 ------------------------------------------- of Audit Committee (James E. Bushman) /S/ James H. Carey Director and Member March 15, 2002 ------------------------------------------- of Audit Committee (James H. Carey) /S/ Michael J. Conaton Director March 15, 2002 ------------------------------------------- (Michael J. Conaton) /S/ Jerry A. Grundhofer Director March 15, 2002 ------------------------------------------- (Jerry A. Grundhofer) /S/ J. P. Hayden, Jr. Chairman of the Executive March 15, 2002 ------------------------------------------- Committee of the Board (J. P. Hayden, Jr.) and Director /S/ J. P. Hayden, III Chairman of the Board, March 15, 2002 ------------------------------------------- Chief Operating Officer (J. P. Hayden, III) and Director /S/ John W. Hayden President, Chief Executive March 15, 2002 ------------------------------------------- Officer and Director (John W. Hayden) /S/ Robert W. Hayden Director March 15, 2002 ------------------------------------------- (Robert W. Hayden) /S/ William T. Hayden Director March 15, 2002 ------------------------------------------- (William T. Hayden) /S/ William J. Keating, Jr. Director March 15, 2002 ------------------------------------------- (William J. Keating, Jr.) /S/ John R. LaBar Director March 15, 2002 ------------------------------------------- (John R. LaBar) /S/ David B. O'Maley Director March 15, 2002 ------------------------------------------- (David B. O'Maley) /S/ John M. O'Mara Director and Member March 15, 2002 ------------------------------------------- of Audit Committee (John M. O'Mara) /S/ Glenn E. Schembechler Director and Member March 15, 2002 ------------------------------------------- of Audit Committee (Glenn E. Schembechler) /S/ Marie Francis Thrailkill, OSU Ed.D. Director March 15, 2002 ------------------------------------------- (Marie Francis Thrailkill, OSU Ed.D.) S/ John I. Von Lehman Executive Vice President, March 15, 2002 ------------------------------------------- Chief Financial and Accounting (John I. Von Lehman) 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 Nos. 33-48511 and 333-40560 on Form S-8 of The Midland Company of our report dated February 7, 2002, 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, 2001. 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 March 15, 2002 Cincinnati, Ohio THE MIDLAND COMPANY AND SUBSIDIARIES SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2001
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 $ 55,747,000 $ 58,284,000 $ 58,284,000 States, municipalities and political subdivisions 183,645,000 187,833,000 187,833,000 Mortgage-backed securities 70,931,000 72,889,000 72,889,000 Foreign governments 8,998,000 9,402,000 9,402,000 Public utilities 5,137,000 5,135,000 5,135,000 All other corporate bonds 163,835,000 167,346,000 167,346,000 ------------------------------------------------------- Total 488,293,000 500,889,000 500,889,000 ------------------------------------------------------- Equity securities, available-for-sale: Common stocks: Public utilities 1,960,000 2,049,000 2,049,000 Banks, trusts and insurance companies 9,500,000 57,744,000 57,744,000 Industrial, miscellaneous and all other 44,915,000 52,003,000 52,003,000 Imbedded derivatives 1,108,000 1,108,000 1,108,000 Nonredeemable preferred stocks 33,108,000 35,346,000 35,346,000 ------------------------------------------------------- Total 90,591,000 148,250,000 148,250,000 ------------------------------------------------------- Accrued interest and dividends 8,170,000 XXXXXXX 8,170,000 ------------------------------------------------------- Mortgage loans on real estate 8,131,000 XXXXXXX 8,131,000 ------------------------------------------------------- Short-term investments 38,569,000 XXXXXXX 38,569,000 ------------------------------------------------------- Total Investments $633,754,000 XXXXXXX $704,009,000 =======================================================
12 THE MIDLAND COMPANY (PARENT ONLY) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET INFORMATION DECEMBER 31, 2001 AND 2000
ASSETS 2001 2000 ------------------ ------------------ Cash $ 98,000 $ 68,000 ------------------ ------------------ Marketable Securities Available for Sale (at market value): Debt Securities (cost, $175,000 in 2001 and $353,000 in 2000) 175,000 353,000 Equity (cost, $338,000 in 2001 and $342,000 in 2000) 2,691,000 2,964,000 ------------------ ------------------ Total 2,866,000 3,317,000 ------------------ ------------------ Receivables - Net 10,851,000 16,152,000 ------------------ ------------------ Intercompany Receivables 1,098,000 16,902,000 ------------------ ------------------ Property, Plant and Equipment (at cost): 37,457,000 37,480,000 Less Accumulated Depreciation 10,229,000 9,114,000 ------------------ ------------------ Net 27,228,000 28,366,000 ------------------ ------------------ Other Assets 7,643,000 6,571,000 ------------------ ------------------ Investments in Subsidiaries (at equity) 298,482,000 278,755,000 ------------------ ------------------ Total Assets $348,266,000 $350,131,000 ================== ==================
13 THE MIDLAND COMPANY (PARENT ONLY) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET INFORMATION DECEMBER 31, 2001 AND 2000
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 ------------------ ------------------ Notes Payable Within One Year: Banks (including current portion of long-term debt) $ 26,756,000 $ 39,706,000 Commercial Paper 9,522,000 6,020,000 ------------------ ------------------ Total 36,278,000 45,726,000 ------------------ ------------------ Other Payables and Accruals 3,649,000 4,009,000 ------------------ ------------------ Long - Term Debt 16,463,000 17,219,000 ------------------ ------------------ Shareholders' Equity: Common Stock - No Par (issued and outstanding: 8,830,000 shares at December 31, 2001 and 9,000,000 shares at December 31, 2000 after deducting treasury stock of 2,098,000 shares and 1,928,000 shares, respectively) 911,000 911,000 Additional Paid - in Capital 20,386,000 19,838,000 Retained Earnings 264,057,000 239,679,000 Accumulated Other Comprehensive Income 45,875,000 54,396,000 Treasury Stock (at cost) (38,698,000) (30,404,000) Unvested Restricted Stock Awards (655,000) (1,243,000) ------------------ ------------------ Total 291,876,000 283,177,000 ------------------ ------------------ Total Liabilities and Shareholders' Equity $348,266,000 $350,131,000 ================== ==================
14 THE MIDLAND COMPANY (PARENT ONLY) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 ---------------- ----------------- ----------------- Revenues: Dividends from Subsidiaries $ 298,000 $13,529,000 $ 9,000,000 All Other Income, Primarily Charges to Subsidiaries 5,992,000 6,317,000 6,359,000 ---------------- ----------------- ----------------- Total Revenues 6,290,000 19,846,000 15,359,000 ---------------- ----------------- ----------------- Expenses: Interest Expense 3,446,000 3,745,000 3,391,000 Depreciation and Amortization 1,749,000 2,458,000 3,973,000 All Other Expenses 2,626,000 2,975,000 1,786,000 ---------------- ----------------- ----------------- Total Expenses 7,821,000 9,178,000 9,150,000 ---------------- ----------------- ----------------- Income (Loss) Before Federal Income Tax (1,531,000) 10,668,000 6,209,000 Provision (Credit) for Federal Income Tax (695,000) (1,053,000) (1,023,000) ---------------- ----------------- ----------------- Income (Loss) Before Change in Undistributed Income of Subsidiaries (836,000) 11,721,000 7,232,000 Change in Undistributed Income of Subsidiaries 28,058,000 23,742,000 23,947,000 ---------------- ----------------- ----------------- Net Income $27,222,000 $35,463,000 $31,179,000 ================ ================= =================
15 THE MIDLAND COMPANY (PARENT ONLY) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 ----------------- -------------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 27,222,000 $ 35,463,000 $ 31,179,000 Adjustments to reconcile net income to net cash provided by operating activities: Increase in undistributed income of subsidiaries (28,058,000) (23,742,000) (23,947,000) Decrease (Increase) in receivables 6,162,000 (4,631,000) (1,170,000) Depreciation and amortization 1,749,000 2,458,000 3,973,000 Decrease (increase) in other assets (1,072,000) (1,013,000) 8,004,000 Increase (decrease) in other payables and accruals (247,000) (2,723,000) 2,422,000 Other - net 68,000 2,000 19,000 ----------------- -------------------- ----------------- Net Cash Provided by Operating Activities 5,824,000 5,814,000 20,480,000 ----------------- -------------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment (208,000) (259,000) (279,000) Change in investments (excluding unrealized appreciation/depreciation) 159,000 (232,000) 373,000 Sale of property, plant and equipment - net 40,000 24,000 214,000 ----------------- -------------------- ----------------- Net Cash Provided by (Used in) Investing Activities (9,000) (467,000) 308,000 ----------------- -------------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in intercompany accounts 15,804,000 (6,489,000) (12,080,000) Purchase of treasury stock (10,900,000) (15,432,000) (3,709,000) Increase (decrease) in short - term borrowings (9,498,000) 19,470,000 4,028,000 Dividends paid (2,818,000) (2,747,000) (2,515,000) Issuance of treasury stock 2,333,000 1,068,000 2,300,000 Decrease in long - term debt (706,000) (1,297,000) (8,760,000) ----------------- -------------------- ----------------- Net Cash Used in Financing Activities (5,785,000) (5,427,000) (20,736,000) ----------------- ----------------------------------------- NET INCREASE (DECREASE) IN CASH 30,000 (80,000) 52,000 CASH AT BEGINNING OF YEAR 68,000 148,000 96,000 ----------------- -------------------- ----------------- CASH AT END OF YEAR $ 98,000 $ 68,000 $ 148,000 ================= ==================== =================
16 THE MIDLAND COMPANY (PARENT ONLY) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes included in Midland's 2001 Annual Report to Shareholders. Total debt of Midland (parent only) consists of the following:
DECEMBER 31, 2001 2000 ----------------- ------------------ Short - Term Bank Borrowings $26,000,000 $39,000,000 Commercial Paper 9,522,000 6,020,000 Mortgage Notes: 6.83% - Due December 20, 2005 17,219,000 17,925,000 ----------------- ------------------ Total Debt $52,741,000 $62,945,000 ================= ==================
See Notes 6 and 7 to the consolidated financial statements included in the 2001 Annual Report to Shareholders for further information on Midland's outstanding debt at December 31, 2001. The amount of debt that becomes due during each of the next four years is as follows: 2002 - $756,000; 2003 - $810,000; 2004 - $865,000; 2005 - remainder of $14,788,000. 17 THE MIDLAND COMPANY AND SUBSIDIARIES SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (AMOUNTS IN 000'S)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F Future Policy Deferred Benefits, Other Policy Policy Losses, Claims and Acquisition Claims and Unearned Benefits Premium Cost Loss Expenses Premiums Payable Revenue --------------------------------------------------------------------------------------- 2001 ---------------------------------- Manufactured Housing $ 70,976 $ 233,180 $ 318,298 Other Insurance 29,809 170,675 189,935 Unallocated Amounts 148,674 Inter-segment Elimination --------------------------------------------------------------------------------------- Total $ 100,785 $ 148,674 $ 403,855 $ - $ 508,233 ======================================================================================= 2000 ---------------------------------- Manufactured Housing $ 67,026 $ 228,665 $ 309,943 Other Insurance 24,548 128,520 146,177 Unallocated Amounts 135,887 Inter-segment Elimination --------------------------------------------------------------------------------------- Total $ 91,574 $ 135,887 $ 357,185 $ - $ 456,120 ======================================================================================= 1999 ---------------------------------- Manufactured Housing $ 60,112 $ 215,437 $ 283,332 Other Insurance 25,056 97,401 117,659 Unallocated Amounts 133,713 Inter-segment Elimination --------------------------------------------------------------------------------------- Total $ 85,168 $ 133,713 $ 312,838 $ - $ 400,991 ======================================================================================= COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K Benefits, Amortization of Net Claims, Losses Deferred Policy Other Investment and Settlement Acquisition Operating Premiums Income (1) Expenses Costs Expenses (1) Written ---------------------------------------------------------------------- ------------------ 2001 -------------------------------- Manufactured Housing $ 20,562 $ 176,699 $ 92,968 $ 39,435 $ 322,818 Other Insurance 14,042 115,489 52,809 33,887 204,618(2) Unallocated Amounts 7 Inter-segment Elimination (809) ---------------------------------------------------------------------- ------------------ Total $ 33,802 $ 292,188 $ 145,777 $ 73,322 $ 527,436 ====================================================================== ================== 2000 -------------------------------- Manufactured Housing $ 20,787 $ 156,517 $ 94,940 $ 41,684 $ 323,165 Other Insurance 11,272 84,163 42,113 29,071 153,682(2) Unallocated Amounts 25 Inter-segment Elimination (1,310) ---------------------------------------------------------------------- ------------------ Total $ 30,774 $ 240,680 $ 137,053 $ 70,755 $ 476,847 ====================================================================== ================== 1999 -------------------------------- Manufactured Housing $ 15,526 $ 133,436 $ 82,302 $ 40,079 $ 306,446 Other Insurance 10,631 70,929 31,910 26,462 137,049(2) Unallocated Amounts 19 Inter-segment Elimination (884) ---------------------------------------------------------------------- ------------------ Total $ 25,292 $ 204,365 $ 114,212 $ 66,541 $ 443,495 ====================================================================== ==================
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 from the life insurance subsidiaries ($4,331, $5,511 and $3,632 for 2001, 2000 and 1999, respectively). 18 THE MIDLAND COMPANY AND SUBSIDIARIES SCHEDULE IV - REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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 --------------------------------------------------------------------------------------- 2001 ---- Life Insurance in Force $ 942,494,000 $601,866,000 $79,697,000 $420,325,000 19.0% ======================================================================================= Insurance Premiums and Other Considerations: Life and Health Insurance $ 23,962,000 $ 15,013,000 $ 2,065,000 $ 11,014,000 18.7% Property & Liability Insurance 455,253,000 28,462,000 70,428,000 497,219,000 14.2% --------------------------------------------------------------------------------------- Total Premiums $ 479,215,000 $ 43,475,000 $72,493,000 $508,233,000 14.3% ======================================================================================= 2000 ---- Life Insurance in Force $ 731,201,000 $415,567,000 $55,023,000 $370,657,000 14.8% ======================================================================================= Insurance Premiums and Other Considerations: Life and Health Insurance $ 20,693,000 $ 11,403,000 $ 1,331,000 $ 10,621,000 12.5% Property & Liability Insurance 434,565,000 30,766,000 41,700,000 445,499,000 9.4% --------------------------------------------------------------------------------------- Total Premiums $ 455,258,000 $ 42,169,000 $43,031,000 $456,120,000 9.4% ======================================================================================= 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% =======================================================================================
19 THE MIDLAND COMPANY AND SUBSIDIARIES SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ADDITIONS CHARGED BALANCE AT (CREDITED) TO BALANCE BEGINNING COSTS AND DEDUCTIONS AT END DESCRIPTION OF PERIOD EXPENSES (ADDITIONS) OF PERIOD ------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2001: Allowance For Losses $ 826,000 $ 96,000 $ 96,000 (1) $ 826,000 YEAR ENDED DECEMBER 31, 2000: Allowance For Losses $ 807,000 $ 84,000 $ 65,000 (1) $ 826,000 YEAR ENDED DECEMBER 31, 1999: Allowance For Losses $ 753,000 $ 192,000 $ 138,000 (1) $ 807,000
NOTES: (1) Accounts written off are net of recoveries. 20 THE MIDLAND COMPANY AND SUBSIDIARIES SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (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 2001 $ 91,098 $ 140,777 $ - $340,505 $497,219 $31,380 =============== ================= =============== =============== =============== ============= 2000 $ 82,575 $ 129,596 $ - $308,282 $445,499 $28,589 =============== ================= =============== =============== =============== ============= 1999 $ 76,031 $ 128,467 $ - $281,442 $392,689 $23,746 =============== ================= =============== =============== =============== ============= COLUMN A COLUMN H COLUMN I COLUMN J COLUMN K Claims and Claim Adjustment Expenses Incurred Amortization Related to of Deferred Paid Claims Affiliation ---------- Policy and Claim with Current Prior Acquisition Adjustment Premiums Registrant Year Years Costs Expenses Written ----------------------------------------------------------------------------------------------------- Consolidated Property-Casualty Subsidiaries 2001 $291,502 $ (4,179) $ 142,983 $279,487 $523,105 ============= ============ =============== =============== =============== 2000 $242,689 $ (6,952) $ 130,275 $230,040 $471,336 ============= ============ =============== =============== =============== 1999 $211,066 $(10,178) $ 108,689 $199,830 $439,863 ============= ============ =============== =============== ===============
Note: Certain amounts above will not agree with Schedule III because other insurance amounts in Schedule III include life and accident and health insurance. 21