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, 1998
Commission File Number - 1-6026
THE MIDLAND COMPANY
Incorporated in Ohio
I.R.S. Employer Identification No. 31-0742526
7000 Midland Boulevard
Amelia, Ohio 45102-2607
Tel. (513) 943-7100
Securities registered pursuant to Section 12(b) of the Act:
Common stock - no par value. - American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all other
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes__X__ No_____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting common stock held by
nonaffiliates, which includes shares held by executive officers and directors,
of the registrant as of March 5, 1999 was $237,966,000.
Number of shares of common stock outstanding as of March 5, 1999 -
9,518,639.
Documents Incorporated by Reference
Annual Report to Shareholders for the year ended December 31, 1998 is
incorporated by reference into Parts I, II and IV.
Registrant's Proxy Statement dated March 11, 1999 is incorporated by
reference into Parts III and IV.
1
<PAGE>
THE MIDLAND COMPANY
FORM 10-K
DECEMBER 31, 1998
Certain statements contained in this report that are not historical facts
constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on forward-
looking statements because they involve known and unknown risks, uncertainties
and other factors which may cause actual results, performance or achievements
to differ materially from those expressed or implied. Any forward-looking
statement speaks only as of the date made. The Midland Company undertakes no
obligation to update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made.
Statements concerning expected financial performance, on-going business
strategies and possible future action which The Midland Company intends to
pursue to achieve strategic objectives constitute forward-looking
information. Implementation of these strategies and the achievement of such
financial performance are each subject to numerous conditions, uncertainties and
risk factors.
Factors which might cause deviations from the forward looking statements
include, without limitations, the following: 1) changes in the laws or
regulations affecting the operations of the Company or any of its subsidiaries;
2) changes in the business tactics or strategies of the Company or any of its
subsidiaries; 3)acquisition(s) of assets or of new or complementary operations,
or divestiture of any segment of the existing operations of the Company or any
of its subsidiaries; 4) changing market forces or litigation which necessitate,
in Management's judgment, changes in plans, strategy or tactics of the Company
or its subsidiaries and 5) adverse weather conditions, fluctuations in the
investment markets, changes in the retail marketplace, Year 2000 related issues
or fluctuations in interest rates, any one of which might materially affect the
operations of the Company and/or its subsidiaries.
2
<PAGE>
PART I
ITEM 1. Business.
Incorporated by reference from the inside cover and pages 2 through 13
and 33 and 34 (Note 18) of the Registrant's 1998 Annual Report to
Shareholders. The number of persons employed by the Registrant was
approximately 890 at December 31, 1998.
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.
There are no material differences between the loss and LAE liability
reported in the accompanying consolidated financial statements in
accordance with generally accepted accounting principles ("GAAP") and
that reported in the annual statements filed with state insurance
departments in accordance with statutory accounting practices ("SAP").
The following table provides an analysis of changes in loss and LAE
reserves for 1998, 1997 and 1996 (net of reinsurance amounts) for the
Company. Based on the information available during and at the end of
1998, operations were credited $2,120,000 in 1998 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 and 1996,
operations were charged $5,230,000 in 1997 and $3,771,000 in 1996 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.
3
<PAGE>
Changes in Loss and LAE Reserves:
(amounts in 000's)
1998 1997 1996
--------------------------------------
Balance at January 1 $108,334 $ 88,992 $ 61,497
Less reinsurance recoverables 26,433 24,208 13,785
--------------------------------------
Net balance at January 1 81,901 64,784 47,712
--------------------------------------
Incurred related to:
Current year 208,811 163,035 166,554
Prior years (2,120) 5,230 3,771
--------------------------------------
Total incurred 206,691 168,265 170,325
--------------------------------------
Paid related to:
Current year 157,530 113,841 121,782
Prior years 42,795 37,307 31,471
--------------------------------------
Total paid 200,325 151,148 153,253
--------------------------------------
Net balance at
December 31 88,267 81,901 64,784
Plus reinsurance recoverables 20,430 26,433 24,208
--------------------------------------
Balance at December 31 $108,697 $108,334 $ 88,992
======================================
Analysis of Loss and LAE Reserve Development
The next table presents the development of the estimated liability for
the ten years prior to 1998. 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 at the end of 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 1998. For example, the Company's 1990 reserve of $16,570,000 has
been re-estimated as of year-end 1998 to be $13,579,000, indicating a
redundancy of $2,991,000.
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, 1998, the Company had
paid $13,574,000 of the currently estimated $13,579,000 of losses and
LAE that have been incurred as of the end of 1990; thus an estimated
$5,000 of losses incurred as of the end of 1990 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 due to a
reduction in the aforementioned commercial lines business combined with
a strengthening of the commercial lines reserves in 1997.
4
<PAGE>
<TABLE>
Analysis of Loss and Loss Adjustment Expense Development
(Amounts in 000s)
Year Ended
December 31 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses, Net of
Reinsurance $12,464 $15,732 $16,570 $19,089 $20,405 $27,744 $37,481 $47,712 $64,784 $81,901 $88,267
Net Reserve Re-estimated
as of:
One Year Later 11,609 15,167 15,492 17,160 18,425 25,668 30,134 51,483 70,014 79,781
Two Years Later 11,534 15,043 14,859 15,699 18,451 22,686 32,074 53,467 67,310
Three Years Later 11,292 14,397 13,841 15,202 16,871 21,154 31,880 52,418
Four Years Later 11,024 13,773 13,929 14,497 16,616 20,966 31,734
Five Years Later 10,886 13,758 13,663 14,393 16,505 20,688
Six Years Later 10,926 13,754 13,598 14,373 16,445
Seven Years Later 10,962 13,722 13,589 14,361
Eight Years Later 10,948 13,741 13,579
Nine Years Later 10,967 13,732
Ten Years Later 10,929
Net Cumulative
Redundancy
(Deficiency) $ 1,535 $ 2,000 $ 2,991 $ 4,728 $ 3,960 $ 7,056 $ 5,747 $(4,706) $(2,526) $ 2,120
=========================================================================================
Net Cumulative
Amount of
Reserve Paid
Through:
One Year Later $ 8,659 $11,210 $11,117 $10,937 $11,730 $ 9,684 $19,040 $31,471 $37,307 $42,795
Two Years Later 9,644 12,902 12,488 12,685 14,397 18,445 26,471 41,785 51,461
Three Years Later 10,461 13,355 12,965 13,588 15,923 19,930 29,237 47,434
Four Years Later 10,668 13,465 13,208 14,171 16,312 20,427 30,425
Five Years Later 10,739 13,595 13,471 14,307 16,381 20,558
Six Years Later 10,825 13,689 13,530 14,331 16,420
Seven Years Later 10,915 13,704 13,550 14,356
Eight Years Later 10,930 13,703 13,574
Nine Years Later 10,929 13,727
Ten Years Later 10,929
Net Reserve - December 31 $20,405 $27,744 $37,481 $47,712 $64,784 $ 81,901 $ 88,267
Reinsurance Recoverables 2,780 6,220 14,597 13,785 24,208 26,433 20,430
-------------------------------------------------------------
Gross Reserve-December 31 $23,185 $33,964 $52,078 $61,497 $88,992 $108,334 $108,697
=============================================================
Net Re-estimated Reserve $16,445 $20,688 $31,734 $52,418 $67,310 $ 79,781
Re-estimated Reinsurance 2,240 4,638 12,359 15,145 25,152 25,742
-----------------------------------------------------
Gross Re-estimated Reserve $18,685 $25,326 $44,093 $67,563 $92,462 $105,523
=====================================================
Gross Cumulative Redundancy (Deficiency) $ 4,500 $ 8,638 $ 7,985 $(6,066) $(3,470)$ 2,811
=====================================================
</TABLE>
5
<PAGE>
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. As
indicated in Management's Discussion and Analysis of Financial
Condition and Results of Operations, for 1998, 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 1998, from 25% of written
premium with a maximum of $50 million to 12.5% with a maximum of
$25 million.
Significant Customer
As indicated in Note 18 to the Company's 1998 consolidated financial
statements, in 1998 and 1997, respectively, revenues (including amounts
that are ultimately ceded to reinsurers) from one customer amounted to
$61,865,000 and $41,011,000. That customer is Greentree Financial
Corporation.
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 and Clearwater, Florida and
the Company's transportation subsidiaries lease offices in Metairie,
Louisiana. The Company owns a 292,000 square foot manufacturing,
warehouse and office facility which it leases to a non-affiliated third
party.
ITEM 3. Legal Proceedings.
Reference is made to Item 3 of the December 31, 1995 Registrant's Form
10-K concerning criminal litigation against M/G Transport Services,
Inc., a subsidiary of the Registrant. Upon Motion, the Court dismissed
six of the remaining eight counts against M/G, four of the six
remaining counts against one former employee and all of the remaining
counts against two former employees. The United States has appealed.
The Sixth Circuit Court of Appeals heard oral agreements on the appeal
by the United States in January, 1999 and has not yet rendered an
opinion. On October 31, 1997, M/G was fined $250,000 and placed on
two years' probation on the two remaining counts. The Company does not
expect any additional fines unless the United States is successful in
its appeal.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None during the fourth quarter.
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Security Holder
Matters. Incorporated by reference to pages 33 (Note 17) and 36 of the
Registrant's 1998 Annual Report to Shareholders. The number of holders
of the Company's common stock at December 31, 1998 was approximately
1,350. The Company's common stock is registered on the American Stock
Exchange (MLA).
ITEM 6. Selected Financial Data.
Incorporated by reference to pages 14 and 15 of the Registrant's 1998
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 the
Registrant's 1998 Annual Report to Shareholders.
6
<PAGE>
PART II (Continued)
ITEM 8. Financial Statements and Supplementary Data.
Incorporated by reference to pages 22 through 36 of the Registrant's
1998 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 11, 1999.
Executive Officers of the Company -
J. P. Hayden, Jr. - Age 69 - Chairman of the Executive Committee of
the Board
Michael J. Conaton - Age 65 - Vice Chairman
J. P. Hayden, III - Age 46 - Chairman and Chief Operating Officer
John W. Hayden - Age 41 - President and Chief Executive Officer
John I. Von Lehman - Age 46 - Executive Vice President, Chief
Financial Officer and Secretary
Kurt R. Schwamberger - Age 52 - Senior Vice President
Paul T. Brizzolara - Age 41 - Senior Vice President and Chief
Legal Officer
W. Todd Gray - Age 31 - 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, Kurt R. Schwamberger was elected Senior Vice President of
The Midland Company. Mr. Schwamberger joined the Company in 1996 as
President and Chief Operating Officer of American Modern Insurance
Group, Inc. (AMIG) and will continue in that position with AMIG.
Before joining AMIG in 1996, Mr. Schwamberger held executive management
positions in the insurance industry. Also in 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.
The Board of Directors of The Midland Company voted at their regular
meeting on March 5, 1998 to elect the following new executive officers
effective with the Company's Annual Shareholders' Meeting on April 9,
1998. Mr. J. P. Hayden, III was elected Chairman and Chief Operating
Officer of The Midland Company. Mr. John W. Hayden was elected
President and Chief Executive Officer of The Midland Company.
Mr. J. P. Hayden, Jr. was elected Chairman of the Executive Committee
of the Board. Mr. Michael J. Conaton was elected Vice Chairman of the
Board and Vice Chairman of the Company.
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.
7
<PAGE>
PART III (Continued)
ITEM 11. Executive Compensation.
Incorporated by reference to the Registrant's Proxy Statement dated
March 11, 1999.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Registrant's Proxy Statement dated
March 11, 1999.
ITEM 13. Certain Relationships and Related Transactions.
Incorporated by reference to the Registrant's Proxy Statement dated
March 11, 1999.
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, 1998 and 1997.
Consolidated Statements of Income for the Years
Ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.
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, 1998 13
Schedule II - Condensed Financial Information of
Registrant 14-18
Schedule III - Supplementary Insurance Information
for the Years Ended December 31, 1998, 1997 and 1996 19
Schedule IV - Reinsurance for the Years Ended
December 31, 1998, 1997 and 1996 20
Schedule V - Valuation and Qualifying Accounts for the
Years Ended December 31, 1998, 1997 and 1996 21
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations for the
Years Ended December 31, 1998, 1997 and 1996 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.
8
<PAGE>
PART IV (Continued)
(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.
10.1 The Midland Company 1992 Employee Incentive Stock
Plan and The Midland Company Stock Option Plan for
Non-Employee Directors and The Midland Company 1972
Stock Options Plan - Incorporated by reference to
Registrant's Statement 33-48511 on Form S-8.
10.2 A description of the Company's Profit Sharing Plan,
Salaried Employees' Non-Qualified Savings Plan and
the Supplemental Retirement Plan - Incorporated by
reference to the Registrant's Proxy Statement dated
March 11, 1999.
13. Annual Report to security holders - Incorporated by
reference to the Registrant's 1998 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 11, 1999.
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 1998.
9
<PAGE>
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 5, 1999
(J. P. Hayden, III) Chief Operating Officer
S/ John W. Hayden President and March 5, 1999
(John W. Hayden) Chief Executive Officer
S/ John I. Von Lehman Executive Vice President, March 5, 1999
(John I. Von Lehman) Chief Financial and
Accounting Officer
and Secretary
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
THE MIDLAND COMPANY
Signature Title Date
S/ George R. Baker Director March 5, 1999
(George R. Baker)
S/ James E. Bushman Director and Member March 5, 1999
(James E. Bushman) of Audit Committee
S/ James H. Carey Director and Member March 5, 1999
(James H. Carey) of Audit Committee
S/ Michael J. Conaton Vice Chairman March 5, 1999
(Michael J. Conaton)
S/ Jerry A. Grundhofer Director March 5, 1999
(Jerry A. Grundhofer)
S/ J. P. Hayden, Jr. Chairman of the Executive March 5, 1999
(J. P. Hayden, Jr.) Committee of the Board
S/ J. P. Hayden, III Chairman and March 5, 1999
(J. P. Hayden, III) Chief Operating Officer
S/ John W. Hayden President and March 5, 1999
(John W. Hayden) Chief Executive Officer
S/ Robert W. Hayden Director March 5, 1999
(Robert W. Hayden)
S/ William T. Hayden Director March 5, 1999
(William T. Hayden)
S/ William J. Keating Director March 5, 1999
(William J. Keating)
S/ John R. LaBar Director March 5, 1999
(John R. LaBar)
S/ David B. O'Maley Director March 5, 1999
(David B. O'Maley)
S/ John M. O'Mara Director and Member March 5, 1999
(John M. O'Mara) of Audit Committee
S/ Glenn E. Schembechler Director and Member March 5, 1999
(Glenn E. Schembechler) of Audit Committee
S/ John I. Von Lehman Executive Vice President, March 5, 1999
(John I. Von Lehman) Chief Financial and Accounting
Officer, Secretary and Director
11
<PAGE>
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 11, 1999, 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,
1998.
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 5, 1999
12
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule I - Summary of Investments
Other than Investments in Related Parties
December 31, 1998
Column A Column B Column C Column D
- --------------------------------------------------------------------------------------------------------
Amount at
Which Shown
in the Balance
Type of Investment Cost Value Sheet
- --------------------------------------------------------------------------------------------------------
<C> <C> <C>
Fixed maturity securities, available-for-sale:
Bonds:
United States Government and government
agencies and authorities $170,035,000 $174,031,000 $174,031,000
States, municipalities and political subdivisions 161,699,000 165,966,000 165,966,000
Mortgage-backed securities 15,422,000 15,570,000 15,570,000
Foreign governments 504,000 508,000 508,000
Public utilities 8,289,000 8,353,000 8,353,000
All other corporate bonds 53,289,000 54,258,000 54,258,000
------------------------------------------------
Total 409,238,000 418,686,000 418,686,000
------------------------------------------------
Equity securities, available-for-sale:
Common stocks:
Public utilities 1,044,000 1,498,000 1,498,000
Banks, trusts and insurance companies 5,817,000 82,243,000 82,243,000
Industrial, miscellaneous and all other 26,584,000 48,801,000 48,801,000
Nonredeemable preferred stocks 4,000,000 3,914,000 3,914,000
------------------------------------------------
Total 37,445,000 136,456,000 136,456,000
------------------------------------------------
Accrued interest and dividends 6,434,000 6,434,000 6,434,000
------------------------------------------------
Short-term investments 28,594,000 28,594,000 28,594,000
------------------------------------------------
Total Investments $481,711,000 $590,170,000 $590,170,000
================================================
</TABLE>
13
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheet Information
December 31, 1998 and 1997
ASSETS 1998 1997
------------- -------------
Cash $ 96,000 $ 236,000
------------- -------------
Marketable Securities Available
for Sale (at market value):
Fixed Income (cost, $497,000 in 1998
and $2,427,000 in 1997) 497,000 2,427,000
Equity (cost, $341,000 in 1998 and
$354,000 in 1997) 3,937,000 2,456,000
------------- -------------
Total 4,434,000 4,883,000
------------- -------------
Receivables - Net 8,932,000 7,010,000
------------- -------------
Property, Plant and Equipment (at cost): 37,314,000 35,878,000
Less Accumulated Depreciation 5,439,000 3,552,000
------------- -------------
Net 31,875,000 32,326,000
------------- -------------
Other Real Estate - Net 8,700,000 14,779,000
------------- -------------
Other Assets 4,862,000 3,720,000
------------- -------------
Investments in Subsidiaries ( at equity) 247,569,000 197,206,000
------------- -------------
Total Assets $306,468,000 $260,160,000
============= =============
14
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheet Information
December 31, 1998 and 1997
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
------------- -------------
Notes Payable Within One year:
Banks (including current portion of
long-term debt) $ 16,710,000 $ 25,425,000
Commercial Paper 6,522,000 5,791,000
------------- -------------
Total 23,232,000 31,216,000
------------- -------------
Other payables and Accruals 4,664,000 3,403,000
------------- -------------
Intercompany Payables 3,469,000 501,000
------------- -------------
Long - Term Debt 26,271,000 28,014,000
------------- -------------
Shareholders' Equity:
Common Stock - No Par (issued and
outstanding: 9,352,000 shares at
December 31, 1998 and 9,334,000 shares
at December 31, 1997 after deducting
treasury stock of 1,576,000 shares
and 1,594,000 shares, respectively) 911,000 911,000
Additional Paid - in Capital 15,947,000 15,359,000
Retained Earnings 178,398,000 153,797,000
Accumulated Other Comprehensive Income 70,507,000 44,123,000
Treasury Stock (at cost) (15,293,000) (14,704,000)
Unvested Restricted Stock Awards (1,638,000) (2,460,000)
------------- -------------
Total 248,832,000 197,026,000
------------- -------------
Total Liabilities and
Shareholders' Equity $306,468,000 $260,160,000
============= =============
15
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Statements of Income Information
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------- ------------- -------------
Revenues:
Dividends from Subsidiaries $ 3,000,000 $ 8,900,000 $ 20,500,000
All Other Income, Primarily Charges
to Subsidiaries 6,934,000 7,746,000 7,876,000
------------- ------------- -------------
Total Revenues 9,934,000 16,646,000 28,376,000
------------- ------------- -------------
Expenses:
Interest Expense 3,971,000 4,775,000 5,101,000
Depreciation and Amortization 2,701,000 6,195,000 2,548,000
All Other Expenses 2,303,000 833,000 2,033,000
------------- ------------- -------------
Total Expenses 8,975,000 11,803,000 9,682,000
------------- ------------- -------------
Income Before Federal Income Tax 959,000 4,843,000 18,694,000
Provision (Credit) for Federal
Income Tax (1,023,000) (1,599,000) (654,000)
------------- ------------- -------------
Income Before Change in Undistributed
Income of Subsidiaries 1,982,000 6,442,000 19,348,000
Change in Undistributed Income
of Subsidiaries:
From Continuing operations 24,950,000 17,925,000 (15,605,000)
From Discontinued operations - (6,817,000) (2,675,000)
------------- ------------- -------------
Net Income $ 26,932,000 $ 17,550,000 $ 1,068,000
============= ============= =============
16
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Statements of Cash Flows Information
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------- ------------- -------------
Cash Flows from Operating Activities:
Net income $ 26,932,000 $ 17,550,000 $ 1,068,000
Loss from discontinued operations - 6,817,000 2,675,000
------------- ------------- -------------
Income from continuing operations 26,932,000 24,367,000 3,743,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Decrease (increase) in undistributed
income of subsidiaries (24,950,000) (17,925,000) 15,605,000
Depreciation and amortization 2,701,000 6,195,000 2,548,000
Increase in other assets (1,142,000) (1,286,000) (1,359,000)
Decrease (increase) in receivables (1,922,000) 134,000 689,000
Increase in other payables and
accruals 153,000 1,575,000 90,000
Other - net 301,000 4,000 (592,000)
------------- ------------- -------------
Net Cash Provided by
Operating Activities 2,073,000 13,064,000 20,724,000
------------- ------------- -------------
Cash Flows from Investing Activities:
Acquisition of property, plant and
equipment (1,657,000) (2,617,000) (1,516,000)
Capital contributions to
subsidiaries - (12,326,000) -
Sale of property, plant and
equipment and other real
estate - net 5,969,000 535,000 66,000
Change in investments (excluding
unrealized appreciation/depreciation) 1,943,000 (1,991,000) 7,690,000
------------- ------------- -------------
Net Cash Provided by (Used in)
Investing Activities 6,255,000 (16,399,000) 6,240,000
------------- ------------- -------------
Cash Flows from Financing Activities:
Net change in intercompany accounts 2,968,000 7,323,000 (21,363,000)
Increase (decrease) in long - term
debt (1,458,000) 948,000 (767,000)
Decrease in short - term borrowings (8,269,000) (2,909,000) (2,920,000)
Dividends paid (1,746,000) (2,677,000) (1,962,000)
Net issuance (purchase) of treasury
stock 37,000 619,000 75,000
------------- ------------- -------------
Net Cash Provided by (Used in)
Financing Activities (8,468,000) 3,304,000 (26,937,000)
------------- ------------- -------------
Net Increase (Decrease) in cash (140,000) (31,000) 27,000
Cash at Beginning of Year 236,000 267,000 240,000
------------- ------------- -------------
Cash at End of Year $ 96,000 $ 236,000 $ 267,000
============= ============= =============
17
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Notes to Condensed Financial Information
For the Years Ended December 31, 1998 and 1997
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes included in the
Registrant's 1998 Annual Report to Shareholders.
Total debt of the Registrant (parent only) consists of the following:
DECEMBER 31,
1998 1997
------------- -------------
Short - Term Bank Borrowings $ 15,000,000 $ 24,000,000
Commercial Paper 6,522,000 5,791,000
Mortgage Notes:
7.10% - Due January 1, 2001 1,227,000 1,773,000
6.83% - Due December 20, 2005 19,195,000 19,768,000
5.40% - Due December 1, 2003 7,559,000 7,898,000
Total Debt $ 49,503,000 $ 59,230,000
See Notes 8 and 9 to the consolidated financial statements included in the 1998
Annual Report to Shareholders for further information on the Company's
outstanding debt at December 31, 1998.
The Amount of debt that becomes due during each of the next five years is as
follows: 1999 - $1,710,000; 2000 - $1,806,000; 2001 - $1,215,000;
2002 - $1,266,000; 2003 - $6,331,000.
18
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For the Years Ended December 31, 1998, 1997 and 1996
(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)
-----------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
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
=========================================================================================
1996
Manufactured Housing $ 34,492 $ 42,547 $ 183,792 $ 182,581 $ 12,303
Other Insurance 10,850 53,283 24,625 98,033 6,756
Unallocated Amounts 14
Inter-segment Elimination (804)
-----------------------------------------------------------------------------------------
Total $ 45,342 $ 95,830 $ 208,417 $ - $ 280,614 $ 18,269
=========================================================================================
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
-------------------------------------------------------------------------
<C> <C> <C> <C>
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
================================================ ==========
1996
Manufactured Housing $ 101,223 $ 54,761 $ 20,477 $ 205,933
Other Insurance 71,203 26,772 20,878 86,600 (2)
Unallocated Amounts
Inter-segment Elimination
------------------------------------------------ ----------
Total $ 172,426 $ 81,533 $ 41,355 $ 292,533
================================================ ==========
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 ($2,237, $2,738 and $2,178 for 1998, 1997
and 1996, respectively) insurance.
</TABLE>
19
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule IV - Reinsurance
For the Years Ended December 31, 1998, 1997 and 1996
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
-----------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
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 $ 9,712,000 $ 3,520,000 $ 235,000 $ 6,427,000 3.7%
Property & Liability Insurance 394,166,000 60,573,000 35,458,000 369,051,000 9.6%
-----------------------------------------------------------------------------------
Total Premiums $403,878,000 $ 64,093,000 $35,693,000 $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%
===================================================================================
1996
- ----
Life Insurance in Force $327,473,000 $163,604,000 $ 5,730,000 $169,599,000 3.4%
===================================================================================
Insurance Premiums and
Other Considerations:
Life and Health Insurance $ 7,813,000 $ 4,072,000 $ 1,004,000 $ 4,745,000 21.2%
Property & Liability Insurance 347,259,000 92,674,000 21,284,000 275,869,000 7.7%
-----------------------------------------------------------------------------------
Total Premiums $355,072,000 $ 96,746,000 $22,288,000 $280,614,000 7.9%
===================================================================================
</TABLE>
20
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule V - Valuation and Qualifying Accounts
For the Years Ended December 31, 1998, 1997 and 1996
ADDITIONS
CHARGED
BALANCE AT (CREDITED) TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (ADDITIONS) OF PERIOD
- --------------------------------------------------------------------------------
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
YEAR ENDED DECEMBER 31, 1996:
Allowance For Losses $ 863,000 $ (50,000) $ 14,000 (1) $ 799,000
NOTES:
(1) Accounts written off are net of recoveries.
21
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations
For the Years Ended December 31, 1998, 1997 and 1996
(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
- ----------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Consolidated
Property-Casualty
Subsidiaries
1998 $ 59,736 $ 121,154 $ - $ 236,171 $ 369,051 $ 22,468
=========== =========== ========== =========== =========== ===========
1997 $ 52,198 $ 116,898 $ - $ 222,530 $ 305,555 $ 20,018
=========== =========== ========== =========== =========== ===========
1996 $ 42,308 $ 92,940 $ - $ 190,071 $ 275,869 $ 17,161
=========== =========== ========== =========== =========== ===========
Column H Column I Column J Column K
Claims and
Claim
Adjustment
Expenses Amortization
Incurred of Deferred Paid Claims
Affiliation Related to Policy and Claim
with Current Prior Acquisition Adjustment Premiums
Registrant Year Years Costs Expenses Written
- -------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Consolidated
Property-Casualty
Subsidiaries
1998 $ 208,811 $ (2,120) $ 100,190 $ 200,325 $ 391,770
=========== ========== =========== =========== ===========
1997 $ 163,035 $ 5,230 $ 77,100 $ 151,148 $ 342,711
=========== ========== =========== =========== ===========
1996 $ 166,554 $ 3,771 $ 79,100 $ 153,253 $ 290,355
=========== ========== =========== =========== ===========
</TABLE>
22
THE MIDLAND COMPANY 1998 ANNUAL REPORT
Inside Cover
COMPANY PROFILE
The Midland Company is a highly focused provider of specialty insurance products
and services with a profitable investment in a niche transportation business.
The company has produced a track record of extraordinary results by building on
the entrepreneurial spirit and commitment of its associates.
The company's M/G Transport Services Group (M/G) subsidiaries, which contribute
the remaining portion of revenue, represent a profitable investment in a niche
transportation business. Since the sale of approximately two-thirds of its
assets in December 1994, M/G has increased operating income by 10.5% and yielded
more than $4.8 million in operating cash flow during 1998.
Midland management is focused on a clear, concise, compelling strategic course
designed to help it exceed the insurance industry's rates of growth and
profitability. Key elements of the company's growth and profit strategies
include:
- Specialized underwriting expertise - AMIG has unsurpassed knowledge of
and experience in the manufactured housing market.
- Strong competitive position - A diverse product line, strong customer
relationships and underwriting expertise help AMIG maintain its market
leadership position.
- Risk diversification - Geographic, product and distribution channel
diversification aid in limiting AMIG's exposure to catastrophes.
- Claims management - Internal claims management contributes to AMIG's
strong underwriting results.
- Growth opportunities - Introduction of new products, including new
fee-based services, into new markets is expected to contribute to a
continuation of AMIG's strong growth rate.
- Cash flow from transportation business - M/G's healthy return on invested
capital makes it a lucrative investment for Midland.
- Emphasis on total return investment strategy - A conservative investment
strategy is designed to generate long-term capital appreciation with
reasonable current income.
This page cotains a pie chart:
BUSINESS MIX (Revenues)
AMIG - $408.2 million
M/G - $33.1 million
American Modern Insurance Group (AMIG), a highly focused provider of
specialty insurance products and services, provides The Midland Company with
more than 90% of its revenue. AMIG specializes in writing physical damage
insurance and related coverages on manufactured hosing and has expanded into
other areas of specialty insurance.
The remainder of revenue is contributed by M/G Transport, also a
specialty business, which charters barges for the movement of dry cargos on the
inland waterways.
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.
<PAGE>
FINANCIAL HIGHLIGHTS
THE MIDLAND COMPANY AND SUBSIDIARIES
For the Years Ended December 31, 1998 1997 % Change
- ------------------------------------------------------------------------------
Operating Performance
Revenues from Continuing Operations $ 442,362 $ 373,768 18.4%
Income from Continuing Operations Before
Federal Income Tax $ 37,527 $ 34,703 8.1%
Operating Income from Continuing Operations $ 22,802 $ 21,657 5.3%
Capital Gains (After-Tax) $ 4,130 $ 2,710 52.4%
Net Income (Loss):
From Continuing Operations $ 26,932 $ 24,367 10.5%
From Discontinued Operations - (6,817)
---------------------
Total $ 26,932 $ 17,550 53.5%
=====================
Per Share Data
Operating Income from Continuing
Operations (Diluted) $ 2.42 $ 2.33 3.9%
Net Income (Loss) - Basic:
From Continuing Operations $ 2.99 $ 2.72 9.9%
From Discontinued Operations - (.76)
---------------------
Total $ 2.99 $ 1.96 52.6%
=====================
Average Shares Outstanding 9,018 8,956
Net Income (Loss) - Diluted:
From Continuing Operations $ 2.86 $ 2.63 8.7%
From Discontinued Operations - (.74)
---------------------
Total $ 2.86 $ 1.89 51.3%
=====================
Average Shares Outstanding 9,412 9,292
Cash Dividends $ .25 $ .23 8.7%
Book Value $ 26.61 $ 21.11 26.1%
Financial Position
Total Assets $ 837,220 $ 760,463 10.1%
Shareholders' Equity $ 248,832 $ 197,026 26.3%
Performance Ratios
Combined Ratio (AMIG Property and
Casualty Companies) 96.9% 95.8%
Return on Beginning Equity -
Continuing Operations 13.7% 15.3%
Total Return on Beginning Equity
Including Net Unrealized Gain and
Loss - Continuing Operations 27.1% 28.1%
TABLE OF CONTENTS
Financial Highlights 1
Letter to Shareholders 2-5
Focus on Specialty Markets 6-7
Focus on Differentiation 8-9
Focus on Lucrative Investment 10-11
Focus on Conservative Investment Strategy 12-13
Six Year Financial Summary Data 14-15
Management's Discussion and Analysis 16-21
Private Securities Reform Act of 1995 -
Forward Looking Statements Disclosure 21
Income Statements 22
Balance Sheets 23
Changes in Shareholders' Equity 24
Cash Flows 25
Notes to Financial Statements 26-34
Management's Report 35
Independent Auditors' Report 35
Quarterly Data and Other Information 36
Officers and Directors 37
This page includes a five year bar chart with the following data:
NET INCOME AND NET OPERATING INCOME PER SHARE (Continuing Operations)
94 95 96 97 98
Operating Income $1.11 $1.57 $0.22 $2.33 $2.42
Net Income 1.27 1.74 0.41 2.63 2.86
1998 results continued the company's strong record, with net income from
continuing operations rising 10.5% to a record $26.9 million or $2.86 per share
(diluted).
1
<PAGE>
LETTER TO SHAREHOLDERS
Nineteen ninety eight was a milestone year for The Midland Company. It
celebrated its 60th anniversary, reported record results, passed the torch of
leadership to a new generation and implemented plans for future growth. It was
an emotional and exciting year filled with appreciation for all that has been
accomplished and anticipation of an even brighter future.
Early in the year, Midland's Board of Directors placed full
responsibility for day-to-day management in our hands. We appreciate their
confidence in our ability to lead the business successfully into the future and
are eager to prove that their confidence is well-placed. We gratefully
acknowledge the continued contributions of our father, J. P. Hayden, Jr.,
now Chairman of the Executive Committee of the Board, and Michael J. Conaton,
now Vice Chairman of the Board. We would also like to acknowledge the
retirement of J. R. LaBar and Robert W. Hayden, each of whom served the company
in various capacities throughout their 45 and 38 year careers, respectively.
We thank them for their many years of loyal service to the company.
It is with tremendous enthusiasm that we have assumed our new roles as
Chairman and Chief Operating Officer and as President and Chief Executive
Officer. We will, in the pages to follow, demonstrate to you that we indeed are
focused on a clear, concise and compelling strategic path designed to build on
Midland's extraordinary track record.
1998 RESULTS REFLECT BENEFIT OF FOCUSED STRATEGY
Results for the company's first year of performance under our care were very
satisfying. For the second consecutive year, net income from continuing
operations was a record, reaching $26.9 million, up 10.5% from 1997, on an
increase in revenues from continuing operations to $442.4 million from
$373.8 million. Net income per share from continuing operations reached $2.86
per share (diluted), compared with $2.63 per share (diluted), while return on
beginning equity was 13.7% vs. 15.3% a year earlier.
Net operating income from continuing operations (net income excluding
capital gains) reached a record $22.8 million, or $2.42 per share (diluted), up
from $21.7 million, or $2.33 (diluted), while pre-tax investment income,
excluding capital gains, rose 12% to $23.9 million. These strong results were
driven by solid performance in each of our operating units, as well as from
American Modern Insurance Group's (AMIG) investment portfolio.
Strong Performance for American Modern Insurance Group - Direct and
assumed written premiums generated by AMIG increased 5.4% for 1998 to
$458 million, while net earned premiums rose 20.7% to $375 million. The primary
driver of growth in written premiums was continued volume
This page includes a bar chart with the following data:
AMIG PROPERTY & CASUALTY 10-YEAR COMPOUNDED ANNUAL PREMIUM GROWTH
AMIG 15.7%
Industry 3.4%
AMIG has a track record of extraordinary success - consistently outperforming
the property and casualty insurance industry by leveraging its unsurpassed
knowledge of the specialty markets it serves. Over the past ten years, AMIG's
premiums have compounded at a rate more than four times the estimated industry
average.
2
<PAGE>
increases in manufactured housing and related coverages, where direct and
assumed premium written growth was above 13%.
As the year progressed, premium growth in key specialty markets,
including manufactured housing, watercraft and recreational vehicles, was offset
by declines in several less profitable specialty commercial lines markets where
we had intentionally reduced our exposure or even exited various portions of the
business. The benefits of these decisions were clear as overall premium growth
continued and profitability - as measured by the combined ratio (ratio of losses
and expenses as a percent of earned premiums) - was substantially better than
industry averages.
For the year, AMIG's property and casualty combined ratio was 96.9% vs.
95.8% in 1997, with total weather-related catastrophe losses at $34 million on a
pre-tax basis compared with an unusually low $14 million in 1997. Excluding
catastrophe losses, the combined ratio for the year was 87.7% vs. 91.3% in 1997,
reflecting our focus on designing and pricing all AMIG products to yield at
least a 5% underwriting margin. Our disciplined approach to underwriting - and
to risk management - has allowed us to consistently produce an underwriting
profit.
Continued Contribution from M/G Transport Services Group (M/G) - For the
year, M/G reported revenue of $33.1 million, compared with $34.9 million, and
pre-tax operating profits of $4.4 million, essentially unchanged from 1997. The
lower revenue and level operating profits were predominantly due to a decline,
late in the year, in shipments of barite, a drilling mud used by the oil
industry, that was not offset by other types of shipments by year-end 1998.
Barite shipments are impacted by the level of oil drilling, which has been
declining due to the lower oil prices.
M/G's after-tax contribution to net income, however, was down only
slightly for the year, at $3.0 million, or 32 cents per share (diluted),
compared with $3.1 million, or 34 cents per share (diluted), for the prior year.
Cash flow from operations remained strong at $4.8 million and M/G generated a
15.7% return on beginning equity.
Investment Income Up 12% - AMIG's investment portfolio continues to be
conservatively invested in equity and high quality fixed income securities. The
value of the portfolio grew by more than $91 million in 1998, due to the
generation of substantial cash flow from operations as well as market
appreciation of the portfolio. Pre-tax capital gains for the year were
$6.4 million, up from $4.2 million last year. Net unrealized portfolio gains
contributed approximately $26 million to the increase in shareholders' equity in
1998. Coupling the net unrealized gains on marketable securities with our strong
net income brought total comprehensive income for 1998 to $53.3 million, which
equates to a total return on beginning shareholders' equity of 27.1%, up from
$38.1 million, or 23.9%, in 1997.
Balance Sheet Remains Strong - In part due to the significant gains in
our investment portfolio, as well as the strong operating performance, we ended
the year with the strongest balance sheet in the company's history. Total
assets at year end were $837 million, with shareholders' equity at a record
$249 million, or $26.61 per share.
BUILDING ON THE TRACK RECORD
The results recorded for 1998 were pleasing, but not surprising. They were the
result of the vision on which we are focused - to create a sustainable
competitive advantage by providing our customers with products, services and
relationships they value more than those offered by our competitors and to
share that success with shareholders. On the following pages, this report
provides details on The Midland Company's operating subsidiaries, their
competitive strengths and growth opportunities. Our focus is on a select number
of strategies designed to capitalize on those advantages to become an even more
indispensable partner to customers in our chosen markets and to achieve
This page includes two bar charts with the following data:
AMIG 10-YEAR AVERAGE ROE
AMIG 14.4%
Industry 7.7%
Strong growth, combined with a disciplined approach to underwriting and to
claims management, has helped AMIG exceed industry returns. Over the past 10
years, AMIG's return on beginning equity has averaged 14.4% compared with an
estimated 7.7% average for the industry.
M/G TRANSPORT ROE
94 95 96 97 98
M/G TRANSPORT 6.5% 4.8% 5.7% 20.0% 15.9%
Since the sale of approximately two-thirds of its assets in December 1994,
M/G has proven its value as a lucrative investment for Midland.
3
<PAGE>
our long-term financial objectives.
Achieve Deeper Penetration of Existing Products Within Existing
Markets - Our first opportunity for continued growth is to capture a larger
share of the market for our existing products in the niches we presently are
serving. While we are widely recognized as a market leader in manufactured
housing insurance, we have tremendous growth potential by simply doing more in
the markets we are already serving with the products we already have. Our
recent track record serves as compelling evidence that we are beginning to
realize some of this potential.
Take Existing Products and Services Into New Markets - Further, we have
the opportunity to move into new markets with our existing assortment of
products and services to fill real consumer needs. Clear evidence of this is
provided by our recent focus on Arizona with our traditional manufactured
housing product/service offering. In less than two years we have been able to
more than triple the number of manufactured housing policies written in
Arizona.
Develop Complementary or Related Products - Our commercial park and
dealer package programs in the manufactured housing segment illustrate our
ability to identify a market need and develop products specifically designed to
address that need. We see a number of similar opportunities on the horizon that
will enable us to become an even more indispensable partner to our customers by
expanding into complementary or related products.
Expand Within Existing Distribution Channels - By continually searching
for new ways to bring additional value-adding products and services for our many
and varied business partners, we have successfully grown our portfolios with
each. We work hard to maximize the performance of all our existing
relationships and are endeavoring to truly become their indispensable partner.
We are also diligent in our efforts to uncover opportunities to selectively add
to our distribution base.
Explore New Distribution Methodologies - The people with whom we do
business are creative entrepreneurs, each seeking to maximize their business
prospects. The pyramiding of these talents affords us numerous opportunities to
expand existing business relationships beyond traditional approaches to their
respective businesses. Such outside-the-box thinking has allowed us to expand
our business horizons beyond those created in a purely linear business
environment.
Capitalize on Non-Risk, Fee Income/Service Opportunities - In addition,
the special expertise that we bring to the table, and our long-standing
relationships with important players in each distribution channel, present us
with new opportunities. For example, Ameritrac, AMIG's in-house loan and lease
tracking service, allows us to meet a vital need of our lending customers.
Today we are tracking and servicing approximately 1.5 million loan and lease
accounts for more than 40 financial institutions. We continually are evaluating
the needs of our customers for additional value-added services. Moving forward,
we intend to increase our focus on identifying those opportunities that have the
potential to generate
This page includes a picture with the following caption:
From left, Joseph P. Hayden III, Chairman and Chief Operating Officer and
John W. Hayden, President and Chief Executive Officer
4
<PAGE>
fee-based revenue, which can be an effective use of capital outside the
regulated insurance industry.
Lucrative Transportation Operations - While we are constantly evaluating
potential expansions of our M/G business, we believe that its focused and
efficient staff of 15 can continue to benefit Midland by generating strong cash
flow and return on equity. M/G has demonstrated a consistency in its ability to
outperform the markets in which it competes, even under the most adverse market
conditions.
RECOGNIZING IMPORTANT CONTRIBUTIONS
Our specialty mindset, combined with the entrepreneurial spirit and genuine
commitment of our associates, over time will produce consistently superior
results. We strive to recognize the efforts and contributions of our associates
on a daily basis, but do not want to miss this opportunity to thank them again
for all they do to set us apart from our competitors.
With respect to our Board of Directors, we are blessed with a group of
talented and devoted individuals who collectively make a real difference in our
company. We were most fortunate during the year to welcome two new members to
our Board: Jerry A. Grundhofer, president and chief executive officer of
Firstar Corporation, and David B. O'Maley, chairman, president and chief
executive officer of Ohio National Financial Services. Their experience and
insight will be valuable to Midland as we move forward with our strategic plan.
EXCITING FUTURE, STRONG BASE
We are intent on continuing to differentiate Midland through its people,
products and services. We have a deep knowledge and understanding of the
markets we serve. We will build on these strengths by giving our talented
associates and business partners the tools they need to achieve extraordinary
results; results we will share with our shareholders as reward for the
confidence they have placed in us. As evidence of our efforts to continue to
enhance shareholder value, the board voted in January 1999 to increase the
indicated annual dividend to shareholders by 8%, the 13th consecutive year in
which The Midland Company has increased its annual dividend.
Thank you for your continued confidence and support. We are gratified
by the results we are honored to share with you in this report and we are
excited by what your company's future holds. We look forward to sharing our
story with you in future communications.
/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 11, 1999
This page includes a bar chart with the following data:
GROWTH IN ASSETS AND EQUITY (millions)
94 95 96 97 98
Assets $479.5 $600.9 $656.0 $760.5 $837.2
Equity 132.4 156.6 159.7 197.0 248.8
AMIG's disciplined approach to growth and underwriting, as well as a
conservative managed investment portfolio and the contribution of M/G, brought
Midland's assets and equity to record levels again in 1998.
5
<PAGE>
FOCUS ON SPECIALTY MARKETS
Midland's specialty insurance operations, American Modern Insurance Group
(AMIG), enjoyed another successful year in 1998. Widely recognized as an
established leader in the manufactured housing insurance sector, AMIG derives
nearly 70% of its premium volume from this unique market segment. Management
believes substantial opportunities exist for continued growth in the
manufactured housing niche, as well as other specialty markets AMIG has
successfully entered over the past ten years. Key to AMIG's success will be
its ability to identify niche markets where it can leverage its specialty
mindset along with the entrepreneurial energy of its associates.
SPECIALTY MARKETS AS DEFINED BY AMIG
AMIG prides itself in targeting those specialty markets where frequency of loss,
rather than severity of loss, is the norm. AMIG consistently has demonstrated
its competency in processing high volumes of lower premium value transactions
and has aggressively targeted product and market segments that lend themselves
to that characteristic.
The manufactured housing segment, in which AMIG has increased premiums
at a 20% rate over the past five years, is a classic example. With an average
premium of $415 or less per policy, and fairly unique customer cross-sell
criteria, the manufactured housing insurer must be able to process high volumes
of transactions very efficiently. AMIG has proven itself a very capable player
in this regard and is continually refining its processes in its efforts to stay
ahead of its customers' constantly changing needs.
The growth outlook for the manufactured housing insurance market remains
strong,
This page contains a bar chart with the following data:
AMIG PROPERTY & CASUALTY PREMIUM VOLUME (millions)
94 95 96 97 98
AMIG PROPERTY & CASUALTY $275.5 $376.3 $387.2 $424.0 $446.2
Over the last five years, AMIG's direct and assumed written premiums have grown
at a compound annual rate of 15.4% reflecting continued penetration of the
manufactured housing sector and growth in other specialty markets.
This page also contains two photos of Manufactured Homes with the following
caption:
Consumer acceptance of manufactured homes is growing, in part due to
improvements in their exterior and interior features. Many now offer spacious
kitchens, multiple bathrooms, vaulted ceilings, fireplaces, utility rooms and
large closets, with floor plans that can measure more than 2,000 square feet.
6
<PAGE>
driven by the favorable demographics of the manufactured housing industry in
total. According to the U.S. Census Bureau, as of July 1997, manufactured
housing accounted for 23.6% of total single-family housing starts and 29.4% of
new single-family unit sales. During the past two decades, the typical
manufactured home and the lifestyle that accompanies it has been constantly
upgraded and the $38,000 average price of a manufactured home compares favorably
with the $124,000 average price for a site-built home. In a nutshell,
manufactured housing, while still a specialty market, is here to stay.
REACHING INTO NEW SPECIALTY MARKETS
The manufactured housing market provides AMIG with the financial resources to
grow and AMIG has been successful in its efforts to achieve a presence in other
specialty markets. For example, since its first foray into the specialty water
craft insurance market in 1990, AMIG has clearly established itself as an
industry player. Specializing in generally lower-valued, lower-powered
watercraft, AMIG has built a highly credible portfolio of marine business, and
is recognized widely as an industry expert and leader in the personal watercraft
insurance market.
AMIG's growing specialty dwelling portfolio is generally targeted at the
dwelling business that is around the periphery of the traditional homeowners
insurance market. AMIG prefers to avoid the traditional dwelling market
segment, as homeowners' insurance is among the least profitable sectors of the
property and casualty insurance industry. Instead, AMIG focuses on more
limited specialty dwelling market niches where coverages are less comprehensive
and price competition is less severe. This group of products is a natural fit
for AMIG's core property insurance policy management systems and has proven to
be a solid performer since AMIG's first venture into it in 1987.
AMIG also is experiencing encouraging results in many of its other
product areas, including recreational vehicles, specialty and collectible auto,
long-haul truck physical damage, collateral protection, mortgage fire and
commercial manufactured housing park and dealer.
FEE INCOME OPPORTUNITIES
In addition to premium-generating insurance products, AMIG is beginning to see
results from its efforts to expand its offering of non-risk related, fee
income-generating services. Evidence of this can be found in the results of
Ameritrac, AMIG's wholly owned loan and lease portfolio, collateral tracking
operation. Ameritrac now services over 1.5 million loan and lease accounts for
more than 40 financial institutions. Ameritrac continues to expand its service
offerings and now provides flood determinations, agent portfolio conversions,
direct mail, marketing and payment processing through electronic fund transfers.
LOOKING AHEAD
By maintaining its specialty mindset, AMIG has been able to increase its direct
and assumed written premiums at a compound annual rate of 16% over the past five
years. Management believes that, with its team of motivated associates, AMIG
can identify and leverage specialty market opportunities that will result in
continued growth in years to come.
This page includes a pie chart with the following data (amounts in millions):
AMIG PRODUCT MIX (Gross Written Premiums)
Manufactured Homes $297.3
Park & Dealer 33.4
Site Built Dwelling 29.1
Collateral Protection 26.8
Watercraft 18.1
Mortgage Fire 9.7
Long Haul Truck 11.8
Credit Life & Related 12.3
All Other 20.2
AMIG is a leader in the manufactured housing insurance market and also offers
many other specialty lines.
7
<PAGE>
FOCUS ON DIFFERENTIATION
AMIG's core business strategy within its targeted specialty markets is
differentiation. As a provider of specialty products and services seeking to
establish partnerships with its customers, AMIG has built a sustainable
competitive advantage by providing its business partners and end-use customers
with products, services and relationships they value more than those offered by
its competitors. By continuously refining this approach, AMIG believes it can
maintain its combined ratio, a measure of overall insurance profitability, well
below the property and casualty industry average.
SPECIALTY FOCUS CONTRIBUTES TO SUCCESS
AMIG is known in the insurance industry as a specialty company, providing highly
specialized products and services to unique markets where opportunities exist
for reasonable production and profitable returns. Competition in these
specialty markets is often less severe and can be more readily predicted.
Therefore, while the property and casualty insurance industry as a whole
generally is over-capitalized and producing less attractive returns than other
industry groups, the specialty insurance companies are growing at a far greater
rate than their industry counterparts and producing returns worthy of investor
interest.
AMIG, for instance, has generated a ten-year compound annual growth rate
of 15.7%, while the property and casualty industry in total has averaged just
3.4%. Over the same period, AMIG's statutory combined ratio has averaged 96.3%,
well below the property and casualty industry estimated average of 106.3% as
reported by A.M. Best Company. Translated into a return on beginning equity
benchmark, AMIG has averaged 14.4% over the
This page includes a bar chart with the following data:
AMIG PROPERTY & CASUALTY UNDERWRITING RESULTS (Statutory Combined Ratio)
94 95 96 97 98
AMIG 96.0% 94.7% 103.0% 94.3% 96.6%
Industry 107.0% 104.9% 104.7% 99.9% 103.3%
All AMIG products are designed and priced to produce a 5% underwriting margin.
This disciplined approach to underwriting - and to risk management - has
allowed AMIG to outperform the industry in each of the past five years.
This page also includes a photo with the following caption:
Classroom training for new adjusters helps guarantee their familiarity with the
company's coverages. AMIG utilizes a variety of examples and displays to
illustrate key points.
8
<PAGE>
past ten years, while the overall industry has struggled to achieve a return on
equity estimated in the range of 7.7%.
DIFFERENTIATION ENHANCES PROFITABILITY
While AMIG will be cost effective in all areas of its business, it does not
expect to generate those results and create a competitive advantage by being
the total low-cost provider across its array of products and services. Instead,
all AMIG products are designed and priced to produce at least a 5% underwriting
margin based on AMIG's experience in its specialty markets. AMIG focuses on
this pricing level because it targets markets where frequency of loss, rather
than severity of loss, is the norm. In particular, in the manufactured housing
insurance market, AMIG's history in the industry gives it a unique advantage in
distributing, pricing and assessing risk for coverages.
SUPERIOR CLAIMS MANAGEMENT
AMIG also differentiates itself with superior claims management systems. In the
early 1990's, AMIG instituted an in-house staff adjuster training program that
is among the best in the industry. Under this program, people are hired out of
their local markets and brought to AMIG's headquarters for five weeks of
rigorous training in all of the types of coverages, and potential related
losses, that it provides. This is followed by extensive in-the-field training
and supervision.
The benefits of this effort are seen daily by AMIG. With 139 employee
field adjusters, AMIG was able to handle 81% of all 1998 claims in-house and
settled 86% of property claims within 30 days. Outside adjusters charge a fee
for settling claims for insurance companies and lack proper motivation to close
the files quickly. By utilizing experienced AMIG staff and by eliminating the
fees charged by these outside adjusters, AMIG is able to trim an average of $425
per claim from its handling costs, and has distinguished itself among customers
for its high quality service.
DISCIPLINED EXPOSURE MANAGEMENT
Another element of AMIG's success in generating consistent underwriting
profitability is a disciplined process that balances exposure management and
reinsurance costs with the potential impact on earnings. AMIG's sophisticated
tracking mechanisms regularly compare 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 that it has not assumed an unacceptable concentration of
risk in any geographic area. Using this information, AMIG evaluates its
reinsurance purchases and has distinguished itself as a solid partner in the
reinsurance community.
SUSTAINABLE COMPETITIVE ADVANTAGE
Through differentiation, AMIG has created a sustainable competitive advantage.
By continuing to provide its business partners and end-use customers with
products, services and relationships they value more than those offered by its
competitors, management believes AMIG can continue to outperform the overall
insurance industry in terms of growth and profitability.
This page contains a pie chart with the following data (amounts in millions):
AMIG DISTRIBUTION MIX
Wholesale $ 80.0
Retail 63.6
Commercial 32.8
Banks/Credit Unions 40.6
Dealer 105.3
Lender 136.2
AMIG continues to strengthen relationships with its loyal agency base as well as
lenders, dealers and others with which it has done business for many years.
These multiple distribution outlets provide AMIG with added insight into the
needs of its specialty insurance markets.
9
<PAGE>
FOCUS ON LUCRATIVE INVESTMENT
Midland's transportation services are provided by M/G Transport Services, Inc.,
which owns 276 jumbo hopper barges, and MGT Services, Inc., which represents the
sales and marketing arm of the operation (collectively referred to as M/G).
This highly focused specialty player in the customized dry cargo transportation
services market represents a lucrative investment for Midland. M/G, with
operations in New Orleans, La., is a barge affreightment company. Since the
sale of approximately two-thirds of its assets in December 1994, it has seen net
income rise 88% to $3.0 million for 1998 from $1.6 million for 1995. Management
believes that M/G can continue to provide the company with a positive
contribution as evidenced by M/G's operating cash flow of $4.8 million in 1998.
CUSTOMIZED DRY CARGO TRANSPORTATION SERVICES
M/G provides superior service to large, industrial clients, transporting dry
cargos such as petroleum coke, barite, sugar, fertilizer, iron ore, grain and
other commodities. The operations are concentrated on the Gulf Coast, but M/G
also services the inland river system. Customers appreciate the flexible
service that M/G can provide and M/G has become a major player in the movement
of both petroleum coke and sugar because of strong customer relationships.
The generally favorable economic climate, as well as the dynamics of
individual end markets, has driven some volume increases on the Gulf Coast and
inland waterways, but, late
This page contains a bar chart with the following data:
M/G TRANSPORT OPERATING CASH FLOW (millions)
95 96 97 98
M/G TRANSPORT $2.6 $2.9 $5.2 $4.8
A highly efficient organization combined with effective use of invested capital,
allows M/G to generate strong operating cash flow and positively contribute to
Midland's overall results.
This page also contains a photo with the following caption:
M/G serves its customers with a fleet of 276 jumbo hopper barges. To hold fixed
costs at a low level, M/G does not own any towboats.
10
<PAGE>
in 1998, shipments of barite fell below anticipated levels because of lower oil
prices. Barite is a drilling mud used by the oil industry to lubricate
drilling, which has declined in recent months. M/G experienced a modest decline
in revenues because of the barite dip, but because of the flexibility of the
company's operations and its relationships across many different industries,
M/G can offset shifts in individual markets over the longer term.
COMPANY-OWNED AND LEASED EQUIPMENT
M/G serves its customers with a fleet of 276 jumbo hopper barges owned, or
leased under long-term contracts, by the company. To supplement its owned and
leased barges, the company charters equipment or rents space from other
operators as necessary to fill customer needs. This provides the company with
operating flexibility, allowing it to ramp up capacity when demand rises and
trim expenses when business drops off. Looking forward, the company strives to
own or lease approximately half of the barges it requires to meet customer
needs. In 1999, M/G anticipates purchasing or leasing an additional 20 barges,
at a total cost of approximately $6.1 million, to keep its fleet at optimum
levels.
To hold fixed costs at a low level, M/G does not own any towboats, but
orchestrates all required pick-ups with hired towboats. This added flexibility
allows the company to focus on its customers' shipping requirements rather than
a towboat schedule.
EFFICIENT OPERATIONS
M/G fills an attractive niche for Midland, in particular because of the
efficiency of M/G's operations. Barges do not require human operators, and the
company's 15 office-based employees were able to generate $33.1 million in
revenue and $3.0 million in net income in 1998. The efficiency extends to M/G's
use of long-term debt and equity, which stood at $25.7 million at year-end 1998.
Management believes that anticipated capital expenditures for 1999 and beyond
can be funded from internally generated cash or bank debt.
This page contains a pie chart with the following data (amounts in millions):
M/G TRANSPORT MIX OF BUSINESS (Revenues)
Petroleum Coke $21.0
Sugar 2.9
Barite 2.1
Barge Charters 1.1
Miscellaneous 5.4
Diverse products such as petroleum coke, barite, sugar, fertilizer, iron ore,
grain and other commodities are transported by M/G's fleet of 276 jumbo hopper
barges.
11
<PAGE>
FOCUS ON CONSERVATIVE INVESTMENT STRATEGY
AMIG's investment portfolio continues to be conservatively invested in equity
and high quality fixed-income securities. The value of the portfolio grew by
more than $91 million in 1998, to $587 million from $495 million, due to the
generation of substantial cash flow from operations as well as market
appreciation of the portfolio. Pre-tax capital gains for the year were
$6.4 million, up from $4.2 million last year. Net unrealized portfolio gains
contributed approximately $26 million to the increase in shareholders' equity
in 1998. AMIG remains focused on the following three objectives for the
portfolio.
BALANCE SAFETY AND LIQUIDITY WITH TOTAL RETURN
As of year-end 1998, 77% of the portfolio was invested in fixed-income
securities with a weighted average quality of AA to AAA, a current average
maturity of 5.3 years and a 5.2% one-year after-tax total return. The remaining
23% was invested in a diverse mix of equities, including a large holding in
Firstar Corporation, which constitutes the company's largest equity investment.
The portfolio has no
This page contains three bar charts with the following data:
AMERICAN MODERN INSURANCE GROUP, INC.
INVESTMENT PORTFOLIO
MARKET VALUES (millions)
94 95 96 97 98
Government $101.3 $155.6 $172.2 $201.4 $177.1
Municipal 64.1 94.5 71.5 88.2 168.4
Corporate 31.2 36.0 41.1 79.0 79.3
Cash Equivalents 44.5 33.1 51.7 34.6 29.3
Equities 26.7 40.8 63.4 92.3 132.8
NET INVESTMENT INCOME (millions)
94 95 96 97 98
Capital Gains $ 2.2 $ 2.4 $ 2.7 $ 4.2 $ 6.4
Operations 10.8 17.1 19.1 22.3 24.8
UNREALIZED GAINS (millions)
94 95 96 97 98
Equities $ 6.6 $16.0 $26.0 $51.9 $88.5
Fixed Income (5.1) 8.9 2.4 7.0 9.4
AMIG's investment portfolio is conservatively invested in equity and
high-quality fixed income securities. In 1998, the portfolio's value grew by
more than $91 million due to substantial cash flow from operations as well as
market appreciation of the securities. After-tax capital gains for the year
increased by 52% while pretax investment income, excluding those gains,
rose 12%.
Coupling Midland's 1998 net income with the net unrealized gains on marketable
securities produced a total return of $53.3 million in 1998, which equates to a
total return on beginning shareholders' equity of 27.1%
12
<PAGE>
investments in real estate or high-risk derivative products.
The market value of the portfolio at year-end 1998 exceeded the cost by
approximately $98.0 million, primarily due to market appreciation of the equity
investments. For 1998, AMIG's equity portfolio achieved a one year total
return of 44.6% compared with 28.6% for the Standard & Poor's 500 Index and a
negative 2.5% for the Russell 2000 Index.
TARGET LONG-TERM CAPITAL APPRECIATION
The careful selection of a portfolio of high quality securities, combined with
continued cash flow from operations, has resulted in overall portfolio
compounded annual growth of 21.8% over the past five years and 16.3% over the
past 10 years. Management believes that it has created a portfolio with the
diversity necessary to continue to achieve long-term capital appreciation, which
strengthens the company's financial position and provides it with added
flexibility.
PRODUCE REASONABLE CURRENT INCOME
At the same time, AMIG seeks to generate a consistent flow of current income
from investments to help it achieve its overall financial performance
objectives. In 1998, pretax investment income, excluding capital gains, rose
11% to $24.8 million, up from $22.3 million in 1997. At year-end, the current
pre-tax yield on the fixed income portfolio (which includes 37% in municipal
securities) was approximately 5.3%.
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.)
1 Year 3 Year 5 Year
EQUITIES:
AMIG 44.6% 42.8% 33.9%
S&P 500 Index 28.6% 28.2% 24.1%
FIXED INCOME:
AMIG Before Tax 7.3% 6.4% 6.3%
AMIG After Tax 5.2% 4.5% 4.5%
After Tax Lehman Brothers Intermediate
Government/Corporate Index 5.4% 4.4% 4.3%
The average maturity and duration of AMIG's Fixed Income Portfolio
was 5.3 years and 3.8, respectively, at December 31, 1998.
13
<PAGE>
<TABLE>
SIX YEAR FINANCIAL SUMMARY DATA
THE MIDLAND COMPANY AND SUBSIDIARIES For the Periods Ended December 31,
(Amounts in thousands, except per share data) 1998 1997 1996 1995 1994 1993
- --------------------------------------------- ------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Income Statement Data
Revenues:
Insurance:
Premiums earned $375,478 $311,159 $280,614 $263,006 $206,339 $164,363
Net investment income 23,908 21,332 18,269 16,107 10,090 9,240
Net realized investment gains 6,354 4,170 2,690 2,373 2,189 3,735
Other insurance income 2,508 1,557 1,602 618 844 1,066
Transportation(b) 33,059 34,933 34,064 30,371 53,163 53,252
Other 1,055 617 499 752 858 806
-------------------------------------------------------------------
Total 442,362 373,768 337,738 313,227 273,483 232,462
-------------------------------------------------------------------
Costs and Expenses:
Insurance:
Losses and loss adjustment expenses 210,015 171,163 172,426 136,211 113,096 84,787
Commissions and other
policy acquisition costs 103,169 79,518 81,533 80,520 64,557 49,545
Operating and administrative expenses 54,309 49,118 41,355 39,475 26,103 20,919
Transportation operating expenses(b) 28,287 30,079 31,163 28,033 47,820 50,023
Interest expense 4,991 4,983 4,829 3,037 3,800 3,168
Other operating and administrative expenses 4,064 4,204 3,115 3,462 2,807 2,129
-------------------------------------------------------------------
Total 404,835 339,065 334,421 290,738 258,183 210,571
-------------------------------------------------------------------
Income from Continuing Operations
Before Federal Income Tax 37,527 34,703 3,317 22,489 15,300 21,891
Provision (Credit) for Federal Income Tax(a) 10,595 10,336 (426) 6,441 3,663 1,554
-------------------------------------------------------------------
Income from Continuing Operations 26,932 24,367 3,743 16,048 11,637 20,337
Loss from Discontinued Operations(c) - (6,817) (2,675) (6,496) (2,218) (2,365)
-------------------------------------------------------------------
Net Income $ 26,932 $ 17,550 $ 1,068 $ 9,552 $ 9,419 $ 17,972
===================================================================
Basic Earnings (Loss) Per Share
of Common Stock(e):
Continuing operations $ 2.99 $ 2.72 $ .42 $ 1.81 $ 1.31 $ 2.28
Discontinued operations - (.76) (.30) (.73) (.25) (.27)
-------------------------------------------------------------------
Total $ 2.99 $ 1.96 $ .12 $ 1.08 $ 1.06 $ 2.01
===================================================================
Diluted Earnings (Loss) Per Share
of Common Stock(e):
Continuing operations $ 2.86 $ 2.63 $ .41 $ 1.74 $ 1.27 $ 2.20
Discontinued operations - (.74) (.29) (.70) (.24) (.25)
-------------------------------------------------------------------
Total $ 2.86 $ 1.89 $ .12 $ 1.04 $ 1.03 $ 1.95
===================================================================
Cash Dividends Per Share
of Common Stock(e): $ .25 $ .23 $ .22 $ .21 $ .19 $ .18
===================================================================
14
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES For the Periods Ended December 31,
(Amounts in thousands, except per share data) 1998 1997 1996 1995 1994 1993
- --------------------------------------------- ------------------------------------------------------------------
Operating Income from
Continuing Operations(d) $ 22,802 $ 21,657 $ 1,995 $ 14,506 $ 10,214 $ 17,909
Operating Income Per Share from
Continuing Operations (Diluted)(d,e) $ 2.42 $ 2.33 $ .22 $ 1.57 $ 1.12 $ 1.95
Balance Sheet Data
Total Cash and Marketable Securities $593,857 $504,106 $403,804 $373,275 $282,116 $228,435
Total Assets 837,220 760,463 655,979 600,905 479,497 433,263
Total Debt 76,085 92,309 95,170 101,076 74,637 92,824
Unearned Premiums 255,115 240,340 208,417 190,948 158,316 118,802
Loss Reserves 125,496 120,134 95,830 68,347 57,715 42,607
Shareholders' Equity 248,832 197,026 159,688 156,595 132,437 113,110
Book Value Per Share(e) $ 26.61 $ 21.11 $ 17.50 $ 17.28 $ 14.73 $ 14.80
Common Shares Outstanding(e) 9,352 9,334 9,126 9,060 8,991 8,997
Other Data
AMIG's Property and Casualty Operations
Direct and Assumed Written Premiums $446,248 $423,964 $387,165 $376,330 $275,509 $218,022
Net Written Premium 391,770 342,711 290,355 285,306 235,821 180,318
Loss and Loss Adjustment Expense Ratio (GAAP) 56.1% 55.1% 61.8% 52.0% 55.0% 51.7%
Underwriting Expense Ratio (GAAP) 40.8% 40.7% 42.5% 45.2% 43.5% 42.3%
Combined Ratio (GAAP) 96.9% 95.8% 104.3% 97.2% 98.5% 94.0%
Statutory Capital and Surplus 217,091 164,128 124,131 113,189 89,910 70,801
Net Written Premium to Statutory Surplus 1.8x 2.1x 2.3x 2.5x 2.6x 2.5x
M/G Transport's Transportation Operations(b)
Net Revenues $ 33,059 $ 34,933 $ 34,064 $ 30,371 $ 53,163 $ 53,252
Net Income 2,994 3,126 1,938 1,585 2,000 120
Total Assets 41,576 44,544 41,458 48,375 52,534 87,654
Shareholders' Equity 19,075 19,081 15,658 34,219 32,736 30,735
Footnotes:
(a) Included in the 1993 financial results is a credit of $4,867,000 ($0.53 per common share) for the cumulative
effect of a change in accounting from the adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," effective January 1, 1993.
(b) M/G Transport sold approximately 66% of its assets in December 1994.
(c) 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.
(d) Represents income from continuing operations excluding net realized investment gains or losses, net of federal
income taxes.
(e) Previously reported share information has been adjusted to reflect a three-for-one common stock split effective
May 21, 1998.
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE MIDLAND COMPANY AND SUBSIDIARIES
LINES OF BUSINESS AND REPORTABLE SEGMENTS
The discussions of Results of Operations and Liquidity and Capital
Resources are grouped according to Midland's (the company) two primary lines of
business (insurance and transportation) and three reportable segments
(manufactured housing insurance, other insurance and transportation). A
description of the operations of each of these lines, along with a brief
discussion of Discontinued Operations, is included below.
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 two licensed insurance agencies. Other
subsidiaries of AMIG offer warranty products 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 Lower Valued Homes, Dwelling Fire, Homeowners,
Mortgage Fire, Collateral Protection, Watercraft, Long-Haul Truck, Commercial
Park and Dealer, Excess and Surplus Lines, Specialty Auto and Extended Service
Contracts.
Transportation
M/G Transport Services, Inc. and MGT Services, Inc. (collectively
M/G Transport), the company's transportation subsidiaries, operate a barge
chartering and freight brokerage business. M/G Transport arranges for the
movement of dry bulk commodities such as petroleum coke, ores, barite,
fertilizers, sugar and other dry cargos primarily on the Gulf Coast and the
lower Mississippi River and its tributaries.
1997 Discontinued Operations
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). 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. Management does not expect any future activity in regard
to this subsidiary to have a material impact on the consolidated financial
results of the company and there have been no financial results reported from
this discontinued subsidiary since the date of sale.
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 5.4% to $458.5 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 difference in growth rates between the direct and assumed written
premiums and net earned premiums was due primarily to AMIG's decision to cede
less written business to its reinsurers 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.
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. Direct
and assumed written premiums of all other specialty insurance products
collectively decreased by 6.4% to $161.2 million in 1998 from $172.3 million in
1997 due, in part, to AMIG's strategy to exit certain commercial lines programs.
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 positive
cash flow generated by underwriting activities coupled with 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) 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
16
<PAGE>
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 was due primarily to an increase in the
level of weather-related catastrophe losses compared to the prior year and
AMIG's decision to cede less written business to its reinsurers 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.
Overall Underwriting Results
AMIG's property and casualty operations generated pre-tax underwriting
income of $11.4 million in 1998 compared to $12.9 million in 1997. This equates
to 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 the oil industry to lubricate
drilling. Transportation's pre-tax profits amounted to $4.4 million in both
1998 and 1997. The transportation operations in 1998 generated a 15.7% return on
beginning equity. This compares to a return on beginning equity in 1997 of
19.8%.
Discontinued Operations
As previously reported, 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 after-tax operating losses and loss on disposal from
the discontinued operations for 1997 amounted to $(6.8 million), $(0.74) per
share (diluted). There have been no financial results reported from this
discontinued subsidiary since the date of sale.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Insurance
Insurance Premium
Direct and assumed written premium generated from AMIG's property and
casualty and life insurance operations for the year ended December 31, 1997
increased 9.0% to $435.0 million from $399.1 million in 1996. Net earned
premiums for the year increased by 10.9% to $311.2 million from $280.6 million
in 1996. This premium growth was primarily the result of a volume increase in
the premiums for manufactured homes and related coverages. Manufactured home and
related coverages direct and assumed written premium increased 20.6% to $262.7
million in 1997 from $217.8 million in 1996. Direct and assumed written premium
of all other specialty insurance products collectively decreased by 5.0% to
$172.3 million in 1997 from $181.3 million in 1996 due, in part, to the
implementation of AMIG's strategy to exit certain commercial lines programs.
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 by approximately 16.4% to $21.3 million in 1997 from
$18.3 million in 1996. This increase was primarily the result of the growth in
AMIG's investment portfolio. AMIG's investment portfolio increased by $95.6
million to $495.5 million in market value at December 31, 1997. After-tax net
realized capital gains increased to $2.7 million, $0.30 per share (diluted), in
1997 from $1.7 million, $0.19 per share (diluted), in 1996.
Losses and Loss Adjustment Expenses (LAE)
AMIG's losses and LAE decreased 0.7% to $171.2 million in 1997 from
$172.4 million in 1996. Losses decreased (even though net earned premiums
17
<PAGE>
increased by nearly 11%) due to the existence of more favorable weather patterns
throughout the United States in 1997 compared to 1996. Weather related
catastrophe losses represented 4.5 percentage points of the 95.8% property and
casualty combined ratio in 1997 compared to 8.4 percentage points of the 104.3%
property and casualty combined ratio in 1996. The 1996 losses and LAE were
negatively impacted by numerous catastrophic weather related losses ranging
from severe winter storm systems and flooding during the first part of the year
to Hurricanes Fran and Bertha which caused heavy damage along the eastern United
States during the third quarter of 1996.
The decrease in weather related catastrophe losses, however, was
partially offset by loss and LAE reserve strengthening by AMIG in 1997. This
strengthening included $5.2 million in loss reserve provisions related to prior
years' reserve development and was in addition to reserves established for
losses in the normal course of business. Such loss reserve strengthening was
deemed necessary as a result of an unfavorable loss development trend
attributable to the commercial lines business. The commercial lines operation
(including both continuing and discontinued programs) incurred approximately
$17.7 million in underwriting losses in 1997 compared to $10.3 million of
underwriting losses in 1996. Based on the underwriting results generated by the
commercial products, AMIG made the decision to refocus the Commercial Lines
Division in 1997. As a result, AMIG discontinued numerous commercial programs
and the remaining programs were redesigned in an effort to improve underwriting
profitability and build on synergies between the commercial and personal lines
operations.
Commissions, Other Policy Acquisition Costs and
Other Operating and Administration Expenses
While the growth in AMIG's written premium resulted in a $5.7 million
increase in underwriting expenses (commission, other policy acquisition and
operating and administrative expenses), the property and casualty underwriting
expense ratio (ratio of underwriting expenses to earned premium) actually
decreased to 40.7% in 1997 from 42.5% in 1996. This improvement was due, in
part, to a decrease in litigation related expenses resulting from the settlement
of a class action lawsuit in Alabama and Mississippi. Also contributing to the
decrease in the property and casualty underwriting expense ratio was the fact
that commission expenses remained flat in 1997 compared to 1996, despite the
increase in earned premium. This was due to increases in ceding commissions
received by AMIG in 1997 (which are included in the consolidated financial
statements as offsets to commission expenses).
Overall Underwriting Results
AMIG's property and casualty operations generated pre-tax underwriting
income of $12.9 million in 1997 compared to a pre-tax loss of $(11.8 million)
in 1996. The property and casualty companies' combined ratio improved to 95.8%
in 1997 from 104.3% in 1996. As discussed in "Losses and Loss Adjustment
Expenses (LAE)" above, the improved underwriting results were primarily the
result of favorable weather patterns in 1997 compared to 1996.
Transportation
M/G Transport's revenues increased 2.3% to $34.9 million in 1997 from
$34.1 million in 1996. Transportation operating expenses decreased in 1997
compared to 1996 due primarily to a $3.6 million decrease in litigation related
expenses. M/G Transport's net profits improved 63.2% to $3.1 million in 1997
from $1.9 million in 1996.
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 AMIG's
insurance subsidiaries is restricted by state regulatory agencies and/or
covenants contained in debt agreements. Such restrictions, however, have not
had, and are not expected to have, a significant impact on the 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 $50 million of conventional short-term credit lines
available at costs generally 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, 1998 amounted to approximately $49.5 million. The December 31, 1998
balance of outstanding interest bearing debt consisted of short-term borrowings
on conventional lines of credit of $15.0 million, $6.5 million in commercial
paper payable to external investors, $1.2 million related to a collateralized
equipment obligation and $26.8 million in mortgage obligations. Any intercompany
investment in parent company commercial paper is eliminated in consolidation.
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<PAGE>
Capital expenditures, other than for barge acquisitions discussed below,
amounted to $4.9 million, $7.6 million and $4.4 million for years ended
December 31, 1998, 1997 and 1996, respectively. The company currently estimates
that the level of capital expenditures for 1999 will be in the range of prior
years.
Insurance
AMIG generates cash inflows primarily from insurance premiums,
investment income and proceeds from sales of marketable securities and
maturities of fixed income investment securities. The principal cash outflows
for the insurance operations relate to the payment of claims, commissions,
premium taxes, operating expenses, income taxes and the purchase of marketable
securities. 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 fixed income
investment portfolio are approximately 5.3 and 3.8 years, respectively, which
management believes provide adequate asset/liability matching. The gross
unrealized appreciation on AMIG's marketable securities increased by 66.4% to
$98.0 million at December 31, 1998 from $58.9 million at December 31, 1997.
AMIG also has a $40 million long-term credit facility available on a revolving
basis at various rates. As of December 31, 1998, $20 million was outstanding on
this credit facility. Cash flow from the insurance operations is expected to
remain sufficient to meet AMIG's future operating requirements and to provide
for reasonable dividends to the company. As of December 31, 1998, AMIG's
property and casualty statutory surplus was $217.1 million resulting in a
premium to surplus ratio of 1.8 for the year ended December 31, 1998.
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 and the
acquisition of capital equipment. Like the insurance operations, cash flow from
the transportation operations is expected to remain sufficient to meet future
operating requirements while providing for reasonable dividends to Midland.
The transportation subsidiaries acquired 41 barges in 1997 and 25 barges
in 1996. The total collective cost of these 66 barges was approximately $18.1
million. As consideration for these acquisitions, M/G Transport exchanged four
of its towboats in 1996 and paid $11.9 million in 1997. These acquisitions were
financed primarily with internally generated capital and short-term bank
borrowings. There were no barge acquisitions during 1998. M/G Transport has
committed to acquiring 20 new steel roll-top barges to be delivered in the third
quarter of 1999. The total cost of these barges will be approximately $6.1
million. This acquisition, along with any additional acquisitions, will likely
be accomplished through a combination of internally financed funds, external
borrowings or lease transactions. As of December 31, 1998, the transportation
subsidiaries had $6.6 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 below.
Interest rate risk is the risk that AMIG will incur economic losses due
to adverse changes in interest rates. The risk arises from 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 assets to changes in interest rates.
Based upon the 3.8 year average duration of AMIG's fixed income portfolio at
December 31, 1998, management estimates that a 100 basis point increase in
interest rates ("rate shock") would decrease the net fair value of its fixed
income portfolio by 3.8% or $17.3 million.
Equity price risk is the risk that AMIG will incur economic losses due
to adverse changes in a particular stock or its stock portfolio. AMIG's equity
exposure consists primarily of the risk of declines in the value of its equity
security holdings, including the common stock of Firstar Corporation. At
December 31, 1998, AMIG had approximately $131.2 million in equity holdings,
including $72.4 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 AMIG's equity portfolio by approximately $7.2 million. AMIG's
portfolio of equity securities has a beta coefficient (a measure of stock price
volatility) of approximately .97. 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 9.7%.
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<PAGE>
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 accountability and control over
these activities.
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 during 1998 and 1997 was the
appreciation in the company's equity investments. For the year ended
December 31, 1998 and 1997, such net unrealized gains increased (net of income
tax effects) by $26.4 million and $20.5 million, respectively. The company's
1998 net income, coupled with the appreciation of the net unrealized gains on
marketable securities, produced a total comprehensive income of $53.3 million,
which equates to a return on beginning shareholders' equity of 27.1%. This
follows a total comprehensive income from continuing operations in 1997 of $44.9
million, a 28.1% return on beginning equity.
Year 2000 Compliance
The Year 2000 Issue
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.
Status of the Company's Response to the Year 2000 Issue
The company's information systems professional staff began preparing for
the Year 2000 Issue as early as 1992. Since that time, the company has been
upgrading and replacing its computer hardware and software. These upgrades and
replacements have been driven by non-Year 2000 related business requirements.
However, all hardware and software that have been upgraded and replaced since
1992 have been certified by their suppliers as Year 2000 compliant.
The company has developed a comprehensive Year 2000 Work Plan to deal
with the Year 2000 Issue. The company's Year 2000 Work Plan called for all
mission-critical internal computer hardware and software to be Year 2000
compliant by the end of 1998. As of December 31, 1998, the company, with minor
exceptions, had met the schedule established in its Year 2000 Work Plan.
The company's Year 2000 Work Plan consists of five phases: 1) awareness,
2) assessment, 3) remediation, 4) testing and 5) implementation. The awareness
and assessment phases of its Year 2000 Work Plan are ongoing, but have been
substantially completed. Remediation, testing and implementation have been
completed for nearly all of the company's internal hardware and software.
Remediation, testing and implementation for the remaining internal hardware and
software are currently scheduled for completion by the end of the first quarter
of 1999.
During the awareness phase, the company formed a multi-disciplinary task
force to address the Year 2000 Issue, defined the Year 2000 Issue, obtained
executive level support, and educated company personnel, customers, suppliers
and policyholders concerning the Year 2000 Issue and its potential effects on
the company. Education efforts are ongoing.
During the assessment phase, the company collected a comprehensive list
of internal items that might be affected by Year 2000 Issues. The company also
identified critical business relationships that might be affected by the
Year 2000 Issue. The company then evaluated these items and business
relationships to determine whether they faced Year 2000 Issues and what effect
they would have on the company if they failed due to Year 2000 Issues. The
company continues to try to identify potential Year 2000 Issues.
The remediation phase included an analysis of the items that are
affected by Year 2000 Issues, identification of problem areas, recommendations
concerning repair of critical non-Year 2000 compliant items and remediation of
those items. Similarly, during the remediation phase, the company has been and
is communicating and working with its critical business relationships to help
them understand and remediate their Year 2000 Issues.
The testing phase followed the remediation phase and included a thorough
testing of all recommended remediation. Testing included present and forward
date testing which simulated critical dates in the Year 2000. The company has
tested, or will test, all of its critical internal systems and has or will
attempt to verify Year 2000 compliance of its critical business relationships.
The implementation phase consisted of placing all internal items that
have been remediated and successfully tested into production.
Successful completion of the company's Year 2000 Work Plan is expected
to significantly reduce the company's level of uncertainty about Year 2000
Issues, and, in particular, about the Year 2000 compliance and readiness of its
material business relationships. The company believes that with the
implementation of its new computer hardware and software and completion of its
Year 2000 Work Plan as scheduled, the possibility of significant interruptions
of normal operations should be reduced.
20
<PAGE>
Risks
The company expects that its internal mission critical computer
hardware and software and other mission critical equipment already is, or will
be, Year 2000 compliant before December 31, 1999. The company believes, based
on responses it has received to date, that its significant business partners,
including vendors, suppliers (including suppliers of utilities) and customers,
will be Year 2000 compliant before December 31, 1999. If the company's Year
2000 Work Plan fails to identify or correct Year 2000 Issues in the company's
mission critical computer hardware and software or other equipment, the company
might not be able to communicate with and/or provide services to suppliers,
customers and policyholders until corrective measures have been taken. Under
such a worst case scenario, the company might not be able to process policy
applications and collect premium revenue for some period of time. If corrective
actions cannot be taken in a timely fashion, this could have a material adverse
affect on the company's financial condition or results of operations.
Sustained Year 2000 failures by certain of the company's vendors and
suppliers (especially suppliers of utility services such as electric and
telephone) could have similar consequences for the company. The company cannot
currently predict the impact of the Year 2000 Issue on its customers. However,
sustained Year 2000 failures by customers which, in the aggregate, provide a
material portion of the company's revenues could materially reduce cash flow
available to the company. This, in turn, could have a material adverse affect
on the company's financial condition or results of operations.
Contingency Plans
The company is preparing a Year 2000 specific contingency plan to deal
with business failures brought about by Year 2000 Issues. Contingency planning
will include plans for alternative processing of business from customers who
experience disruptions due to the Year 2000 Issue. The company's Year 2000
contingency plans will involve invoking existing disaster recovery plans where
appropriate. During the first few months of 1999, the company will continue to
document its Year 2000 specific contingency plan. The company anticipates that
the contingency planning process will be substantially completed by the end of
April, 1999.
Cost of the Year 2000 Issue
Based upon currently available information, the company estimates that
the total cost of implementing its Year 2000 Work Plan will be less than
$1 million. This estimate does not include costs associated with converting the
company's mainframe. As discussed above, the migration to the company's new
mainframe was made, primarily, to address specific business needs rather than
to address the Year 2000 Issue. The cost estimate, however, does include all
internal costs related to activities undertaken on Year 2000 related matters
across the company including activities pursued as part of all five phases of
the company's Year 2000 Work Plan. Through December 31, 1998, the company had
expended approximately $650,000 on the Year 2000 Work Plan. The majority of the
remaining costs are expected to be directed primarily towards testing,
remediation and implementation activities. These costs have been, and will
continue to be, funded through operating cash flow and are expensed in the
period in which they are incurred.
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 1999 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,
Year 2000 related issues 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.
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<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31,
(Amounts in thousands, except per
share data) 1998 1997 1996
- ---------------------------------------- ------------------------------------
Revenues:
Insurance:
Premiums earned $375,478 $311,159 $280,614
Net investment income 23,908 21,332 18,269
Net realized investment gains 6,354 4,170 2,690
Other insurance income 2,508 1,557 1,602
Transportation 33,059 34,933 34,064
Other 1,055 617 499
------------------------------------
Total 442,362 373,768 337,738
------------------------------------
Costs and Expenses:
Insurance:
Losses and loss adjustment expenses 210,015 171,163 172,426
Commissions and other policy
acquisition costs 103,169 79,518 81,533
Operating and administrative expenses 54,309 49,118 41,355
Transportation operating expenses 28,287 30,079 31,163
Interest expense 4,991 4,983 4,829
Other operating and
administrative expenses 4,064 4,204 3,115
------------------------------------
Total 404,835 339,065 334,421
------------------------------------
Income from Continuing Operations
Before Federal Income Tax 37,527 34,703 3,317
Provision (Credit) for Federal Income Tax 10,595 10,336 (426)
------------------------------------
Income from Continuing Operations 26,932 24,367 3,743
------------------------------------
Discontinued Operations:
Loss from discontinued operations less
related income tax credits of
$1,881, and $1,411 in 1997 and
1996, respectively - (3,492) (2,675)
Loss on disposal of assets less related
income tax credit of $1,790 - (3,325) -
------------------------------------
Loss from Discontinued Operations - (6,817) (2,675)
------------------------------------
Net Income $ 26,932 $ 17,550 $ 1,068
====================================
Basic Earnings (Loss) Per Share of Common Stock:
Continuing operations $ 2.99 $ 2.72 $ .42
Discontinued operations - (.76) (.30)
------------------------------------
Total $ 2.99 $ 1.96 $ .12
====================================
Diluted Earnings (Loss) Per Share of Common Stock:
Continuing operations $ 2.86 $ 2.63 $ .41
Discontinued operations - (.74) (.29)
------------------------------------
Total $ 2.86 $ 1.89 $ .12
====================================
Cash Dividends Per Share of
Common Stock-Declared $ .25 $ .23 $ .22
====================================
See notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
THE MIDLAND COMPANY AND SUBSIDIARIES December 31,
(Amounts in thousands) 1998 1997
- -------------------------------------------------- ----------------------
ASSETS
Marketable Securities Available for Sale:
Fixed income (cost, $443,975 in 1998 and
$397,033 in 1997) $453,422 $404,038
Equity (cost, $37,736 in 1998 and
$33,928 in 1997) 136,748 94,791
----------------------
Total 590,170 498,829
----------------------
Cash 3,687 5,277
----------------------
Receivables:
Accounts receivable 60,094 59,492
Less allowance for losses 753 753
----------------------
Net 59,341 58,739
----------------------
Reinsurance Recoverables and Prepaid
Reinsurance Premiums 33,955 49,016
----------------------
Property, Plant and Equipment:
Original cost 114,466 111,418
Less accumulated depreciation and amortization 46,629 39,806
----------------------
Net 67,837 71,612
----------------------
Other Real Estate-Net 8,700 14,779
----------------------
Deferred Insurance Policy Acquisition Costs 63,962 55,590
----------------------
Other Assets 9,568 6,621
----------------------
Total Assets $837,220 $760,463
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned Insurance Premiums $255,115 $240,340
----------------------
Insurance Loss Reserves 125,496 120,134
----------------------
Insurance Commissions Payable 20,272 19,033
----------------------
Funds Held Under Reinsurance Agreements and
Reinsurance Payables 14,624 15,443
----------------------
Long-Term Debt 54,563 62,518
----------------------
Other Notes Payable:
Banks 15,000 24,000
Commercial paper 6,522 5,791
----------------------
Total 21,522 29,791
----------------------
Deferred Federal Income Tax 39,305 26,180
----------------------
Other Payables and Accruals 57,491 49,998
----------------------
Commitments and Contingencies - -
----------------------
Shareholders' Equity:
Common stock (issued and outstanding: 9,352
shares at December 31, 1998 and 9,334 shares
at December 31, 1997 after deducting treasury
stock of 1,576 shares and 1,594 shares,
respectively) 911 911
Additional paid-in capital 15,947 15,359
Retained earnings 178,398 153,797
Accumulated other comprehensive income 70,507 44,123
Treasury stock (at cost) (15,293) (14,704)
Unvested restricted stock awards (1,638) (2,460)
----------------------
Total 248,832 197,026
----------------------
Total Liabilities and Shareholders' Equity $837,220 $760,463
======================
See notes to consolidated financial statements.
23
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THE MIDLAND COMPANY AND SUBSIDIARIES
(Amounts in thousands) Years Ended December 31, 1998, 1997, and 1996
- -----------------------------------------------------------------------------------------------------------------------
Accumulated Unvested
Additional Other Compre- Restricted Compre-
Common Paid-In Retained hensive Treasury Stock hensive
Stock Capital Earnings Income Stock Awards Total Income
- -----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $911 $15,362 $139,350 $19,716 $(16,575) $(2,169) $156,595
Comprehensive income:
Net income 1,068 1,068 $ 1,068
Increase in unrealized gain
on marketable securities,
net of related income tax
effect of $2,083 3,871 3,871 3,871
--------
Total comprehensive income $ 4,939
========
Purchase of treasury stock, net 111 (1,810) (1,699)
Cash dividends declared (1,995) (1,995)
Exercise of stock options (620) 1,774 1,154
Amortization and cancellation of
unvested restricted stock awards (7) (10) 711 694
----------------------------------------------------------------------------
Balance, December 31, 1996 911 14,846 138,423 23,587 (16,621) (1,458) 159,688
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
========
Issuance of treasury stock, net 124 160 284
Cash dividends declared (2,176) (2,176)
Exercise of stock options (32) 335 303
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, net 570 (906) (336)
Cash dividends declared (2,331) (2,331)
Exercise of stock options 50 373 423
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
============================================================================
See notes to consolidated financial statements.
</TABLE>
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31,
(Amounts in thousands) 1998 1997 1996
- ------------------------------------------ ------------------------------------
Cash Flows from Operating Activities:
Net income $ 26,932 $ 17,550 $ 1,068
Loss from discontinued operations - 6,817 2,675
Income from continuing operations 26,932 24,367 3,743
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 8,798 10,269 7,939
Net realized investment gains (6,354) (4,170) (2,690)
Decrease (increase) in reinsurance
recoverables and prepaid
reinsurance premiums 15,061 3,789 (14,000)
Increase in unearned insurance
premiums 14,775 31,923 17,469
Increase in deferred insurance policy
acquisition costs (8,372) (10,248) (2,196)
Increase in other accounts payable and
accruals 7,417 11,240 5,905
Increase in insurance loss reserves 5,362 24,304 27,483
Increase in other assets (2,947) (2,308) (2,335)
Increase (decrease) in insurance
commissions payable 1,239 5,212 (1,935)
Increase (decrease) in deferred federal
income tax (1,082) (1,725) 519
Increase (decrease) in funds held under
reinsurance agreements and
reinsurance payables (819) (11,506) 6,330
Increase in net accounts receivable (602) (4,865) (3,474)
Other-net 748 (459) 392
------------------------------------
Net cash provided by continuing
operations 60,156 75,823 43,150
Net cash used in discontinued
operations - (2,104) (8,973)
------------------------------------
Net cash provided by operating
activities 60,156 73,719 34,177
------------------------------------
Cash Flows from Investing Activities:
Purchase of marketable securities (277,853) (207,474) (138,486)
Proceeds from sale of marketable securities 191,014 88,687 87,577
Maturity of marketable securities 35,034 41,165 42,041
Decrease (increase) in cash equivalent
marketable securities 6,937 15,404 (17,445)
Proceeds from sale of property, plant
and equipment 6,003 1,561 1,453
Acquisition of property, plant and equipment (4,948) (19,538) (4,403)
Proceeds from sale of discontinued operations - 13,330 -
------------------------------------
Net cash used in investing activities (43,813) (66,865) (29,263)
------------------------------------
Cash Flows from Financing Activities:
Decrease in net short-term borrowings (8,269) (2,909) (2,920)
Repayment of long-term debt (7,944) (3,289) (2,647)
Dividends paid (1,746) (2,677) (1,962)
Payment of capitalized lease obligations (414) (375) (339)
Issuance of long-term debt 403 3,712 -
Net treasury stock transactions 37 619 75
------------------------------------
Net cash used in financing activities (17,933) (4,919) (7,793)
------------------------------------
Net Increase(Decrease) in Cash (1,590) 1,935 (2,879)
Cash at Beginning of Period 5,277 3,342 6,221
------------------------------------
Cash at End of Period $ 3,687 $ 5,277 $ 3,342
====================================
Supplemental Disclosures:
The Company paid interest of $4,946, $6,148 and $5,820 and income taxes of
$10,690, $4,655 and $930 in 1998, 1997 and 1996, respectively.
See notes to consolidated financial statements.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE MIDLAND COMPANY AND SUBSIDIARIES
Years Ended December 31, 1998, 1997 and 1996
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 (GAAP). 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 debt
securities (cash equivalents, debt instruments and preferred stocks having
scheduled redemption provisions) and equity securities (common and preferred
stocks which do not have redemption provisions). The company classifies all
debt and equity securities as available-for-sale and carries such investments at
market value. Unrealized gains or losses on investments, net of related income
taxes, are included in shareholders' equity 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
vessels and barges - 20 to 30 years).
Federal Income Tax-Deferred federal income taxes are recognized to
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for federal income tax purposes. Investment tax credits previously
allowed on property and equipment additions were deferred in the year of tax
benefit and are being amortized against future operations over the estimated
useful lives of the related properties. The company 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
which are not primarily related to premiums written are expensed as incurred.
Insurance Loss Reserves-Unpaid insurance losses and loss adjustment
expenses include an amount determined from reports on individual cases and an
amount, based on past experience, for losses incurred but not reported. Such
liabilities are necessarily based on estimates and, while management believes
that the amounts are fairly stated, the ultimate liability may be in excess of
or less than the amounts provided. The methods of making such estimates and
for establishing the resulting liabilities are continually reviewed and any
adjustments resulting therefrom are included in earnings currently. Insurance
loss reserves also include an amount for claim drafts issued but not yet paid.
Allowance for Losses-Provisions for losses on receivables are made in
amounts deemed necessary to maintain adequate reserves to cover probable losses
incurred at the balance sheet date.
Reinsurance-The company reinsures certain levels of risk with other
insurance companies and cedes varying portions of its written premiums to such
reinsurers. Failure of reinsurers to honor their obligations could result in
losses to the company as reinsurance contracts do not relieve the company from
its obligations to policyholders. The company evaluates the financial condition
of its reinsurers and monitors concentrations of credit risk arising from
similar geographic regions, activities or economic characteristics of the
reinsurers to minimize its exposure to significant losses
26
<PAGE>
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 waterways.
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, other 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. As permitted by Statements of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation", 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-For the year ended December 31, 1998, the
company adopted SFAS Nos. 130 and 131 "Reporting Comprehensive Income" and
"Disclosures about Segments of an Enterprise and Related Information",
respectively. Adoption of Statement No. 130 resulted in the company reporting
comprehensive income, which for the company consists of net income and the
after-tax effect of changes in the unrealized appreciation of marketable
securities. Also, the company decided to present changes in shareholders' equity
in a financial statement; such changes had previously been reported in the
notes to the financial statements. Adoption of Statement No. 131 resulted in
certain changes to segment information discussed in Note 18 and had no effect
on the company's reported results of operations or financial position.
For the year ended December 31, 1998, the company also adopted SFAS
No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits", which resulted in certain additional disclosures included in Note 13,
but had no effect on the company's reported results of operations or financial
position.
The Financial Accounting Standards Board issued SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities" during 1998. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. The company is
currently evaluating the impact of adoption of SFAS 133 on the results of
operations or financial position.
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", SOP 98-1 revises the accounting for software development costs
which the company has historically expensed. The company is currently analyzing
the impact of this statement, which is required to be adopted in 1999, and does
not expect the statement 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 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 and $32.8 million for 1997
and 1996, respectively.
27
<PAGE>
3. MARKETABLE SECURITIES
Thousands of Dollars
--------------------------------------------
Gross Unrealized Market
1998 Cost Gains Losses Value
- ------------------------------------------------------------------------
Fixed Income Securities:
Governments $170,539 $ 4,320 $ 320 $174,539
Municipals 161,699 4,366 99 165,966
Corporates 77,000 1,496 315 78,181
Cash Equivalents 28,594 - - 28,594
--------------------------------------------
Total 437,832 10,182 734 447,280
Equity Securities 37,445 99,537 526 136,456
Accrued Interest
and Dividends 6,434 - - 6,434
--------------------------------------------
Total Marketable
Securities $481,711 $109,719 $1,260 $590,170
============================================
Thousands of Dollars
--------------------------------------------
Gross Unrealized Market
1997 Cost Gains Losses Value
- ------------------------------------------------------------------------
Fixed Income Securities:
Governments $195,577 $ 2,965 $ 168 $198,374
Municipals 83,997 2,890 10 86,877
Corporates 76,459 1,418 90 77,787
Cash Equivalents 35,532 - - 35,532
--------------------------------------------
Total 391,565 7,273 268 398,570
Equity Securities 33,711 61,672 809 94,574
Accrued Interest
and Dividends 5,685 - - 5,685
--------------------------------------------
Total Marketable
Securities $430,961 $ 68,945 $1,077 $498,829
============================================
At December 31, 1998 and 1997, the market value of the company's
investment in the common stock of Firstar Corporation (Star Banc Corporation
prior to recent merger), which exceeded 10% of the company's shareholders'
equity, was $76.3 million and $47.1 million, respectively.
The following is investment information summarized by investment
category (net investment income includes amounts classified as insurance,
transportation or other revenues) (amounts in 000's):
1998 1997 1996
---------------------------
Investment Income:
Interest on Fixed
Income Securities $23,344 $20,895 $18,410
Dividends on
Equity Securities 1,624 1,493 1,259
---------------------------
Total 24,968 22,388 19,399
Less Investment Expenses (884) (837) (891)
---------------------------
Net Investment Income $24,084 $21,551 $18,508
===========================
Realized Gains on
Marketable Securities:
Fixed Income Securities:
Gross Realized Gains $ 4,420 $ 306 $ 1,061
Gross Realized Losses (371) (169) (690)
Equity Securities:
Gross Realized Gains 5,683 5,859 3,964
Gross Realized Losses (3,378) (1,826) (1,645)
---------------------------
Total $ 6,354 $ 4,170 $ 2,690
===========================
Change in Unrealized Gains
on Marketable Securities:
Fixed Income Securities $ 2,443 $ 4,590 $(6,507)
Equity Securities 38,148 27,006 12,460
---------------------------
Total $40,591 $31,596 $ 5,953
===========================
The cost and approximate market value of debt securities held at
December 31, 1998, summarized by contractual maturities, are shown below. Actual
maturities may differ from contractual maturities when there exists a right to
call or prepay obligations with or without call or prepayment penalties
(amounts in 000's).
Market
Cost Value
---------------------
Under 1 year $ 50,917 $ 51,085
1-5 years 205,799 209,980
6-10 years 142,197 146,474
Over 10 years 38,919 39,741
---------------------
Total $437,832 $447,280
=====================
28
<PAGE>
4. RECEIVABLES
Accounts receivable at December 31, 1998 and 1997 are generally due
within one year and consist of the following (amounts in 000's):
1998 1997
---------------------
Insurance $ 53,764 $ 49,975
Transportation 4,687 5,912
Other 1,643 3,605
---------------------
Total $ 60,094 $ 59,492
=====================
5. PROPERTY, PLANT AND EQUIPMENT
At December 31, 1998 and 1997, property, plant and equipment stated at
original cost consist of the following (amounts in 000's):
1998 1997
------------------------
Land $ 1,366 $ 1,241
Buildings, Improvements,
Fixtures, etc. 56,944 52,860
Transportation Equipment 56,156 57,317
------------------------
Total $114,466 $111,418
========================
Total rent expense related to the rental of equipment included in the
accompanying consolidated statements of income is (amounts in 000's): $5,496
in 1998, $4,582 in 1997 and $4,867 in 1996. Future rentals under non-cancelable
operating leases are approximately (amounts in 000's): $3,425 - 1999;
$2,639 - 2000; $2,160 - 2001; $1,942 - 2002 and $586 - 2003.
The company has committed to acquire 20 new barges with a total cost of
approximately $6.1 million with delivery during the third quarter of 1999.
6. OTHER REAL ESTATE-NET
Other real estate-net at December 31, 1998 includes the former
manufacturing facility of CS Crable Sportswear, Inc., the company's discontinued
operations. This facility is currently subject to a leasing arrangement with an
option to purchase; however, the lessee has declared bankruptcy subsequent to
year-end. The facility is carried at estimated net realized value. At
December 31, 1997, other real estate-net included the aforementioned
manufacturing facility as well as the former corporate headquarters of the
company which was sold in 1998 with a small capital gain. These properties are
carried at their estimated net realizable value. After-tax impairment provisions
of $975,000 (former corporate headquarters) and $991,000 (manufacturing
facility) were recognized (based on estimated current market values) in the
1997 consolidated income statement and were included in "Other Operating and
Administrative Expenses" and "Discontinued Operations-Loss on Disposal of
Assets...", respectively.
7. DEFERRED INSURANCE POLICY ACQUISITION COSTS
Acquisition costs incurred and capitalized during 1998, 1997 and 1996
amounted to $111.5 million, $89.8 million and $83.7 million, respectively.
Amortization of deferred acquisition costs was $103.2 million, $79.5 million and
$81.5 million for 1998, 1997 and 1996, respectively.
8. NOTES PAYABLE TO BANKS
At December 31, 1998 and 1997, the company had conventional lines of
credit with commercial banks of $50 million. The lines of credit in use under
these agreements at December 31, 1998 and 1997 amounted to $11 million and
$21 million, respectively. Borrowings under these lines of credit constitute
senior debt. Annual commitment fees of $89,000 are currently paid to the lending
institutions to maintain these credit agreements.
Additionally, at December 31, 1998 and 1997, the company had other
short-term bank borrowings outstanding of $4 million and $3 million,
respectively. These borrowings also constitute senior debt.
The aforementioned notes payable, together with outstanding commercial
paper, had weighted average interest rates of 6.06% and 5.73% at
December 31, 1998 and 1997, respectively.
9. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 is summarized as follows
(amounts in 000's):
1998 1997
-------------------------
Equipment Obligations, Due Through-
6.45% July 1, 2000 $ 1,710 $ 2,090
7.10% January 1, 2001 1,227 1,773
*6.79% September 30, 2003 1,149 1,355
6.50% October 31, 2003 3,500 3,717
6.35% December 31, 1998 - 5,280
Mortgage Notes, Due Through-
5.40% December 1, 2003 7,559 7,898
6.83% December 20, 2005 19,195 19,768
Unsecured Notes Under a
$40 million Credit Facility,
Payments Beginning 2002-
*6.32% November 1, 2005 20,000 20,000
Capitalized Lease Obligations 223 637
-------------------------
Total Obligations 54,563 62,518
Current Maturities 3,225 11,420
-------------------------
Non Current Portion $51,338 $51,098
=========================
*Rates in effect on December 31, 1998. The interest rates on the borrowings are
adjusted quarterly to the LIBOR rate plus a margin ranging from 1% to 1.2%.
29
<PAGE>
Equipment and real estate obligations are collateralized by
transportation equipment and real estate with a net book value of $44,860,000
at December 31, 1998.
The aggregate amount of repayment requirements on long-term debt and
capitalized leases for the five years subsequent to 1998 are (amounts in 000's):
1999 - $3,225; 2000 - $4,064; 2001 - $2,159; 2002 - $7,226; 2003 - $12,237.
Certain long-term debt agreement covenants limit the payment of
dividends as discussed in Note 17.
At December 31, 1998 and 1997, the carrying value approximated the fair
value of the company's long-term debt.
10. FEDERAL INCOME TAX
The provision for federal income tax is summarized as follows (amounts
in 000's):
1998 1997 1996
-----------------------------
Current provision (credit) $11,677 $12,061 $ (945)
Deferred provision (credit) (1,082) (1,725) 519
Total continuing operations 10,595 10,336 (426)
Discontinued operations - (3,671) (1,411)
-----------------------------
Total $10,595 $ 6,665 $(1,837)
=============================
The federal income tax provision related to income from continuing operations
for the years ended December 31, 1998, 1997 and 1996 is different from amounts
derived by applying the statutory tax rates to income before federal income tax
as follows (amounts in 000's):
1998 1997 1996
-----------------------------
Federal income tax
at statutory rate $13,134 $12,146 $ 1,161
Tax effect of:
Tax exempt interest
and excludable
dividend income (2,330) (1,793) (1,574)
Investment tax credits (167) (366) (169)
Business meals and
entertainment expenses 91 106 151
Other-net (133) 243 5
-----------------------------
Provision (credit) for
federal income tax $10,595 $10,336 $ (426)
=============================
Significant components of the company's net deferred federal income tax
liability are summarized as follows (amounts in 000's):
1998 1997
-------------------
Deferred tax liabilities:
Deferred insurance policy
acquisition costs $21,123 $18,450
Unrealized gain on
marketable securities 37,952 23,745
Accelerated depreciation 6,968 7,585
Other 407 861
-------------------
Sub-total 66,450 50,641
-------------------
Deferred tax assets:
Unearned insurance premiums 16,402 14,808
Pension expense 4,197 3,383
Insurance loss reserves 3,465 3,136
Other 3,081 3,134
-------------------
Sub-total 27,145 24,461
-------------------
Deferred federal income tax $39,305 $26,180
===================
11. 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 (amounts in
000's):
Direct Assumed Ceded Net
-------------------------------------------
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
1996
- ----
Written $358,418 $28,747 $(96,810) $290,355
Earned 347,259 21,284 (92,674) 275,869
The amounts of recoveries pertaining to reinsurance contracts that were
deducted from losses incurred during 1998, 1997 and 1996 were (amounts in
000's): $28,674, $52,182 and $71,133, respectively.
30
<PAGE>
12. INSURANCE LOSS RESERVES
Activity in the liability for unpaid insurance losses and loss
adjustment expenses (excluding claim checks issued but not yet paid) for the
property and casualty companies is summarized as follows (amounts in 000's):
1998 1997 1996
------------------------------------------
Balance at January 1 $108,334 $ 88,992 $ 61,497
Less reinsurance
recoverables 26,433 24,208 13,785
------------------------------------------
Net balance at January 1 81,901 64,784 47,712
------------------------------------------
Incurred related to:
Current year 208,811 163,035 166,554
Prior years (2,120) 5,230 3,771
------------------------------------------
Total incurred 206,691 168,265 170,325
------------------------------------------
Paid related to:
Current year 157,530 113,841 121,782
Prior years 42,795 37,307 31,471
------------------------------------------
Total paid 200,325 151,148 153,253
------------------------------------------
Net balance at
December 31 88,267 81,901 64,784
Plus reinsurance
recoverables 20,430 26,433 24,208
------------------------------------------
Balance at December 31 $108,697 $108,334 $ 88,992
==========================================
13. BENEFIT PLANS
The company has a qualified pension plan which provides for the payment
of annual benefits to substantially all employees upon retirement. Such benefits
are based on years of service and the employee's highest compensation during
five consecutive years of employment. The company's funding policy is to
contribute annually an amount sufficient to satisfy ERISA funding standards.
Contributions are intended to provide not only for benefits attributed to
service to date but also for benefits expected to be earned in the future. The
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 and assets, 2) the weighted average assumptions used
and 3) the components of the net periodic benefit cost (amounts in 000's except
for percentages):
1998 1997
-------------------------
Qualified Plan
Change in benefit obligation:
Benefit obligation
at beginning of year $ 22,460 $ 20,849
Service cost 1,159 1,124
Interest cost 1,734 1,587
Actuarial (gain)/loss 1,777 393
Curtailments - (645)
Benefits paid (1,266) (848)
-------------------------
Benefit obligation at end of year $ 25,864 $ 22,460
=========================
Change in plan assets:
Fair value of plan assets
at beginning of year $ 22,587 $ 19,774
Actual return on plan assets 4,616 3,628
Employer contributions - 33
Benefits paid (1,266) (848)
-------------------------
Fair value of plan
assets at end of year $ 25,937 $ 22,587
=========================
Funded status:
Funded status at end of year $ 73 $ 127
Unrecognized net
actuarial (gain)/loss (5,317) (3,988)
Unrecognized prior service cost 379 408
Unrecognized net transition asset (948) (1,113)
-------------------------
Accrued benefit cost $ (5,813) $ (4,566)
=========================
Supplemental Plan
Change in benefit obligation:
Benefit obligation
at beginning of year $ 6,268 $ 7,238
Service cost 210 100
Interest cost 600 397
Actuarial (gain)/loss 3,917 (1,416)
Benefits paid (63) (51)
-------------------------
Benefit obligation at end of year
(accumulated benefit
obligation of $6,999 and
$4,905, respectively) $ 10,932 $ 6,268
=========================
Funded status:
Funded status at end of year $(10,932) $ (6,268)
Unrecognized actuarial (gain)/loss 5,490 1,725
Unrecognized prior service cost 1,102 1,180
-------------------------
Accrued benefit cost $ (4,340) $ (3,363)
=========================
31
<PAGE>
1998 1997 1996
-----------------------------
Qualified and
Supplemental Plans
Weighted-average
assumptions as of
December 31:
Discount rate 7.00% 7.25% 7.50%
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 $ 1,369 $ 1,224 $ 1,160
Interest cost 2,334 1,984 1,969
Expected return on assets (1,510) (1,367) (1,271)
Amortization of:
Transition asset (165) (165) (165)
Prior service cost 106 112 112
Actuarial loss 152 34 151
-----------------------------
Net periodic benefit cost 2,286 1,822 1,956
Curtailment credit - (559) -
-----------------------------
Total net periodic
benefit cost $ 2,286 $ 1,263 $ 1,956
=============================
14. STOCK OPTION AND AWARD PLANS
Under the company's stock option plans, all of the outstanding stock
options at December 31, 1998 were exercisable non-qualified options and had an
exercise price of not less than 100% of the fair market value of the common
stock on the date of grant. A summary of stock option transactions follows:
1998 1997 1996
--------------------------------------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
(000's) Option (000's) Option (000's) Option
Shares Price Shares Price Shares Price
--------------------------------------------------------------
Outstanding,
beginning
of year 420 $10.13 456 $ 9.77 657 $ 8.59
Exercised (40) 10.65 (36) 8.34 (201) 5.91
Expired - - (27) 8.93 - -
Granted - - 27 12.63 - -
--------- --------- ---------
Outstanding,
end of year 380 $10.07 420 $10.13 456 $ 9.77
==============================================================
Weighted avg.
fair value
of options
granted $ - $ 4.74 $ -
======= ======= =======
Information regarding such outstanding options at December 31, 1998
follows:
Weighted
Average Outstanding Weighted Range of
Remaining Options Average Exercise
Life (000's) Price Price
- ----------------------------------------------------------------
One year 314 $ 8.94 $ 8.83 to $ 9.00
Three years 45 16.81 $16.71 to $16.92
Seven years 21 12.63 $12.63 to $12.63
-----------------------
Total 380 $10.07
=======================
The company implemented a restricted stock award program during 1993.
Under this program, grants of the company's common stock will vest after an
incentive period, conditioned upon the recipient's employment throughout the
period. During the vesting period, shares issued are nontransferable, but the
shares are entitled to all of the rights of outstanding shares. In 1993, 96,000
shares were initially awarded under the program and 71,000 shares were
eventually distributed by 1998. In 1995 and 1997, 147,000 and 195,000 shares,
respectively, were also awarded and 124,000 and 172,000 shares, respectively,
remain outstanding at December 31, 1998. 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 1997 net income and earnings per share would have
been reduced to the pro forma amounts indicated below (1998 and 1996 would not
have been affected)(amounts in 000's, except per share data):
1997
-------
Net Income
As reported $17,550
Pro forma $17,467
Net Income per Common Share-basic
As reported 1.96
Pro forma 1.95
Net Income per Common Share-diluted
As reported 1.89
Pro forma 1.88
32
<PAGE>
The fair value of the 1997 option grant was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following (weighted
average) assumptions: dividend yield of 1.3%, expected volatility of 26.7%,
risk-free interest rates of 6.4% and expected lives of 7 years.
At December 31, 1998, 1,278,000 common shares are authorized for future
option awards or stock grants.
15. EARNINGS PER SHARE
The following table is a reconciliation of the number of shares used to
compute Basic and Diluted earnings per share. There was no adjustment necessary
to the income used in the Basic or Diluted calculations for the years ended
December 31, 1998, 1997 or 1996.
Shares in 000's
-----------------------------
1998 1997 1996
-----------------------------
Shares used in basic
EPS calculation
(shares outstanding) 9,018 8,956 8,844
Effect of dilutive
stock options 228 164 159
Effect of dilutive
restricted stock grants 166 172 96
-----------------------------
Shares used in diluted
EPS calculation 9,412 9,292 9,099
=============================
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.
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 1996 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.
16. CONTINGENCIES
Various litigation and claims against the company and its subsidiaries
are in process and pending. Based upon a review of open matters with legal
counsel, Management believes that the outcome of such matters will not have a
material effect upon the company's consolidated financial position or results
of operations.
17. 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.
Covenants included in the borrowing agreements of M/G Transport
Services, Inc. (the company's transportation subsidiary) limit its payment of
dividends to The Midland Company. Under the most restrictive of such covenants,
$12,642,000 of its $19,877,000 of shareholder's equity was not available for
distribution to the company at December 31, 1998.
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 1999 without regulatory
approval total approximately $21,087,000; such subsidiaries paid cash dividends
of $4,725,000 in 1998, $1,240,000 in 1997 and $4,375,000 in 1996.
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 $22,583,000,
$17,538,000 and $5,396,000 for 1998, 1997 and 1996, respectively. Shareholders'
equity on the same basis was $227,647,000 and $173,181,000 at December 31, 1998
and 1997.
18. 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 is a barge
affreightment operation primarily on the Gulf Coast and the lower Mississippi
River and its tributaries.
33
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Listed below is financial information required to be reported for each
industry segment. Certain amounts are allocated and certain amounts are not
allocated (n/a below) (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, 1998, 1997 and
1996 (amounts in 000's):
Insurance
---------------------------------- Corporate
Manufactured Unallocated and All Inter-segment
Housing Other Amounts Transportation Other Elimination Total
- ---------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
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
1996
- ----
Revenues-External customers 182,581 99,635 34,064 260 316,540
Net investment income 12,303 6,756 14 845 391 (1,801) 18,508
Net realized investment gains n/a n/a 2,690 2,690
Interest expense n/a n/a 1,391 984 5,895 (3,441) 4,829
Depreciation and amortization 1,878 1,025 2,488 2,548 7,939
Income-Continuing operations
before taxes 14,936 (5,342) (2,336) 2,763 (6,704) 3,317
Income tax expense 4,362 (2,549) (818) 825 (2,246) (426)
Acquisition of fixed assets n/a n/a 2,440 6,326 1,603 10,369
Identifiable assets n/a n/a 551,498 41,458 94,924 (31,901) 655,979
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. Except
for $16,518,000 of assets of discontinued operations included in corporate and
all other assets at the end of 1996, amounts above for 1997 and 1996 do not
include amounts related to discontinued sportswear operations (a separate
segment that, as discussed elsewhere herein, was sold in 1997). Inter-segment
revenues were not significant for 1998, 1997 or 1996.
In 1998 and 1997, revenues from one customer amounted to $61,865,000
and $41,011,000, respectively. No single customer accounted for 10% or more of
consolidated revenues in 1996.
</TABLE>
34
<PAGE>
MANAGEMENT'S REPORT
THE MIDLAND COMPANY AND SUBSIDIARIES
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
comprehensive internal controls which are supplemented by a program of internal
audits. Management believes that the company's internal controls are 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.
Deloitte & Touche LLP, independent auditors, have audited and reported
on the company's consolidated financial statements in accordance with generally
accepted auditing standards. Deloitte & Touche LLP reviews the results of its
audits 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.
INDEPENDENT AUDITORS' REPORT
THE MIDLAND COMPANY AND SUBSIDIARIES
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, 1998 and 1997, and the
related consolidated statements of income, of changes in shareholders' equity
and of cash flows for each of the three years in the period ended
December 31, 1998. 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, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
S/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
February 11, 1999
35
<PAGE>
<TABLE>
QUARTERLY DATA
THE MIDLAND COMPANY AND SUBSIDIARIES
THE MIDLAND COMPANY AND SUBSIDIARIES 1998 1997
- ----------------------------------------------------------------------------- ---------------------------------------
(Amounts in thousands, First Second Third Fourth First Second Third Fourth
except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------- ---------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
Revenues from continuing operations $107,237 $110,431 $112,538 $112,156 $ 89,753 $ 92,369 $ 92,425 $ 99,221
======================================= =======================================
Income from continuing operations $ 6,040 $ 3,638 $ 7,299 $ 9,955 $ 4,265 $ 5,047 $ 6,112 $ 8,943
Loss from discontinued operations - - - - (1,175) (1,067) (4,575) -
--------------------------------------- ---------------------------------------
Net income $ 6,040 $ 3,638 $ 7,299 $ 9,955 $ 3,090 $ 3,980 $ 1,537 $ 8,943
======================================= =======================================
Basic earnings (loss) per common share:
Continuing operations $ .67 $ .40 $ .81 $ 1.11 $ .48 $ .56 $ .68 $ 1.00
Discontinued operations - - - - (.13) (.12) (.51) -
--------------------------------------- ---------------------------------------
Total $ .67 $ .40 $ .81 $ 1.11 $ .35 $ .44 $ .17 $ 1.00
======================================= =======================================
Diluted earnings (loss) per common share:
Continuing operations $ .64 $ .39 $ .77 $ 1.06 $ .46 $ .55 $ .66 $ .96
Discontinued operations - - - - (.12) (.12) (.50) -
--------------------------------------- ---------------------------------------
Total $ .64 $ .39 $ .77 $ 1.06 $ .34 $ .43 $ .16 $ .96
======================================= =======================================
Cash dividends per common share $ .0625 $ .0625 $ .0625 $ .0625 $ .0583 $ .0583 $ .0583 $ .0583
======================================= =======================================
Price range of common stock (AMEX):
High $ 27.13 $ 31.67 $ 30.75 $ 22.50 $ 14.75 $ 16.67 $ 19.17 $ 21.50
======================================= =======================================
Low $ 19.42 $ 22.88 $ 22.50 $ 20.00 $ 12.42 $ 12.67 $ 16.42 $ 19.04
======================================= =======================================
</TABLE>
Note: The sum of the quarterly reported diluted earnings per share may not equal
the full year as each is computed independently.
Certain reclassifications have been made to 1997 revenues from continuing
operations to conform with 1998 classifications.
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 GENERAL AND TAX COUNSEL
Fifth Third Bank Deloitte & Touche LLP Cohen, Todd, Kite &
38 Fountain Square, 250 East Fifth Street Stanford, LLC
Mail Drop #10AT66 Cincinnati, Ohio 45202 525 Vine Building
Cincinnati, Ohio 45263 Cincinnati, Ohio 45202
SHAREHOLDERS' MEETING
The next meeting of the shareholders will be held at 10:00 a.m. on Thursday,
April 8, 1999 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 1998 Annual Report to the Securities and Exchange
Commission on Form 10-K may be obtained by writing to the company - Attention:
Chief Financial Officer.
36
INSIDE BACK COVER
OFFICERS AND DIRECTORS
THE MIDLAND COMPANY AND SUBSIDIARIES
BOARD OF DIRECTORS
George R. Baker
Corporate Director / Advisor
James E. Bushman +
President and Chief Executive Officer
Cast-Fab Technologies, Inc.
James H. Carey * +
Corporate Director/Advisor
Michael J. Conaton
Vice Chairman
Jerry A. Grundhofer *
President and Chief Executive Officer
Firstar Corporation
J. P. Hayden, Jr.
Chairman of the Executive
Committee of the Board
J. P. Hayden, III
Chairman and Chief Operating Officer
John W. Hayden
President and Chief Executive Officer
Robert W. Hayden
Formerly Vice President of the Company
William T. Hayden
Attorney
William J. Keating *
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 *
Chairman, President and CEO
Ohio National Financial Services
John M. O'Mara +
Corporate Director/Financial Consultant
Glenn E. Schembechler +
Professor Emeritus
University of Michigan
John I. Von Lehman
Executive Vice President,
Chief Financial Officer and Secretary
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
Kurt R. Schwamberger
Senior Vice President
Paul T. Brizzolara
Senior Vice President and
Chief Legal Officer
W. Todd Gray
Treasurer
Charles J. Jenkins
Vice President-Management
Information Systems
Michael L. Flowers
Vice President and Assistant Secretary
Henry N. Thoman
Assistant Vice President and
Assistant Secretary
Brenda D. Gumbs
Vice President - Human Resources
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
+ Member of Audit Committee
* Member of Compensation Committee
THE MIDLAND COMPANY AND SUBSIDIARIES
Exhibit (21) - Subsidiaries of the Registrant
December 31, 1998
The subsidiaries of the Registrant as of December 31, 1998, 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
The Atlas Insurance Agency, Inc. Ohio 100
American Modern Life Insurance Company Ohio 100
Midwest Enterprises, Inc. Florida 100
Lloyds Modern Corporation Texas 100
American Modern Home Service Company Ohio 100
SUBSIDIARIES OF AMERICAN MODERN HOME INSURANCE CO.:
American Modern Lloyds Insurance Company Texas 100
American Southern Home Insurance Company Florida 100
American Western Home Insurance Company Oklahoma 100
G.U.I.C. Insurance Company Pennsylvania 100
SUBSIDIARY OF AMERICAN WESTERN HOME INSURANCE CO.:
Modern Life Insurance Company of Arizona, Inc. Arizona 100
SUBSIDIARY OF MIDWEST ENTERPRISES, INC.:
Sunbelt General Agency, Inc. Alabama 100
The names of two wholly - owned subsidiaries of The Midland Company are not
shown above as such individual listing is not required.
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 453,422,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 136,748,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 590,170,000
<CASH> 3,687,000
<RECOVER-REINSURE> 20,430,000
<DEFERRED-ACQUISITION> 63,962,000
<TOTAL-ASSETS> 837,220,000
<POLICY-LOSSES> 125,496,000
<UNEARNED-PREMIUMS> 255,115,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 34,896,000
<NOTES-PAYABLE> 76,085,000
0
0
<COMMON> 911,000
<OTHER-SE> 247,921,000
<TOTAL-LIABILITY-AND-EQUITY> 837,220,000
375,478,000
<INVESTMENT-INCOME> 23,908,000
<INVESTMENT-GAINS> 6,354,000
<OTHER-INCOME> 36,622,000
<BENEFITS> 210,015,000
<UNDERWRITING-AMORTIZATION> 103,169,000
<UNDERWRITING-OTHER> 54,309,000
<INCOME-PRETAX> 37,527,000
<INCOME-TAX> 10,595,000
<INCOME-CONTINUING> 26,932,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,932,000
<EPS-PRIMARY> 2.99
<EPS-DILUTED> 2.86
<RESERVE-OPEN> 81,901,000
<PROVISION-CURRENT> 208,811,000
<PROVISION-PRIOR> (2,120,000)
<PAYMENTS-CURRENT> 157,530,000
<PAYMENTS-PRIOR> 42,795,000
<RESERVE-CLOSE> 88,267,000
<CUMULATIVE-DEFICIENCY> (2,120,000)
</TABLE>
