UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number - 1-6026
THE MIDLAND COMPANY
Incorporated in Ohio
I.R.S. Employer Identification No. 31-0742526
7000 Midland Boulevard
Amelia, Ohio 45102-2607
Tel. (513) 943-7100
Securities registered pursuant to Section 12(b) of the Act:
Common stock - no par value. - NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all other
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X_ No_____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting common stock held by
nonaffiliates, which includes shares held by executive officers and directors,
of the registrant as of March 20, 2000 was $203,208,000.
Number of shares of common stock outstanding as of March 20, 2000 -
9,451,517.
Documents Incorporated by Reference
Annual Report to Shareholders for the year ended December 31, 1999 is
incorporated by reference into Parts I, II and IV.
Registrant's Proxy Statement dated March 17, 2000 is incorporated by
reference into Parts III and IV.
<PAGE>
THE MIDLAND COMPANY
FORM 10-K
DECEMBER 31, 1999
Certain statements contained in this report that are not historical facts
constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. The Midland Company
undertakes no obligation to update any forward-looking statements to reflect
events or circumstances arising after the date on which they are made.
Statements concerning expected financial performance, on-going business
strategies and possible future action which The Midland Company intends to
pursue to achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors.
Factors which might cause deviations from the forward looking statements
include, without limitations, the following: 1) adverse weather conditions,
fluctuations in the investment markets, changes in the retail marketplace, or
fluctuations in interest rates; 2) changes in the laws or regulations affecting
the operations of the Company or any of its subsidiaries; 3) changes in the
business tactics or strategies of the Company or any of its subsidiaries;
4) acquisition(s) of assets or of new or complementary operations, or
divestiture of any segment of the existing operations of the Company or any of
its subsidiaries and 5) changing market forces or litigation which necessitate,
in management's judgment, changes in plans, strategy or tactics of the Company
or its subsidiaries or fluctuations in interest rates, any one of which might
materially affect the operations of the Company and/or its subsidiaries.
<PAGE>
PART I
ITEM 1. Business.
Incorporated by reference from the inside cover and pages 2 through 17
and 37 and 38 (Note 17) of the Registrant's 1999 Annual Report to
Shareholders. The number of persons employed by the Registrant was
approximately 980 at December 31, 1999.
Property and Casualty Loss Reserves
The Company's consolidated financial statements include the estimated
liability (reserves) for unpaid losses and loss adjustment expenses
(LAE) of its property and casualty insurance subsidiaries. The
liability is presented net of amounts recoverable from salvage and
subrogation and includes amounts recoverable from reinsurance for which
receivables are recognized.
The Company establishes reserves for losses that have been reported to
the Company and certain legal expenses on the "case basis" method. The
Company estimates claims incurred but not reported ("IBNR") and other
adjustment expenses using statistical procedures. The Company accrues
salvage and subrogation recoveries using the "case basis" method for
large claims and statistical procedures for smaller claims.
The Company's objective is to set reserves that are adequate; that is,
the amounts originally recorded as reserves should at least equal the
amounts ultimately expected to be required to settle losses. The
Company's reserves aggregate its best estimates of the total ultimate
cost of claims that have been incurred but have not yet been paid. The
estimates are based on past claims experience and reflect current claims
trends as well as social, legal and economic conditions, including
inflation. The reserves are not discounted.
The Company reviews its loss and loss adjustment expense reserve
development on a regular basis to determine whether the reserving
assumptions and methods are appropriate. Reserves initially determined
are compared to the amounts ultimately paid. The Company regularly
makes statistical estimates of the projected amounts necessary to settle
outstanding claims, compares these estimates to the recorded reserves
and adjusts the reserves as necessary. The adjustments are reflected in
current operations.
The principle reason for differences between the loss and LAE liability
reported in the accompanying consolidated financial statements in
accordance with generally accepted accounting principles ("GAAP") and
that reported in the annual statements filed with state insurance
departments in accordance with statutory accounting practices ("SAP")
relates to the reporting of reinsurance recoverables as receivables for
GAAP purposes and as a reduction in reserves for SAP purposes.
The following table provides an analysis of changes in loss and LAE
reserves for 1999, 1998 and 1997 (net of reinsurance amounts) for the
Company. Based on the information available during and at the end of
1999 and 1998, operations were credited $10,178,000 in 1999 and
$2,120,000 in 1998, respectively, as a result of a decrease in the
estimated amounts needed to settle prior years' claims. Based on
information available during and at the end of 1997, operations were
charged $5,230,000 in 1997 as a result of increases in such estimates.
Such reserve adjustments, which affected reported results of current
operations during each of the years, resulted from developed losses from
prior years being different than were anticipated when the liability for
losses and loss adjustment expense were originally estimated. These
development trends have been considered in establishing the current year
liabilities.
<PAGE>
Changes in Loss and LAE Reserves:
(amounts in 000's)
1999 1998 1997
-----------------------------------
Balance at January 1 $108,697 $108,334 $ 88,992
Less reinsurance recoverables 20,430 26,433 24,208
-----------------------------------
Net balance at January 1 88,267 81,901 64,784
-----------------------------------
Incurred related to:
Current year 211,066 208,811 163,035
Prior years (10,178) (2,120) 5,230
-----------------------------------
Total incurred 200,888 206,691 168,265
-----------------------------------
Paid related to:
Current year 159,045 157,530 113,841
Prior years 40,785 42,795 37,307
-----------------------------------
Total paid 199,830 200,325 151,148
-----------------------------------
Net balance at
December 31 89,325 88,267 81,901
Plus reinsurance recoverables 24,114 20,430 26,433
-----------------------------------
Balance at December 31 $113,439 $108,697 $108,334
===================================
Analysis of Loss and LAE Reserve Development
The next table presents the development of the estimated liability for
the ten years prior to 1999. The top line of the table illustrates the
estimated liability for unpaid losses and LAE recorded at the balance
sheet date at the end of each of the indicated years. This liability
represents the estimated amount of losses and LAE for claims arising in
all prior years that were unpaid at the balance sheet date, including
losses that had been incurred but not yet reported to the Company.
The upper portion of the table shows the re-estimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimate was increased or decreased as more
information became known about the frequency and severity of claims for
individual years. Conditions and trends that have affected development
of the liability in the past may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
The table shows the cumulative redundancy (deficiency) developed with
respect to the previously recorded liability for all years as of the
end of 1999. For example, the Company's 1992 reserve of $20,405,000 has
been re-estimated as of year-end 1999 to be $16,441,000, indicating a
redundancy of $3,964,000.
The lower section of the table shows the cumulative amount paid with
respect to the previously recorded liability as of the end of each
succeeding year. For example, as of December 31, 1999, the Company had
paid $16,435,000 of the currently estimated $16,441,000 of losses and
LAE that had been incurred as of the end of 1992; thus an estimated
$6,000 of losses incurred as of the end of 1992 remain unpaid as of the
current financial statement date.
In using this information, it should be noted that this table does not
present accident or policy year development data which readers may be
more accustomed to analyzing. Each amount in each column includes
amounts applicable to the year over the column and all prior years. For
example, the amounts included in the 1993 column include amounts related
to 1993 and all prior years.
The Company's reserve development is unfavorable for 1995 and 1996 due
to the Company's expansion into certain areas of commercial lines
insurance. However, reserve development is favorable for 1997 and 1998
due to a reduction in the aforementioned commercial lines business
combined with an overall strengthening of reserves.
<PAGE>
<TABLE>
Analysis of Loss and Loss Adjustment Expense Development
(Amounts in 000's)
Year Ended
December 31 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses, Net of
Reinsurance $15,732 $16,570 $19,089 $20,405 $27,744 $37,481 $47,712 $64,784 $81,901 $88,267 $89,325
Net Reserve Re-estimated
as of:
One Year Later 15,167 15,492 17,160 18,425 25,668 30,134 51,483 70,014 79,781 78,089
Two Years Later 15,043 14,859 15,699 18,451 22,686 32,074 53,467 67,310 77,148
Three Years Later 14,397 13,841 15,202 16,871 21,154 31,880 52,418 66,442
Four Years Later 13,773 13,929 14,497 16,616 20,966 31,734 51,688
Five Years Later 13,758 13,663 14,393 16,505 20,688 31,155
Six Years Later 13,754 13,598 14,373 16,445 20,629
Seven Years Later 13,722 13,589 14,361 16,441
Eight Years Later 13,741 13,579 14,354
Nine Years Later 13,732 13,576
Ten Years Later 13,727
Net Cumulative
Redundancy
(Deficiency) $ 2,005 $ 2,994 $ 4,735 $ 3,964 $ 7,115 $ 6,326 $(3,976) $(1,658) $ 4,753 $10,178
=========================================================================================
Net Cumulative
Amount of
Reserve Paid
Through:
One Year Later $11,210 $11,117 $10,937 $11,730 $ 9,684 $19,040 $31,471 $37,307 $42,795 $40,785
Two Years Later 12,902 12,488 12,685 14,397 18,445 26,471 41,785 51,461 57,677
Three Years Later 13,355 12,965 13,588 15,923 19,930 29,237 47,434 58,716
Four Years Later 13,465 13,208 14,171 16,312 20,427 30,425 49,596
Five Years Later 13,595 13,471 14,307 16,381 20,558 30,770
Six Years Later 13,689 13,530 14,331 16,420 20,598
Seven Years Later 13,704 13,550 14,356 16,435
Eight Years Later 13,703 13,574 14,354
Nine Years Later 13,727 13,576
Ten Years Later 13,727
Net Reserve - December 31 $20,405 $27,744 $37,481 $47,712 $64,784 $ 81,901 $ 88,267 $ 89,325
Reinsurance Recoverables 2,780 6,220 14,597 13,785 24,208 26,433 20,430 24,114
----------------------------------------------------------------------
Gross Reserve-December 31 $23,185 $33,964 $52,078 $61,497 $88,992 $108,334 $108,697 $113,439
======================================================================
Net Re-estimated Reserve $16,441 $20,629 $31,155 $51,668 $66,442 $ 77,148 $ 78,089
Re-estimated Reinsurance 2,240 4,625 12,133 14,928 24,828 24,899 18,074
-------------------------------------------------------------
Gross Re-estimated Reserve $18,681 $25,254 $43,288 $66,596 $91,270 $102,047 $ 96,163
=============================================================
Gross Cumulative Redundancy (Deficiency) $ 4,504 $ 8,710 $ 8,790 $(5,099) $(2,278) $ 6,287 $ 12,534
=============================================================
</TABLE>
<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. For
1999, the Company decided to cede less business to it reinsurers than in
prior years. This was significantly accomplished by a change in a quota
share reinsurance contract for manufacturing housing insurance. The
related terms were changed, applicable with business written in 1999,
from 12.5% of written premium with a maximum of $25 million to 8.0% with
the same maximum. At year end, the Company terminated the quota share
reinsurance agreement.
Significant Customer
As indicated in Note 17 to the Company's 1999 consolidated financial
statements, in 1999 and 1998, respectively, revenues (including amounts
that are ultimately ceded to reinsurers) from one customer amounted to
$64,621,000 and $61,865,000. That customer is Conseco Inc. which merged
with Greentree Financial Corporation during 1999.
ITEM 2. Properties.
The Company owns its 275,000 square foot principal offices located in
Amelia, Ohio. The Company's insurance subsidiaries lease office space
in Montgomery, Alabama, St. Louis, Missouri, Auburn Hills, Michigan and
Grand Rapids, Michigan. The Company's transportation subsidiaries lease
offices in Metairie, Louisiana.
ITEM 3. Legal Proceedings.
Reference is made to Item 3 of the December 31, 1995 Registrant's Form
10-K concerning criminal litigation against M/G Transport Services, Inc.
(M/G), a subsidiary of Registrant. On April 22, 1999, a three judge
panel of the Sixth Circuit Court of Appeals issued an opinion reversing
the earlier ruling of the trial court that dismissed six of the eight
counts against M/G and several counts against individual defendants
formerly employed by M/G. All of the verdicts against M/G on the six
counts that had been dismissed by the trial court were reinstated by
the Court of Appeals. On January 20, 2000, M/G was sentenced to a fine
of $150,000 and two years probation concerning the 6 reinstated counts.
The January 20, 2000 sentencing concluded the case against M/G.
Registrant had established and maintained adequate accruals relating to
the fines connected with the M/G litigation and such fines did not have
a material adverse effect on the financial condition or the results of
Registrant's operations.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None during the fourth quarter.
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Security Holder
Matters. Incorporated by reference to pages 37 (Note 16) and 40 of the
Registrant's 1999 Annual Report to Shareholders. The number of holders
of the Company's common stock at December 31, 1999 was approximately
1,530. The Company's common stock is registered on the NASDAQ (MLAN).
ITEM 6. Selected Financial Data.
Incorporated by reference to pages 18 and 19 of the Registrant's 1999
Annual Report to Shareholders.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated by reference to pages 20 through 25 of the Registrant's
1999 Annual Report to Shareholders.
<PAGE>
PART II (Continued)
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Incorporated by reference to page 24 of the Registrant's 1999 Annual
Report to Shareholders.
ITEM 8. Financial Statements and Supplementary Data.
Incorporated by reference to pages 26 through 40 of the Registrant's
1999 Annual Report to Shareholders.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
Incorporated by reference to the Registrant's Proxy Statement dated
March 17, 2000.
Executive Officers of the Company -
J. P. Hayden, Jr. - Age 70 - Chairman of the Executive Committee of
the Board
Michael J. Conaton - Age 66 - Vice Chairman of the Company and Vice
Chairman of the Board
J. P. Hayden III - Age 47 - Chairman of the Board and Chief Operating
Officer
John W. Hayden - Age 42 - President, Chief Executive Officer and a
Director
John I. Von Lehman - Age 47 - Executive Vice President, Chief Financial
Officer, Secretary and a Director
Paul T. Brizzolara - Age 42 - Senior Vice President and Chief Legal
Officer
W. Todd Gray - Age 32 - Treasurer
The officers listed above have served in the positions indicated for
the past five years (except as noted below or in the Company's proxy
statement).
During 1998, Paul T. Brizzolara was elected Senior Vice President and
Chief Legal Officer of The Midland Company. Mr. Brizzolara was
previously the Company's Assistant Vice President, Assistant Chief
Counsel and Assistant Secretary of The Midland Company and will
continue as Assistant Secretary in his new position.
Also in 1998, (i) J.P. Hayden III was elected Chairman and Chief
Operating Officer of the Company, (ii) John W. Hayden was elected
President and Chief Executive Officer, (iii) J.P. Hayden, Jr. was
elected Chairman of the Executive Committee of the Board and (iv)
Michael J. Conaton was elected Vice Chairman of the Company and Vice
Chairman of the Board.
During 1997, W. Todd Gray was elected Treasurer. Mr. Gray joined
Midland in 1994 and served as Internal Audit Manager and, more
recently, Assistant Treasurer. Prior to that he was employed by a
national accounting firm.
During 1996, J. P. Hayden III and John W. Hayden (formerly Vice
Presidents) were elected Senior Executive Vice Presidents. Also in
1996, John I. Von Lehman (formerly Vice President, Treasurer and Chief
Financial Officer) was elected Executive Vice President and Chief
Financial Officer.
J. P. Hayden III and John W. Hayden are brothers and are sons of
J.P. Hayden, Jr.
<PAGE>
PART III (Continued)
ITEM 11. Executive Compensation.
Incorporated by reference to the Registrant's Proxy Statement dated
March 17, 2000.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Registrant's Proxy Statement dated
March 17, 2000.
ITEM 13. Certain Relationships and Related Transactions.
Incorporated by reference to the Registrant's Proxy Statement dated
March 17, 2000.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements.
Incorporated by reference in Part II of this report:
Independent Auditors' Report.
Consolidated Balance Sheets, December 31, 1999 and 1998.
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 1999, 1998
and 1997.
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(a) 2. Financial Statement Schedules.
Included in Part IV of this report:
Page
----
Independent Auditors' Consent and Report on Schedules. 12
Schedule I - Summary of Investments - Other Than
Investments in Related Parties - December 31, 1999 13
Schedule II - Condensed Financial Information of
Registrant 14-18
Schedule III - Supplementary Insurance Information
for the Years Ended December 31, 1999, 1998 and
1997 19
Schedule IV - Reinsurance for the Years Ended
December 31, 1999, 1998 and 1997 20
Schedule V - Valuation and Qualifying Accounts for the
Years Ended December 31, 1999, 1998 and 1997 21
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations for the
Years Ended December 31, 1999, 1998 and 1997 22
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission have been omitted because such schedules
are not required under the related instructions, are
inapplicable or the information is included in the financial
statements or notes thereto.
<PAGE>
PART IV (Continued)
Page
----
(a) 3. Exhibits.
3. Articles of Incorporation and Code of Regulations -
Filed as Exhibits 3(i) and 3(ii) to the Registrant's
Form 10-Q for the quarter ended June 30, 1998 and
incorporated herein by reference.
10. The Midland Company 1992 Employee Incentive Stock Plan
and The Midland Company Stock Option Plan for
Non-Employee Directors and The Midland Company 1972
Stock Options Plan-Incorporated by reference to
Registrant's Statement 33-48511 on Form S-8.
13. Annual Report to security holders - Incorporated by
reference to the Registrant's 1999 Annual Report to
Shareholders.
21. Subsidiaries of the Registrant. 23
22. Published Report Regarding Matters Submitted to Vote
of Security Holders - Incorporated by Reference to
the Registrant's Proxy Statement dated March 17,
2000.
23. Independent Auditors' Consent - Included in Consent
and Report on Schedules referred to under Item
14(a)2 above.
27. Financial Data Schedule
(b) Reports on Form 8-K - None during 1999.
<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 20, 2000
- -------------------------- Chief Operating Officer
(J. P. Hayden, III)
S/ John W. Hayden President and March 20, 2000
- -------------------------- Chief Executive Officer
(John W. Hayden)
S/ John I. Von Lehman Executive Vice President, March 20, 2000
- -------------------------- Chief Financial and
(John I. Von Lehman) Accounting Officer
and Secretary
<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 20, 2000
- --------------------------
(George R. Baker)
S/ James E. Bushman Director and Member March 20, 2000
- -------------------------- of Audit Committee
(James E. Bushman)
S/ James H. Carey Director and Member March 20, 2000
- -------------------------- of Audit Committee
(James H. Carey)
S/ Michael J. Conaton Vice Chairman March 20, 2000
- --------------------------
(Michael J. Conaton)
S/ Jerry A. Grundhofer Director March 20, 2000
- --------------------------
(Jerry A. Grundhofer)
S/ J. P. Hayden, Jr. Chairman of the Executive March 20, 2000
- -------------------------- Committee of the Board
(J. P. Hayden, Jr.)
S/ J. P. Hayden, III Chairman and March 20, 2000
- -------------------------- Chief Operating Officer
(J. P. Hayden, III)
S/ John W. Hayden President and March 20, 2000
- -------------------------- Chief Executive Officer
(John W. Hayden)
S/ Robert W. Hayden Director March 20, 2000
- --------------------------
(Robert W. Hayden)
S/ William T. Hayden Director March 20, 2000
- --------------------------
(William T. Hayden)
S/ William J. Keating Director March 20, 2000
- --------------------------
(William J. Keating)
S/ John R. LaBar Director March 20, 2000
- --------------------------
(John R. LaBar)
S/ David B. O'Maley Director March 20, 2000
- --------------------------
(David B. O'Maley)
S/ John M. O'Mara Director and Member March 20, 2000
- -------------------------- of Audit Committee
(John M. O'Mara)
S/ Glenn E. Schembechler Director and Member March 20, 2000
- -------------------------- and Member Committee
(Glenn E. Schembechler)
S/ John I. Von Lehman Executive Vice President, March 20, 2000
- -------------------------- Chief Financial and
(John I. Von Lehman) Accounting Officer,
Secretary and Director
<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 10, 2000, incorporated by reference in this Annual
Report on Form 10-K, and our report (appearing below) on the financial statement
schedules of The Midland Company for the year ended December 31, 1999.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedules of The
Midland Company and its subsidiaries, listed in Item 14(a)2. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/S/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Cincinnati, Ohio
March 20, 2000
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule I - Summary of Investments
Other than Investments in Related Parties
December 31, 1999
Column A Column B Column C Column D
- -----------------------------------------------------------------------------------------------------------
Amount at
Which Shown
in the Balance
Type of Investment Cost Value Sheet
- -----------------------------------------------------------------------------------------------------------
<C> <C> <C>
Fixed maturity securities, available-for-sale:
Bonds:
United States Government and government
agencies and authorities $ 91,020,000 $ 90,006,000 $ 90,006,000
States, municipalities and political subdivisions 171,926,000 168,415,000 168,415,000
Mortgage-backed securities 55,269,000 54,092,000 54,092,000
Foreign governments 3,633,000 3,526,000 3,526,000
Public utilities 8,832,000 8,373,000 8,373,000
All other corporate bonds 104,173,000 101,721,000 101,721,000
---------------------------------------------------
Total 434,853,000 426,133,000 426,133,000
---------------------------------------------------
Equity securities, available-for-sale:
Common stocks:
Public utilities 732,000 818,000 818,000
Banks, trusts and insurance companies 8,629,000 60,682,000 60,682,000
Industrial, miscellaneous and all other 34,126,000 66,795,000 66,795,000
Nonredeemable preferred stocks 2,483,000 2,362,000 2,362,000
---------------------------------------------------
Total 45,970,000 130,657,000 130,657,000
---------------------------------------------------
Accrued interest and dividends 6,740,000 XXXXXXX 6,740,000
---------------------------------------------------
Mortgage loans on real estate 8,655,000 XXXXXXX 8,655,000
---------------------------------------------------
Short-term investments 38,674,000 XXXXXXX 38,674,000
---------------------------------------------------
Total Investments $534,892,000 XXXXXXX $610,859,000
===================================================
</TABLE>
13
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheet Information
December 31, 1999 and 1998
ASSETS 1999 1998
------------- -------------
Cash $ 148,000 $ 96,000
------------- -------------
Marketable Securities Available
for Sale (at market value):
Debt Securities (cost, $122,000 in 1999
and $497,000 in 1998) 122,000 497,000
Equity (cost, $342,000 in 1999 and
$341,000 in 1998) 2,696,000 3,937,000
------------- -------------
Total 2,818,000 4,434,000
------------- -------------
Receivables - Net 11,042,000 8,932,000
------------- -------------
Intercompany Receivables 9,637,000 --
------------- -------------
Property, Plant and Equipment (at cost): 37,315,000 37,314,000
Less Accumulated Depreciation 7,289,000 5,439,000
------------- -------------
Net 30,026,000 31,875,000
------------- -------------
Other Assets 5,558,000 13,562,000
------------- -------------
Investments in Subsidiaries (at equity) 250,179,000 247,569,000
------------- -------------
Total Assets $309,408,000 $306,468,000
============= =============
14
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheet Information
December 31, 1999 and 1998
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------- -------------
Notes Payable Within One Year:
Banks (including current portion of
long-term debt) $ 21,297,000 $ 16,710,000
Commercial Paper 5,550,000 6,522,000
------------- -------------
Total 26,847,000 23,232,000
------------- -------------
Other Payables and Accruals 6,634,000 4,664,000
------------- -------------
Intercompany Payables -- 3,469,000
------------- -------------
Long - Term Debt 17,925,000 26,271,000
------------- -------------
Shareholders' Equity:
Common Stock - No Par (issued and
outstanding: 9,516,000 shares at
December 31, 1999 and 9,352,000 shares
at December 31, 1998 after deducting
treasury stock of 1,412,000 shares
and 1,576,000 shares, respectively) 911,000 911,000
Additional Paid - in Capital 18,583,000 15,947,000
Retained Earnings 207,005,000 178,398,000
Accumulated Other Comprehensive Income 49,388,000 70,507,000
Treasury Stock (at cost) (15,786,000) (15,293,000)
Unvested Restricted Stock Awards (2,099,000) (1,638,000)
------------- -------------
Total 258,002,000 248,832,000
------------- -------------
Total Liabilities and
Shareholders' Equity $309,408,000 $306,468,000
============= =============
15
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Statements of Income Information
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------- ------------- -------------
Revenues:
Dividends from Subsidiaries $ 9,000,000 $ 3,000,000 $ 8,900,000
All Other Income, Primarily Charges
to Subsidiaries 6,359,000 6,934,000 7,746,000
------------- ------------- -------------
Total Revenues 15,359,000 9,934,000 16,646,000
------------- ------------- -------------
Expenses:
Interest Expense 3,391,000 3,971,000 4,775,000
Depreciation and Amortization 3,973,000 2,701,000 6,195,000
All Other Expenses 1,786,000 2,303,000 833,000
------------- ------------- -------------
Total Expenses 9,150,000 8,975,000 11,803,000
------------- ------------- -------------
Income Before Federal Income Tax 6,209,000 959,000 4,843,000
Provision (Credit) for Federal
Income Tax (1,023,000) (1,023,000) (1,599,000)
------------- ------------- -------------
Income Before Change in Undistributed
Income of Subsidiaries 7,232,000 1,982,000 6,442,000
Change in Undistributed Income
of Subsidiaries:
From Continuing Operations 23,947,000 24,950,000 17,925,000
From Discontinued Operations - - (6,817,000)
------------- ------------- -------------
Net Income $ 31,179,000 $ 26,932,000 $ 17,550,000
============= ============= =============
16
<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, 1999, 1998 and 1997
1999 1998 1997
------------- ------------- -------------
Cash Flows from Operating Activities:
Net income $ 31,179,000 $ 26,932,000 $ 17,550,000
Loss from discontinued operations - - 6,817,000
------------- ------------- -------------
Income from continuing operations 31,179,000 26,932,000 24,367,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in undistributed income
of subsidiaries (23,947,000) (24,950,000) (17,925,000)
Decrease (increase) in other
assets 8,004,000 (1,142,000) (1,286,000)
Depreciation and amortization 3,973,000 2,701,000 6,195,000
Increase in other payables and
accruals 2,422,000 153,000 1,575,000
Decrease (increase) in receivables (1,170,000) (1,922,000) 134,000
Other - net 19,000 251,000 36,000
------------- ------------- -------------
Net Cash Provided by
Operating Activities 20,480,000 2,023,000 13,096,000
------------- ------------- -------------
Cash Flows from Investing Activities:
Change in investments (excluding
unrealized appreciation/
depreciation) 373,000 1,943,000 (1,991,000)
Capital contributions to
subsidiaries - - (12,326,000)
Acquisition of property, plant and
equipment (279,000) (1,657,000) (2,617,000)
Sale of property, plant and
equipment and other real
estate - net 214,000 5,969,000 535,000
------------- ------------- -------------
Net Cash Provided by (Used in)
Investing Activities 308,000 6,255,000 (16,399,000)
------------- ------------- -------------
Cash Flows from Financing Activities:
Net change in intercompany accounts (12,080,000) 2,968,000 7,323,000
Increase (decrease) in long - term
debt (8,760,000) (1,458,000) 948,000
Increase (decrease) in short - term
borrowings 4,028,000 (8,269,000) (2,909,000)
Purchase of treasury stock (3,709,000) (1,271,000) (17,000)
Dividends paid (2,515,000) (1,746,000) (2,677,000)
Issuance of treasury stock 2,300,000 1,358,000 604,000
------------- ------------- -------------
Net Cash Provided by (Used in)
Financing Activities (20,736,000) (8,418,000) 3,272,000
------------- ------------- -------------
Net Increase (Decrease) in Cash 52,000 (140,000) (31,000)
Cash at Beginning of Year 96,000 236,000 267,000
------------- ------------- -------------
Cash at End of Year $ 148,000 $ 96,000 $ 236,000
============= ============= =============
17
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Notes to Condensed Financial Information
For the Years Ended December 31, 1999 and 1998
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes included in the
Registrant's 1999 Annual Report to Shareholders.
Total debt of the Registrant (parent only) consists of the following:
DECEMBER 31,
1999 1998
------------ ------------
Short - Term Bank Borrowings $20,000,000 $15,000,000
Commercial Paper 5,550,000 6,522,000
Mortgage Notes:
7.10% - Due January 1, 2001 642,000 1,227,000
6.83% - Due December 20, 2005 18,580,000 19,195,000
5.40% - Due December 1, 2003 - 7,559,000
------------ ------------
Total Debt $44,772,000 $49,503,000
============ ============
See Notes 7 and 8 to the consolidated financial statements included in the 1999
Annual Report to Shareholders for further information on the Company's
outstanding debt at December 31, 1999.
The amount of debt that becomes due during each of the next five years is as
follows: 2000 - $1,297,000; 2001 - $706,000; 2002 - $756,000; 2003 - $810,000;
2004 - $865,000.
18
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For the Years Ended December 31, 1999, 1998 and 1997
(Amounts in 000's)
Column A Column B Column C Column D Column E Column F Column G
Future
Policy
Deferred Benefits, Other Policy
Policy Losses, Claims and Net
Acquisition Claims and Unearned Benefits Premium Investment
Cost Loss Expenses Premiums Payable Revenue Income (1)
----------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
1999
Manufactured Housing $ 67,336 $ 8,170 $ 241,407 $283,332 $ 15,526
Other Insurance 17,832 125,543 71,431 117,659 10,631
Unallocated Amounts 19
Inter-segment Elimination (884)
----------------------------------------------------------------------------------------
Total $ 85,168 $ 133,713 $ 312,838 $ - $400,991 $ 25,292
========================================================================================
1998
Manufactured Housing $ 48,260 $ 48,939 $ 209,171 $258,638 $ 14,875
Other Insurance 15,702 76,557 45,944 116,840 9,923
Unallocated Amounts 34
Inter-segment Elimination (924)
----------------------------------------------------------------------------------------
Total $ 63,962 $ 125,496 $ 255,115 $ - $375,478 $ 23,908
========================================================================================
1997
Manufactured Housing $ 43,366 $ 42,430 $ 195,793 $219,394 $ 13,935
Other Insurance 12,224 77,704 44,547 91,765 8,359
Unallocated Amounts 24
Inter-segment Elimination (986)
----------------------------------------------------------------------------------------
Total $ 55,590 $ 120,134 $ 240,340 $ - $311,159 $ 21,332
========================================================================================
Column H Column I Column J Column K
Benefits, Amortization of
Claims, Losses Deferred Policy Other
and Settlement Acquisition Operating Premiums
Expenses Costs Expenses (1) Written
------------------------------------------------ ---------
<C> <C> <C> <C>
1999
Manufactured Housing $ 133,436 $ 82,302 $ 40,610 $306,446
Other Insurance 70,929 31,910 25,931 137,049 (2)
Unallocated Amounts
Inter-segment Elimination
------------------------------------------------ ---------
Total $ 204,365 $ 114,212 $ 66,541 $443,495
================================================ =========
1998
Manufactured Housing $ 137,483 $ 71,288 $ 31,005 $283,020
Other Insurance 72,532 31,881 23,304 110,987 (2)
Unallocated Amounts
Inter-segment Elimination
------------------------------------------------ ---------
Total $ 210,015 $ 103,169 $ 54,309 $394,007
================================================ =========
1997
Manufactured Housing $ 100,919 $ 64,265 $ 27,763 $247,704
Other Insurance 70,244 15,253 21,355 97,745 (2)
Unallocated Amounts
Inter-segment Elimination
------------------------------------------------ ---------
Total $ 171,163 $ 79,518 $ 49,118 $345,449
================================================ =========
Notes to Schedule III:
- ----------------------
(1) Net investment income is allocated to insurance segments based upon a combination of
premium cash flow and equity data. Other operating expenses include expenses
directly related to the segments and expenses allocated to the segments based on
historical usage factors.
(2) Includes other property and casualty insurance and accident and health insurance
($3,632, $2,237 and $2,738 for 1999, 1998 and 1997, respectively).
</TABLE>
19
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule IV - Reinsurance
For the Years Ended December 31, 1999, 1998 and 1997
Column A Column B Column C Column D Column E Column F
Ceded to Assumed Percentage of
Gross Other from Other Net Amount Assumed
Amount Companies Companies Amount to Net
-----------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1999
- ----
Life Insurance in Force $507,134,000 $233,506,000 $23,359,000 $296,987,000 7.9%
===================================================================================
Insurance Premiums and
Other Considerations:
Life and Health Insurance $ 14,315,000 $ 6,346,000 $ 333,000 $ 8,302,000 4.0%
Property & Liability Insurance 409,506,000 55,620,000 38,803,000 392,689,000 9.9%
-----------------------------------------------------------------------------------
Total Premiums $423,821,000 $ 61,966,000 $39,136,000 $400,991,000 9.8%
===================================================================================
1998
- ----
Life Insurance in Force $416,892,000 $167,412,000 $ 1,895,000 $251,375,000 0.8%
===================================================================================
Insurance Premiums and
Other Considerations:
Life and Health Insurance $ 10,374,000 $ 4,058,000 $ 111,000 $ 6,427,000 1.7%
Property & Liability Insurance 394,166,000 60,573,000 35,458,000 369,051,000 9.6%
-----------------------------------------------------------------------------------
Total Premiums $404,540,000 $ 64,631,000 $35,569,000 $375,478,000 9.5%
===================================================================================
1997
- ----
Life Insurance in Force $371,298,000 $170,668,000 $200,630,000 0.0%
===================================================================================
Insurance Premiums and
Other Considerations:
Life and Health Insurance $ 9,761,000 $ 4,371,000 $ 214,000 $ 5,604,000 3.8%
Property & Liability Insurance 375,967,000 98,406,000 27,994,000 305,555,000 9.2%
-----------------------------------------------------------------------------------
Total Premiums $385,728,000 $102,777,000 $28,208,000 $311,159,000 9.1%
===================================================================================
</TABLE>
20
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule V - Valuation and Qualifying Accounts
For the Years Ended December 31, 1999, 1998 and 1997
ADDITIONS
CHARGED
BALANCE AT (CREDITED) TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (ADDITIONS) OF PERIOD
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999:
Allowance For Losses $753,000 $192,000 $138,000 (1) $807,000
YEAR ENDED DECEMBER 31, 1998:
Allowance For Losses $753,000 $176,000 $176,000 (1) $753,000
YEAR ENDED DECEMBER 31, 1997:
Allowance For Losses $799,000 $184,000 $230,000 (1) $753,000
NOTES:
(1) Accounts written off are net of recoveries.
21
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations
For the Years Ended December 31, 1999, 1998 and 1997
(Amounts in 000's)
Column A Column B Column C Column D Column E Column F Column G
Reserves for
Deferred Unpaid Claims Discount,
Affiliation Policy and Claim if any, Net
with Acquisition Adjustment Deducted in Unearned Earned Investment
Registrant Costs Expenses Column C Premiums Premiums Income
- ------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Consolidated
Property-Casualty
Subsidiaries
1999 $ 76,031 $ 128,467 $ - $ 281,442 $ 392,689 $ 23,746
=========== =========== ========== =========== ========== ============
1998 $ 59,736 $ 121,154 $ - $ 236,171 $ 369,051 $ 22,468
=========== =========== ========== =========== ========== ============
1997 $ 52,198 $ 116,898 $ - $ 222,530 $ 305,555 $ 20,018
=========== =========== ========== =========== ========== ============
Column H Column I Column J Column K
Claims and
Claim
Adjustment
Expenses Amortization
Incurred of Deferred Paid Claims
Related to Policy and Claim
Current Prior Acquisition Adjustment Premiums
Year Years Costs Expenses Written
- ---------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Consolidated
Property-Casualty
Subsidiaries
1999 $ 211,066 $ (10,178) $ 108,689 $ 199,830 $ 439,863
=========== ========== =========== =========== ===========
1998 $ 208,811 $ (2,120) $ 100,190 $ 200,325 $ 391,770
=========== ========== =========== =========== ===========
1997 $ 163,035 $ 5,230 $ 77,100 $ 151,148 $ 342,711
=========== ========== =========== =========== ===========
Note: Certain amounts above will not agree with Schedule III because other insurance amounts in
Schedule III include life and accident and health insurance.
</TABLE>
22
<PAGE>
COMPANY PROFILE
The Midland Company is a highly focused provider of specialty insurance products
and services through its American Modern Insurance Group (AMIG) subsidiary,
which contributes more than 90% of the company's revenues.
AMIG is a leader in the manufactured housing insurance market, and also offers
other specialty insurance products and services through diverse distribution
channels. Innovative products, flexible coverage, expert claims management and
superior underwriting make AMIG an indispensable partner to its customers. AMIG
has a record of exceeding the insurance industry's rates of growth and
profitability. Over the past five years, AMIG's gross written premium has
expanded at an 11.4% rate, compared with 3.4% for the industry.
For 1999, Midland reported that net operating income grew 27 percent to $28.9
million, or $3.06 per share (diluted), on a 6 percent increase in revenue to
$469.1 million. Net income (including capital gains) reached a record $31.2
million, or $3.30 per share (diluted).
The strong performance marked the third consecutive year that Midland posted
record-breaking results from continuing operations. Management remains confident
that the company's strategic plan, effectively executed, should result in an
even greater future. Midland expects to continue to differentiate itself from
the competition in 2000, making itself an indispensable partner to its
customers. The company also is committed to expanding its non-insurance,
fee-generating business to create a sustainable competitive advantage. In
addition, Midland's M/G Transport subsidiary represents a lucrative investment
in a niche river transportation business.
The Midland Company's Mission
To be an indispensable partner to customers within chosen markets by providing
value-adding specialty products and services delivered by the best professionals
in the industry.
TABLE OF CONTENTS
Financial Highlights 1
Letter to Shareholders 2-5
AMIG-Indispensable Partner 6-15
Focus on Investment Results 16
Focus on M/G Transport 17
Six Year Financial Summary Data 18-19
Management's Discussion and Analysis 20-25
Private Securities Reform Act of 1995-
Forward Looking Statements Disclosure 25
Income Statements 26
Balance Sheets 27
Changes in Shareholders' Equity 28
Cash Flows 29
Notes to Financial Statements 30-38
Management's Report 39
Independent Auditors' Report 40
Officers and Directors 41
<PAGE>
FINANCIAL HIGHLIGHTS
THE MIDLAND COMPANY AND SUBSIDIARIES
For the Years Ended December 31,
(Amounts in thousands, except
per share data) 1999 1998 % Change
- --------------------------------------------------------------------------------
Operating Performance
Revenues $ 469,126 $ 442,362 6.1%
Income Before Federal Income Tax $ 43,713 $ 37,527 16.5%
Operating Income (After-Tax) $ 28,913 $ 22,802 26.8%
Capital Gains (After-Tax) $ 2,266 $ 4,130 (45.1%)
Net Income $ 31,179 $ 26,932 15.8%
Per Share Data
Net Income-Basic $ 3.42 $ 2.99 14.4%
Average Shares Outstanding-Basic 9,111 9,018
Operating Income (Excludes Capital
Gains)-Diluted $ 3.06 $ 2.42 26.4%
Net Income-Diluted $ 3.30 $ 2.86 15.4%
Average Shares Outstanding-Diluted 9,463 9,412
Cash Dividends $ .27 $ .25 8.0%
Book Value $ 27.11 $ 26.61 1.9%
Financial Position
Total Assets $ 888,057 $ 837,220 6.1%
Shareholders' Equity $ 258,002 $ 248,832 3.7%
Performance Ratios
Combined Ratio (GAAP) (AMIG Property
and Casualty Companies) 94.4% 96.9%
Return on Beginning Equity 12.5% 13.7%
This page includes three five year bar charts with the following data:
REVENUES (Continuing Operations) dollars in millions
95 96 97 98 99
Revenues $313.2 $337.7 $373.8 $442.4 $469.1
Caption:
Midland's revenue growth from continuing operations maintained a healthy pace in
1999, totaling $469.1 million. Non-insurance, fee-generating products and
services within the Company's Modern Services Group subsidiary helped fuel
top-line growth, producing three times as much gross fee income in 1999 as in
1998.
NET INCOME AND NET OPERATING INCOME PER SHARE (Continuing Operations)
95 96 97 98 99
Operating Income $1.57 $0.22 $2.33 $2.42 $3.06
Net Income 1.74 .41 2.63 2.86 3.30
Caption:
Midland enjoyed another year of record results in 1999, with net operating
income rising 26.8 percent to $28.9 million compared with record 1998 operating
earnings of $22.8 million. Net operating income per diluted share totaled
$3.06 in 1999, up from $2.42 in 1998.
BOOK VALUE PER SHARE
95 96 97 98 99
BOOK VALUE PER SHARE $17.28 $17.50 $21.11 $26.61 $27.11
Caption:
Midland's Book Value Per Share has grown at a compounded rate of 13.0% over the
last five years.
1
<PAGE>
LETTER TO SHAREHOLDERS
Nineteen ninety-nine was more than the end of an incredible millennium
of an almost unimaginable worldwide technological revolution. It was the bridge
between Midland's 61-year rise to leadership in the specialty insurance
marketplace and the unparalleled promise of exhilarating new opportunities in
the century ahead.
It was a year that saw us remain clearly focused on the strategic
directions we had mapped out for ourselves. And, it was a time that saw us defy
the gravity of sustained growth by producing results that, once again,
outperformed the industry while, at the same time, laying the framework for new
products and services that will ensure a sustainable competitive advantage for
your company in the future.
The driving force behind The Midland Company's performance in 1999 was
our goal to reaffirm our role as an indispensable partner for customers in the
markets in which we choose to compete. Through the strong growth and
performance of American Modern Insurance Group (AMIG), our specialty insurance
subsidiary, we feel we have delivered on this goal and we are pleased with our
financial results for the year. Our focus and expertise as a specialty insurer,
coupled with a clear strategy for growth and expansion, will continue to
position AMIG as a leader in its market segments in 2000 and beyond. We believe
that implementation of our strategies will allow AMIG to continue to exceed the
insurance industry's rates of growth and profitability in years to come.
RECORD PERFORMANCE REFLECTS SOUND INSURANCE FUNDAMENTALS
Our strategy of choosing select markets and applying our
results-oriented market leadership has produced consistently strong financial
gains for The Midland Company - and 1999 was no exception. Revenue for the year
increased 6.1% to a record $469.1 million from $442.4 million in 1998, while net
operating income (which excludes capital gains) rose 26.8% to a record $28.9
million, or $3.06 per share (diluted). Net income for the year was also a
record $31.2 million, or $3.30 per share, with return on beginning equity at
12.5% in 1999. These solid results reflect the record underwriting profits that
were derived from sound management and underwriting fundamentals and the
performance of our investment portfolio.
The success of American Modern Insurance Group draws upon our ability to
effectively utilize our multi-faceted distribution network to cross-sell
products and services and to understand the needs of our customers. We are
committed to building relationships within each of our channels in a way that
also leverages their market segment expertise to effectively deliver our
products.
It was a dynamic year for AMIG, with direct and assumed written premiums
for our property and casualty operations growing 6.0% to $472.0 million in 1999
from $445.3 million in 1998, a rate of growth more than 2.5 times the industry
average. Manufactured housing direct and assumed written premiums reached
$324.4 million in 1999, an increase of 9.1%
This page includes a bar chart with the following data:
MIDLAND'S COMPOUNDED ANNUAL GROWTH RATE IN OPERATING EARNINGS PER SHARE
10 YR 12.3%
5 YR 22.5%
1 YR 26.3%
2
<PAGE>
from 1998. Including the net impact of weather-related catastrophe losses,
such as Hurricane Floyd, the combined ratio for the year was 94.4% compared with
96.9% for 1998 (both well below industry averages). Excluding catastrophe
losses, the combined ratio was 88.5% in 1999.
M/G Transport, our transportation subsidiary, contributed total revenue
in 1999 of $31.3 million. Because M/G's affreightment revenues and operating
profits are partially dependent on the energy industry, pre-tax operating
profits decreased to $1.8 million in 1999 from $4.4 million in 1998. Cash flow
from M/G Transport operations was $4.1 million compared with $4.8 million in
1998. M/G's after-tax contribution to net income was $1.2 million, or $0.12
per share (diluted). M/G's historic financial performance and successful market
niche make it a lucrative investment for The Midland Company.
Midland and AMIG employ a conservative investment strategy that focuses
on balancing current income and total return, with an emphasis on safety and
liquidity. Over the course of 1999, AMIG increased its emphasis on
tax-advantaged investments, which increase the net after-tax return on the
portfolio. The value of AMIG's portfolio grew to $610.4 million in 1999 from
$587.0 million in 1998.
The Ward Financial Group recognized AMIG's long-term financial strength
in 1999 by selecting AMIG as one of the Top 50 property and casualty companies
in America. Reflecting the insurance group's record underwriting performance
and the contribution of the investment portfolio, Midland's balance sheet
remained strong, with total shareholders' equity reaching $258.0 million in
1999. Book value per share was $27.11, up 1.9% from $26.61 in 1998. Book
value per share has grown at a compounded annual rate of 13% over the last five
years. Total return on beginning shareholders' equity was 12.5% in 1999, which
significantly outpaced the property and casualty industry as a whole.
REACH OUR OBJECTIVES IN 2000 AND BEYOND
Understanding our customers' needs and reacting to marketplace
opportunities necessitate we build relationships that transcend competitive
pressures. We are committed to advancing our momentum in specialty markets by
continuing to provide superior services to current customers and by forming
partnerships and strategic alliances with key players in those markets. Pooling
expert resources, creating new distribution methods and expanding our customer
base are just a few of the benefits we gain from partnering with our primary
constituencies. We also look to continued internal growth and expansion of our
fee income businesses as means of reaching our performance objectives. In 1999,
we implemented several business decisions designed to further reinforce these
core growth strategies, including new strategic partnerships and selective
acquisitions.
For example, during the year we developed key business relationships
with four influential managing general agencies: Arlington Roe in Indiana,
Southern Insurance Underwriters in Georgia, Texas Specialty Underwriters and
Anderson & Murison in California. These relationships further solidified the
commitment we've made to grow profitably within the MGA channel of distribution.
We will continue to pursue joint venture and strategic alliance partnerships
that enable the placement of our products within new distribution channels and
to meet the ever-changing insurance needs of our customers.
In 1999 we acquired Manufactured Homes Acceptance Corporation (MHAC),
North American Insurance and Acceptance Corporation (NAIAC) and affiliates and,
in early 2000, the operating assets of the Manufactured Housing Insurance Agency
(MHIA). These acquisitions
This page includes a bar chart with the following data:
AMIG 10-YEAR AVERAGE RETURN ON BEGINNING EQUITY
AMIG 14.8%
Industry 9.6%
Caption:
Strong growth, a disciplined approach to underwriting and specialty products and
services designed to meet the needs of its customers have helped AMIG achieve an
industry-leading 10-year return on beginning equity of 14.8%.
3
<PAGE>
leverage our knowledge of niche markets, underwriting skills and management
experience, and they diversify the services we deliver. They also illustrate
our plans to continue expanding into areas that strengthen our core
competencies.
Additionally, we recently have designed a new technological architecture
for our business. While certain elements of the infrastructure have been put
into place, others will be activated throughout the coming years. Our intent is
to strategically deploy technology across all products, services and channels.
We will also continue to utilize e-commerce to more efficiently meet the needs
of our customers and business partners. Future uses of technology will
facilitate policy and claims processing, as well as the gathering, analysis and
application of data needed to respond to changing market needs with timely and
competitive products and services.
During 1999, Midland launched its investor relations Web site,
www.midlandcompany.com, to establish an additional channel of communication to
shareholders. The goal of the Web site is to deliver up-to-the-minute
information to our shareholders and investment community. The site is an
important part of our long-term commitment to add value to our shareholders.
Midland also integrated Web home pages for American Modern Insurance Group and
M/G Transport with the Midland site to enhance the value-added tool for
customers and agents.
The following pages of this report discuss in more detail the strategies
we are using to enhance our relationships with our business partners and
customers, leading to internal growth. To help our shareholders understand how
we work in partnership with leaders in selected markets, we have included
comments received from a cross-section of our customers.
A STRATEGY TO ENHANCE SHAREHOLDER VALUE
The principal measure of the success of our strategies is our ability to
share the achievements of The Midland Company with our shareholders. While we
generated excellent financial results in 1999 and rewarded shareholders with
continued dividend increases in 1999 and early in 2000, our stock price did not
perform to our satisfaction. That was due, in part, to the stock market seeing
generally lower valuations for the entire property and casualty insurance
industry over the course of the year.
Steps were taken in 1999 to enhance the visibility of Midland's stock,
while we continued to generate the financial results expected by our
shareholders. For example, in June we moved to the Nasdaq National Market
System (under a new symbol-MLAN) from the American Stock Exchange as a means of
increasing stock liquidity and visibility.
In October, the board authorized the repurchase of up to 500,000 shares
of our outstanding common stock over a six-month period to illustrate our
confidence in the company's long-term prospects. Management determined that one
of the best ways to use our capital is to invest in ourselves at a time when the
inherent long-term strength of the company is not believed to be fully
recognized by the investment community. Midland's financial condition remains
strong, and we have access to the capital necessary to fund future growth
opportunities.
This page includes a photo with the following caption:
From left, John W. Hayden, President and Chief Executive Officer and
Joseph P. Hayden III, Chairman and Chief Operating Officer
4
<PAGE>
As you can see, Midland and American Modern Insurance Group dramatically
and consistently are outperforming the remainder of the property and casualty
industry, with a conscious and deliberate focus on profitable, sustained growth.
Although challenges remain in 2000, we are encouraged by the progress we have
made in helping the market better appreciate our unique position as a specialty
insurance provider.
By focusing on our businesses, and working to continue our record of
industry-leading growth and profitability, we believe we have positioned The
Midland Company to increase its book value for shareholders in the years ahead.
OUR THANKS TO RETIRING DIRECTOR
It is with deep appreciation that we pay tribute to George R. Baker, who
will retire from The Midland Company's Board of Directors effective
April 8, 2000 after 29 years of service to Midland shareholders. During that
time, Mr. Baker helped provide the vision and leadership that have enabled The
Midland Company to prosper and take its place as one of the leading specialty
insurers in the country. We are grateful for his contributions to our success,
and we wish him the very best in the future.
LOOKING AHEAD
As we move into the future, The Midland Company will remain unwavering
in its dedication to facilitating the growth of our associates, our business
enterprises and our relationships with key partners. As the insurance industry
continues to consolidate and produce new competitive challenges, we will
continue to be flexible in our product and service offerings and reliable in our
marketplace expertise. Through careful planning, loyalty of management and a
focused business plan, The Midland Company is on course for a successful future.
We look forward to building that bright future on the strong foundation of
business relationships that have enabled our past successes. As always, we will
continue to share our success with our shareholders, whose support and trust we
value.
/s/Joseph P. Hayden III /s/John W. Hayden
Joseph P. Hayden III John W. Hayden
Chairman and President and
Chief Operating Officer Chief Executive Officer
February 10, 2000
This page includes a bar chart with the following data:
AMIG PROPERTY & CASUALTY 10-YEAR COMPOUND ANNUAL PREMIUM GROWTH
AMIG 15.9%
Industry 3.6%
Caption:
Over the past 10 years, AMIG's direct and assumed written premiums have grown
more than four times the industry average as the company focused on being an
indispensable partner to customers in its chosen markets.
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AMIG-INDISPENSABLE PARTNER
The Midland Company derives more than 90 percent of its revenues from
its American Modern Insurance Group (AMIG) subsidiary. Known as the "Specialty
Lines Specialists," AMIG is a national leader in providing specialty insurance
products and services. That focused mindset - along with a deep knowledge and
understanding of niche markets - allows AMIG to be an indispensable partner
within its chosen markets.
FOCUS ON SPECIALTY MARKETS
AMIG is widely recognized as an established leader in manufactured
housing insurance. It's no wonder: AMIG has served the manufactured housing
sector for more than 35 years. AMIG knows the product. It knows the people. It
knows the risks.
This kind of specialized knowledge results in a deep and unmatched
understanding of policyholder needs.
In 1999, AMIG used this understanding to develop a Land Home product to
serve the growing number of people with multi-sectional homes on privately owned
property. AMIG also was one of the first specialty insurers to provide
convenient credit-card payment options to policyholders. Additionally, AMIG
expanded its EZTEL service, which enables dealers to meet compliance
requirements while helping customers meet insurance needs.
This page includes a picture with the following caption:
Dan Rolfes (Holiday Homes)
"They create win/win relationships."
Thirty years ago, I had no experience and had never even been in a mobile home.
And yet, Midland took a chance on me by lending me the money to go into
business. That kind of investment is typical of their long-term involvement in
our industry. For those who have known them as I have, it's obvious that much
of their success revolves around their commitment to establishing win/win
relationships with retailers.
Their positive impact on our industry is pervasive, including their
participation in associations, their willingness to adapt products to our
changing environment, the educational opportunities they provide for our
employees and the quality of their staff.
When I visit their offices, I see that same level of commitment to their
community. And, I encounter a group of people who are openly positive,
welcoming and proud of what they've accomplished. To me, that's the sign of an
organization you want to be associated with.
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Such innovative products and services have helped AMIG record a
compounded annual premium growth rate of 17.7% over the past five years in the
manufactured housing segment. In 1999, AMIG's manufactured housing insurance
premiums rose 9.1 percent to $324.4 million.
Yet manufactured housing insurance does not tell the whole story.
Drawing on its history as a specialist in one market, AMIG has effectively
reached into new ones and made an impact.
AMIG has a growing presence in other specialty lines, including
watercraft, recreational vehicle, homeowners, lower valued homes, warranty
products, dwelling fire, mortgage fire, collateral protection, specialty
automobile, credit life, long-haul truck, commercial and excess and surplus
lines. Each of these markets represents a specialty area, as each has unique
characteristics.
In 2000, AMIG will focus on continued profitable growth in manufactured
housing products, as well as new watercraft, recreational vehicle and homeowners
programs that will provide new competitive advantages.
For example, AMIG will introduce its "First Choice" watercraft program
in the first quarter in response to agent requests for a more simplified,
competitive product. A new "RV Guard" extended service contract also is coming
in the dealer distribution channel. Additionally, new homeowner products will
help meet the specialty needs of policyholders not adequately served by standard
lines carriers.
This page includes a picture with the following caption:
Joe Stegmayer (Champion Homes)
"Imaginative products and services."
Client satisfaction is American Modern's number one priority. Everything they
do supports their commitment to the customer...and to the needs of Champion
Enterprises. We are continually impressed with their imaginative approach to
the development of products and services that meet our customers' needs while
increasing written premium among our retailers.
For example, we believe that American Modern's EZTEL operation will
enable Champion to further improve our sales of consumer protection products.
Of course, products and services are only as good as the people behind them.
At American Modern, the people are professional and always respond in a timely
manner, with enthusiasm and a team attitude.
It's impossible to overstate just how valuable those traits are in
making a business relationship durable and enjoyable. We take pride in the
relationship we have with American Modern, and we are pleased with the rewards
we share with them while providing a valuable, worthwhile service to our
customers.
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MULTIPLE DISTRIBUTION CHANNELS
Part of the reason AMIG has been so successful in serving niche markets
is its ability to use and manage multiple distribution channels.
AMIG is the leader in providing coverage at the point of sale, when
customers are purchasing their manufactured homes. The company also works
through a national network of agents, dealers, manufacturers, lenders and
others. In addition to providing multiple sales opportunities and cross-sales
opportunities, these many channels enable AMIG to build multi-layer
relationships. That allows the company to gain a deeper understanding of the
needs of the consumer and the marketplace.
AMIG put that understanding to work in 1999 by testing a new
fee-generating service that relieves lenders of claims-processing and payment
disbursal responsibilities, duties they typically don't have the time or
expertise to handle efficiently. This new service - the direct result of AMIG's
relationship with a client bank - will be offered to other lenders in the second
quarter of 2000.
AMIG also used strategic partnerships to make inroads with its credit
life company - American Modern Life. The company finished the year with eight
consecutive months of record premium production and generated $21.2 million in
credit life and accident and health premium in 1999 - up 72 percent over 1998.
Products, services and results like this come about because of AMIG's
unique relationship
This page includes a picture with the following caption:
Tom Sapinski (Firstar Insurance Services)
"They're masters at communications."
Communication is the driving force that sustains our close relationship with
American Modern. In fact, we have dialogue almost daily. AMIG really listens
and responds promptly to questions and problems in the course of doing business.
Their experience gives them special insights into understanding our
systems and culture. And, that makes a huge difference in the efficiency and
effectiveness of our relationship. Flexibility and adaptability are hallmarks
of the way AMIG does business.
For example, they use bi-weekly conference calls to mutually identify
issues and establish action plans to resolve them. That kind of proactive
involvement exemplifies how they keep communication lines open to improve and
maintain understanding between organizations.
Another competitive advantage they offer us is their expertise in credit
life insurance. Since compliance with the many variations in state laws is
challenging and critical, their experience translates into confidence for us
that we're doing the right thing for our customers.
This page includes a pie chart with the following data (amounts in millions):
AMIG PRODUCT MIX (Gross Written Premiums)
Manufactured Homes $324.4
Park & Dealer 31.1
Site Built Dwelling 25.5
Colateral Protection 22.9
Watercraft 17.4
Mortgage Fire 10.3
Long Haul Truck 11.3
Credit Life & Related 21.2
All Other 35.4
Caption:
AMIG is a leader in the manufactured housing insurance market. AMIG also offers
customers many other specialty products and services.
8
<PAGE>
with its business partners, at all points, within each specialty market area.
AMIG talks to agents, to dealers, to lenders. And, more importantly, AMIG
listens.
In 1999, listening involved roundtable forums with key producers in
various channels to identify needs and develop plans for the strategic
deployment of technology, training and marketing to enhance effectiveness and
improve efficiency. It involved the launch of the AMIG Web site, www.amig.com,
which enabled agents to communicate with the company anytime, from any place.
Listening involved bi-weekly conference calls with a key lender account. It
involved going beyond trade-show and meeting attendance; it involved active
involvement and support.
Listening meant the launch of the company's Next Generation technology
initiative, which will make AMIG even more policyholder-centric in its system
design and will cut the time it takes to move new products and services from
concept to reality. More efficient processes and systems mean that when
business partners talk, AMIG can act on their suggestions quickly.
Other ways AMIG strengthened partner relationships included alliances
with organizations that matter to our customers. For example, AMIG joined with
The Hartford to bring their workers' compensation coverage together with our
dealer and park commercial programs.
These actions, and others like them, have positively impacted new
business results.
This page includes a picture with the following caption:
Thierry DeMascureau (Classic Car Customer)
"Committed to doing right by me."
As a classic car collector, I don't take anything for granted where my car is
involved. And, that includes the choice of an insurance policy. In selecting
Leland-West as my agent, it became obvious to me very quickly that they had
formed a unique relationship with American Modern Insurance Group...the kind of
relationship that is based on trust and freedom to truly meet customer needs.
Leland-West and American Modern obviously know what kind of coverages
and services car aficionados need. And, they work together to deliver a level
of quality that I'd be hard pressed to find somewhere else.
I don't know if I can adequately express how much it puts my mind at
ease to know that I have a team of knowledgeable professionals behind me that
is truly committed to doing right by me...and each other.
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<PAGE>
Perhaps more importantly, they have impacted retention. Retained premium rose
$20.8 million in 1999, in part due to increased flexibility in payment options;
rate stabilization; improved underwriting and risk selection; and overall
improved customer service.
In 2000, AMIG will implement a formal Customer Listening Outreach
Program to encourage customer feedback in every step of the insurance process.
AMIG also will continue to leverage the synergies created by its
multiple company structure - four service companies, six property and casualty
companies, four agencies and two life companies - to add value to its
relationships with distribution channels.
Such comprehensive products and services provide a sustainable
competitive advantage for AMIG, and make the company an indispensable partner in
its chosen markets.
SUPERIOR CLAIMS MANAGEMENT
AMIG also acts as a true business partner by helping agents strengthen
relationships with policyholders. Valuable products, of course, are one way to
speak to consumers. But what really earns their confidence and loyalty is
superior claims service, and AMIG consistently is there in times of need.
AMIG handles claims quickly, efficiently and personally with locally
based, company-employed claims representatives. And, while AMIG is a leader in
handling day-to-day losses, the company helps set the standard for fast and
compassionate service in catastrophes. Special catastrophe teams are deployed to
disaster areas within 24 hours; in the case of hurricanes, AMIG often beats the
storm to the scene. One such 1999 storm - Hurricane Floyd -
This page includes a picture with the following caption:
Jim Potter (GreenPoint Credit)
"Leading-edge technology means choices."
Our relationship with American Modern Home Insurance is a true partnership.
We've worked successfully toward common goals since 1987, even before our name
became GreenPoint Credit. Our rapid expansion would have proven daunting to
many companies, but not American Modern. They didn't miss a step in responding
with highly effective homeowners and flood insurance tracking solutions in their
Ameritrac operation.
Using leading-edge technology, they're able to provide customer-friendly
insurance alternatives for our clients. It's the kind of caring service that
fosters a more solid relationship with our customers and, hopefully, more
repeat business. Their "customer first" attitude was exemplified recently
during Hurricane Floyd, when disaster claim centers were quickly established
in devastated areas, and claims were settled quickly to get people's lives back
on track.
The bottom line is it's hard to find a company whose customer service
philosophy can meet GreenPoint Credit's standards of excellence. We appreciate
American Modern as one that can.
This page includes a pie chart with the following data (amounts in millions):
AMIG DISTRIBUTION MIX (Gross Written Premiums)
Wholesale $ 89.1
Retail 96.8
Commercial 31.6
Banks/Credit Unions 47.1
Dealer 60.6
Lender 148.3
Manufactures 26.0
Caption:
Working with partners in multiple distribution outlets, including independent
agencies, lenders, dealers and others, provides AMIG with added insight into
the needs of its specialty insurance markets.
10
<PAGE>
is a good example of what AMIG accomplishes in the face of disaster. The storm
struck the eastern seaboard in September. Floodwaters were slow to recede,
which kept both homeowners and adjusters from damaged homes. Despite the
challenges, AMIG settled 90 percent of the 9,653 Floyd claims in 30 days or
less.
AMIG's in-house staff adjuster training program is among the best in
the industry. The company hires adjusters out of local markets, then brings
them to AMIG headquarters for five weeks of rigorous training. Adjusters then
return to the field for additional training.
AMIG has approximately 150 employee field adjusters across the country
who, together with Home Office Claims professionals, handled nearly 90% of all
claims in 1999. Such in-house processing cuts the cost per claim and also
speeds payments. AMIG settled 87.5% of property claims within 30 days in 1999,
bringing relief and peace of mind quickly to our policyholders.
Always looking to improve on excellence, AMIG will review service
objectives in 2000 and how they are measured, with a clear focus on providing
the best service possible to the company's one million policyholders.
DISCIPLINED UNDERWRITING
AMIG is able to pay claims quickly and efficiently because of its
financial strength. It's a strength that has been attained through disciplined
underwriting and disciplined exposure management.
This page includes a picture with the following caption:
Bill Fehr (Associates Insurance Group,
Manufactured Housing Division)
"They're our partners of choice."
Not long ago, we were asked to recommend a company to provide insurance support
products for two of our subsidiaries. So, we undertook a lengthy and arduous
evaluation of the three companies providing those services to us at the time.
When all had been scrutinized for efficiencies, field support, claims
paying, product differentiation, ease of doing business and profitability, one
company was the clear winner. American Modern Insurance Group and its Ameritrac
Tracking Service were head and shoulders above the rest and continue to be our
partners of choice.
Even after many years, they continue to impress us with their
professionalism and their willingness to improve already superior products and
services while supporting our efforts to operate more efficiently and
profitably. Based on customer feedback, we know our insurance and tracking
providers are performing up to our expectations, letting us concentrate on other
insurance activities. AMIG is an indispensable asset to our insurance
operations.
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<PAGE>
All AMIG products are designed and priced to produce an underwriting
profit of at least five percent. AMIG focuses on this pricing level because it
targets markets where frequency of loss - rather than severity of loss - is the
norm. In 1999, the statutory combined ratio for AMIG was 93.4 percent, compared
with an estimated industry average of 107.5 percent. The company doubled its
underwriting profit in 1999 over the previous year and had record underwriting
results on operations for the third consecutive year.
AMIG manages exposure across many levels: through geographic
concentrations, business partner profiles and catastrophe modeling.
Sophisticated tracking mechanisms analyze AMIG's exposure by zip code, by
county, by contiguous zip code and county and by state, as well as by
distribution channel, to ensure it has not assumed an unacceptable risk
concentration.
The strategic purchase of reinsurance, too, has been a valuable
component of AMIG's risk management structure. This was dramatically
demonstrated in 1999 when special "second event" coverage mitigated our
Hurricane Floyd losses. This kind of protection, based on long-term
relationships with strong reinsurers, provides AMIG with the flexibility it
needs to serve the insurance needs of national lenders, with coastal exposures.
AMIG's net loss ratio has been 56.1 percent or less in nine of the last
ten years, with the 10-year average loss ratio for AMIG at 54.0 percent.
This page includes a picture with the following caption:
Joe Corona (Fleetwood Retail)
"A shared commitment to quality."
The manufactured housing industry has grown increasingly competitive as the
result of nine successive years of industry growth. So, maintaining a
competitive edge has never been more challenging. Fleetwood Retail Corporation
is driven to become an industry leader by making a strong commitment to quality,
service and customer satisfaction. In doing so, we realize that the strength of
our business partnerships is also an important factor in building a successful
future.
American Modern Insurance Group, a leader in the insurance industry, has
consistently shown that it shares these same beliefs. Together, we are
developing creative products for our customers. American Modern has repeatedly
proven its value as a very important partner to us by offering competitive
insurance products and an extremely talented support staff.
We take comfort in knowing that, despite the volatility of the
manufactured housing industry, we have an insurance partner that is truly
committed to our relationship and to our customers.
This page contains a five year bar chart with the following data:
AMIG POPERTY AND CASUALTY PREMIUM VOLUME
(Direct and Assumed Written Premiums) dollars in millions
95 96 97 98 99
AMIG PROPERTY AND CASUALTY $376.3 $387.2 $423.0 $445.3 $472.0
Caption:
AMIG's property and casualty direct and assumed written premiums grew 6.0
percent to $472.0 million in 1999, with manufactured housing direct and
assumed written premiums increasing 9.1 percent to $324.4 million during the
same period. By comparison, the property/casualty industry is estimated to
have grown premiums at a 2.3 percent pace in 1999, according to A.M. Best.
12
<PAGE>
NEW OPPORTUNITIES
AMIG believes in the power of technology and in harnessing it to improve
service. That was never more evident than in 1999, as AMIG utilized the tool of
the masses - the Internet - to add value to business partners and policyholders.
AMIG's Web site, www.amig.com, currently delivers up-to-the-minute
information on products, services and career opportunities. Beginning in 2000
and in the years that immediately follow, Web site enhancements will allow
claims-filing, quote fulfillment and numerous other interactive services for
various customer groups.
In addition to new products, services and relationships, new markets and
new fee-based services also fulfill AMIG's strategy to remain an indispensable
partner to customers.
New markets present new opportunities, and AMIG has seized those
opportunities with strategic acquisitions. In 1999, the company acquired the
assets of Michigan-based Manufactured Homes Acceptance Corporation (MHAC),
North American Insurance and Acceptance Corporation (NAIAC) and their
affiliates. These acquisitions allow AMIG to better serve the manufactured
housing industry with loan facilitation, warranty, insurance sales and
telemarketing services.
Additionally, in 1999 AMIG strengthened its presence in existing
markets. For example, the company opened a specialized marine center based in
St. Louis to quote, underwrite and process all marine business. The center
utilizes the expertise of nine industry experts
This page includes a picture with the following caption:
Francis Johnson (Johnson & Johnson)
"It's about personal relationships."
The relationships we have built have truly come from the ground up. When I was
still in college, their current CEO, John Hayden, was an American Modern field
representative, calling on Johnson & Johnson. In fact, when he visited, he
would sometimes stay in my parents' house with us. This personal relationship
has grown and helped cement the business relationship we've developed over the
years.
There's something extra special about feeling that a friend is helping
because he wants to...not because he has to. For example, when Hugo devastated
Charleston back in 1989, John came down to help us dig out. He stayed with us,
helping clean up our yards and houses, while making sure our business got great
claims service.
This type of relationship supersedes the small problems that sometimes
get blown out of proportion in a business partnership. It allows both of us to
become true strategic partners, knowing that each is looking out for the other's
best interests.
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<PAGE>
with close to 175 years of combined underwriting experience and watercraft
market knowledge; it operates as a branch of AMIG's Atlas Insurance Agency.
In 1999, AMIG also built considerable momentum in its Modern Services
Group subsidiary, which produced three times the revenue in 1999 compared to
1998 from its fee-generating services. Those services include Ameritrac, a loan
and lease portfolio collateral tracking operation, which now tracks more than
1.7 million loan and lease accounts for 37 financial institutions, providing
$1.8 million in third party revenues and $57.5 million in premiums to AMIG in
1999.
AMIG expects to significantly expand fee-service operations in 2000 by
aggressively marketing recreational vehicle and manufactured housing service
contracts; expanding loan tracking and other Ameritrac services; originating
manufactured housing loans through its MHAC subsidiary; and more. Such services
add value to customers and help insulate the company from the risks inherent in
the insurance business.
New opportunities are where you find them, and AMIG is implementing
programs to engage associates more than ever in the business, to help them think
outside the box and develop the opportunities - as well as the tools - to help
customers, policyholders and the company succeed. One example is the Total
Rewards program, which was launched at the end of 1999 to more closely tie
personal rewards to performance and to give each associate the opportunity to
share in the company's success.
This page includes a picture with the following caption:
David Pietrowski (LoVullo Associates, Inc.)
"The standard we judge others by."
Growth and profitability define the success model for all of us in the insurance
industry. LoVullo Associates has consistently achieved success because of the
essential relationship we enjoy with American Modern Insurance Group...a
relationship that clearly is based on their understanding that the success of
one of our organizations is undeniably impacted by the success of the other.
For that reason, their business decisions reflect the collaborative
thinking of those who will be impacted by them, which is typical of the
"partnership philosophy" that drives their company. American Modern's
commitment to excellence, market expertise and innate willingness to listen and
respond to the needs of their business partners are some of the traits that
explain their unique position in our industry.
Our 18-year relationship with American Modern has set a demanding
standard by which we judge all of our partners. Mutual respect has engendered
mutual success and is the primary reason why we consider them an indispensable
partner.
This page contains a bar chart with the following data:
AMIG PROPERTY AND CASUALTY UNDERWRITING RESULTS
(GAAP Combined Ratio)
95 97.2%
96 104.3%
97 95.8%
98 96.9%
99 94.4%
Caption:
AMIG's disciplined underwriting philosophy combined with strategic acquisition
of reinsurance protection significantly mitigated the impact of Hurricane Floyd
in 1999, producing a combined ratio of 94.4 percent. AMIG has generated an
operating profit in nine of the past 10 years.
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STRONG PAST, BRIGHT FUTURE
Over the past 35 years, AMIG has consistently proven its value in the
manufactured housing insurance market. The company has evolved with the market,
constantly staying ahead of the changing needs of policyholders.
In recent years, AMIG has taken that specialty expertise to other niche
markets, building a credible portfolio of products and services for watercraft,
recreational vehicles, specialty auto, long-haul truck, credit life, collateral
protection, mortgage fire and commercial manufactured housing park and dealers.
AMIG's specialty mindset, entrepreneurial spirit and philosophy of
business partnership have enabled the company to outperform the industry time
and time again. Over the past 10 years, AMIG's written premiums have grown at
a compounded rate of 15.9%, more than four times the estimated industry
average.
Meanwhile, AMIG's disciplined approach to pricing, underwriting and risk
management have enabled the company to be profitable on insurance alone. AMIG's
statutory combined ratio over the past 10 years has averaged 95.5%, well below
the industry average of 106.3%, and the company has recorded an underwriting
profit in nine of ten years.
That focus on adding value, specialty expertise and discipline to the
insurance industry have made and will continue to make AMIG an indispensable
partner to its customers.
This page includes a picture with the following caption:
John Harvey (Voyager Marine)
"They deliver what we promise."
Accessibility, communications and a commitment to claims excellence are just
some of the many reasons why American Modern is easily one of the best partners
we could hope for at Voyager Marine. If we have a need, they're right there to
help us meet it. When they're considering developing a new product or enhancing
an existing one, they keep us firmly in the loop. And, when it comes to
delivering on the promise that we made to a customer, their amazing claims and
customer service professionals redefine the word "excellence."
It's hard to put into words, but we have more than a traditional
"agency/company relationship." We enjoy a partnership based on mutual support
and trust, in good times and bad. And, if you've ever experienced that kind of
a relationship with a business partner, you know it's something you want to hold
onto, because it's hard to find.
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AMERICAN MODERN INSURANCE GROUP, INC.
INVESTMENT PORTFOLIO
This page contains three bar charts with the following data:
MARKET VALUES (dollars in millions)
95 96 97 98 99
Government $155.6 $172.2 $201.4 $177.1 $140.5
Municipal 94.5 71.5 88.2 168.4 170.9
Corporate 36.0 41.1 79.0 79.3 121.0
Cash Equivalents 33.1 51.7 34.6 29.3 38.6
Equities 40.8 63.4 92.3 132.8 125.3
Other 0 0 0 0 11.8
INVESTMENT PORTFOLIO PRE-TAX INVESTMENT INCOME (dollars in millions)
95 96 97 98 99
Capital Gains $ 2.4 $ 2.7 $ 4.2 $ 6.4 $ 3.5
Operations 17.1 19.0 22.2 24.7 26.0
INVESTMENT PORTFOLIO UNREALIZED GAINS (dollars in millions)
95 96 97 98 99
Fixed Income $ 8.9 $ 2.4 $ 7.0 $ 9.4 $(8.7)
Equities 21.4 33.9 60.9 99.0 84.7
Caption:
AMIG manages its investment portfolio, with a focus on quality stocks and high
quality fixed income securities. Market value for the portfolio increased to
$608.0 million in 1999 from $587.0 million in 1998. Pre-tax investment income
meanwhile rose 5.8 percent in 1999 to $25.3 million from $23.9 million in 1998.
After-tax capital gains fell to $2.3 million, or 24 cents a diluted share,
compared with $4.1 million, or 44 cents a diluted share. Net unrealized capital
gains declined in 1999 to $76.0 million from $108.5 million in 1998.
ANNUALIZED TOTAL RETURN
(Total Return is the rate of return on a portfolio that takes
into consideration both interest income and dividends plus
the change in the market value.)
Periods Ending December 31, 1999
--------------------------------
1 Year 3 Year 5 Year
--------------------------------
EQUITIES:
AMIG-Composite -4.9% 27.6% 31.8%
AMIG-Excluding Investment In Firstar 20.4% 25.3% 25.9%
AMIG-Firstar Only -30.8% 29.4% 42.3%
S&P 500 21.1% 27.6% 28.6%
FIXED INCOME TOTAL RETURN:
AMIG After Tax 1.2% 4.0% 4.7%
After Tax Lehman Brothers Intermediate
Government/Corporate Index 0.3% 3.5% 4.6%
FIXED INCOME PRE-TAX YIELD AS OF
DECEMBER 31, 1999* 5.96%
AVERAGE MATURITY AS OF
DECEMBER 31, 1999 4.5 years
DURATION AS OF DECEMBER 31, 1999 3.4 years
*Includes pre-tax yield on municipal securities which have a pre-tax yield that
is lower than taxable securities, but which have a higher effective after-tax
yield.
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FOCUS ON M/G TRANSPORT
M/G Transport Services and its sales and marketing arm, MGT Services
Inc., have successfully filled a niche in the transportation marketplace for
many years, and today account for about seven percent of Midland's total
revenues.
Collectively known as M/G, the barge affreightment company operates in
New Orleans, Louisiana. In 1999 M/G generated $1.8 million in pre-tax income for
Midland, as compared to $4.4 million in 1998, with much of the decrease caused
by a disruption in operating patterns due to low oil prices. Among the
disrupting factors were a drop in the short-term demand for barite-a lubricating
mud used in oil drilling-and a disruption in shipping patterns for petroleum
coke.
Management is confident M/G can continue to contribute to the company's
earnings and operating cash flow. With oil prices rising in late 1999, M/G
expects a return to more normal operating patterns in 2000.
A FOCUS ON SERVICE, FLEXIBILITY AND EFFICIENCY
M/G provides superior service to large industrial clients, transporting
dry cargo such as petroleum coke, barite, fertilizer, sugar, iron ore, grain and
other commodities. The operations are concentrated on the Lower Mississippi
River and westbound on the Gulf Intercoastal Waterway.
As of December 31, 1999, M/G serves its customers with a fleet of 242
jumbo hopper barges, owned or leased by the company. During 1999, the company
added 20 steel roll top barges to its fleet through an operating lease. M/G
supplements its fleet by chartering equipment or renting space from other
operators as necessary to meet customer needs, thus providing operating
flexibility.
M/G has been a lucrative investment for Midland, in particular because
of its efficient operations. M/G generated $31.3 million in revenue and $4.1
million in operating cash flow in 1999, while operating with an experienced
staff of 17 employees who know how to efficiently exploit the niche market in
which they operate. M/G remains attuned to market conditions and will respond
with acquisitions as necessary to meet customer demand. Management believes
capital expenditures can be funded from internally generated cash or bank debt.
17
<PAGE>
<TABLE>
SIX YEAR FINANCIAL SUMMARY DATA
THE MIDLAND COMPANY AND SUBSIDIARIES For the Years Ended December 31,
(Amounts in thousands, except per share data) 1999 1998 1997 1996 1995 1994
- --------------------------------------------- -------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Income Statement Data
Revenues:
Insurance:
Premiums earned $400,991 $375,478 $311,159 $280,614 $263,006 $206,339
Net investment income 25,292 23,908 21,332 18,269 16,107 10,090
Net realized investment gains 3,486 6,354 4,170 2,690 2,373 2,189
Other insurance income 6,793 2,508 1,557 1,602 618 844
Transportation(a) 31,327 33,059 34,933 34,064 30,371 53,163
Other 1,237 1,055 617 499 752 858
-------------------------------------------------------------------
Total 469,126 442,362 373,768 337,738 313,227 273,483
-------------------------------------------------------------------
Costs and Expenses:
Insurance:
Losses and loss adjustment expenses 204,365 210,015 171,163 172,426 136,211 113,096
Commissions and other
policy acquisition costs 114,212 103,169 79,518 81,533 80,520 64,557
Operating and administrative expenses 66,541 54,309 49,118 41,355 39,475 26,103
Transportation operating expenses(a) 29,255 28,287 30,079 31,163 28,033 47,820
Interest expense 4,067 4,991 4,983 4,829 3,037 3,800
Other operating and
administrative expenses 6,973 4,064 4,204 3,115 3,462 2,807
-------------------------------------------------------------------
Total 425,413 404,835 339,065 334,421 290,738 258,183
-------------------------------------------------------------------
Income from Continuing Operations
Before Federal Income Tax 43,713 37,527 34,703 3,317 22,489 15,300
Provision (Credit) for Federal Income Tax 12,534 10,595 10,336 (426) 6,441 3,663
-------------------------------------------------------------------
Income from Continuing Operations 31,179 26,932 24,367 3,743 16,048 11,637
Loss from Discontinued Operations(b) -- -- (6,817) (2,675) (6,496) (2,218)
-------------------------------------------------------------------
Net Income $ 31,179 $ 26,932 $ 17,550 $ 1,068 $ 9,552 $ 9,419
===================================================================
Basic Earnings (Loss) Per Share
of Common Stock(d):
Continuing operations $ 3.42 $ 2.99 $ 2.72 $ .42 $ 1.81 $ 1.31
Discontinued operations -- -- (.76) (.30) (.73) (.25)
-------------------------------------------------------------------
Total $ 3.42 $ 2.99 $ 1.96 $ .12 $ 1.08 $ 1.06
===================================================================
Diluted Earnings (Loss) Per Share
of Common Stock(d):
Continuing operations $ 3.30 $ 2.86 $ 2.63 $ .41 $ 1.74 $ 1.27
Discontinued operations -- -- (.74) (.29) (.70) (.24)
-------------------------------------------------------------------
Total $ 3.30 $ 2.86 $ 1.89 $ .12 $ 1.04 $ 1.03
===================================================================
Cash Dividends Per Share
of Common Stock(d): $ .27 $ .25 $ .23 $ .22 $ .21 $ .19
===================================================================
18
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES For the Years Ended December 31,
(Amounts in thousands, except per share data) 1999 1998 1997 1996 1995 1994
- --------------------------------------------- -------------------------------------------------------------------
Balance Sheet Data
Total Cash and Marketable Securities $620,957 $593,857 $504,106 $403,804 $373,275 $282,116
Total Assets 888,057 837,220 760,463 655,979 600,905 479,497
Total Debt 69,838 76,085 92,309 95,170 101,076 74,637
Unearned Insurance Premiums 312,838 255,115 240,340 208,417 190,948 158,316
Insurance Loss Reserves 133,713 125,496 120,134 95,830 68,347 57,715
Shareholders' Equity 258,002 248,832 197,026 159,688 156,595 132,437
Book Value Per Share(d) $ 27.11 $ 26.61 $ 21.11 $ 17.50 $ 17.28 $ 14.73
Common Shares Outstanding(d) 9,516 9,352 9,334 9,126 9,060 8,991
Other Data
Midland Consolidated
Operating Income from
Continuing Operations(c) $ 28,913 $ 22,802 $ 21,657 $ 1,995 $ 14,506 $ 10,214
===================================================================
Operating Income Per Share
from Continuing Operations(Diluted)(c,d) $ 3.06 $ 2.42 $ 2.33 $ .22 $ 1.57 $ 1.12
===================================================================
AMIG's Property and Casualty Operations
Direct and Assumed Written Premiums $472,041 $445,286 $422,982 $387,165 $376,330 $275,509
Net Written Premium 439,863 390,831 342,310 290,355 285,306 235,821
Loss and Loss Adjustment Expense Ratio (GAAP) 51.2% 56.1% 55.1% 61.8% 52.0% 55.0%
Underwriting Expense Ratio (GAAP) 43.2% 40.8% 40.7% 42.5% 45.2% 43.5%
Combined Ratio (GAAP) 94.4% 96.9% 95.8% 104.3% 97.2% 98.5%
Statutory Capital and Surplus 220,080 217,091 164,128 124,131 113,189 89,910
Net Written Premium to Statutory Surplus 2.0x 1.8x 2.1x 2.3x 2.5x 2.6x
M/G Transport's Transportation Operations(a)
Net Revenues $ 31,327 $ 33,059 $ 34,933 $ 34,064 $ 30,371 $ 53,163
Net Income 1,169 2,994 3,126 1,938 1,585 2,000
Total Assets 31,683 41,576 44,544 41,458 48,375 52,534
Shareholders' Equity 11,245 19,075 19,081 15,658 34,219 32,736
Footnotes:
(a) M/G Transport sold approximately 66% of its assets in December 1994.
(b) On September 29, 1997, the Company's sportswear subsidiary sold substantially all of its assets to Brazos, Inc.,
a subsidiary of Brazos Sportswear, Inc. The assets were sold for approximately $13.3 million in cash resulting
in an after-tax loss on the disposal of approximately $3.3 million.
(c) Represents income from continuing operations excluding net realized investment gains or losses, net of federal
income taxes.
(d) Previously reported share information has been adjusted to reflect a three-for-one common stock split
effective May 21, 1998.
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Midland Company (the Company or Midland), through its wholly owned
subsidiaries, is primarily a specialty property and casualty insurance company,
with more than 60 percent of its premium volume related to insuring manufactured
housing. In addition, Midland owns a barge chartering and freight brokerage
operation that accounts for less than 10 percent of its consolidated revenues.
LINES OF BUSINESS AND REPORTABLE SEGMENTS
The discussions of Results of Operations and Liquidity and Capital
Resources are grouped according to Midland's two primary lines of business and
three reportable segments: manufactured housing insurance, other insurance and
transportation. A description of the operations of each of these lines of
business, is included below.
Insurance (Manufactured Housing and Other Insurance)
The Company's specialty insurance operations are conducted through
American Modern Insurance Group, Inc. (AMIG), a wholly-owned subsidiary of the
Company and a holding company for six property and casualty insurance companies,
two credit life insurance companies and four licensed insurance agencies. Other
subsidiaries of AMIG offer warranty and extended service products and loan
origination services and operate Ameritrac, AMIG's proprietary loan and lease
tracking service. AMIG is licensed, through its subsidiaries, to write
insurance in all 50 states and the District of Columbia. The majority of AMIG's
business relates to physical damage insurance and related coverages on
manufactured homes, generally written for a term of 12 months with coverages
similar to conventional homeowner's insurance policies. Other insurance products
include Homeowner's, Lower Valued Homes, Dwelling Fire, Mortgage Fire,
Collateral Protection, Watercraft, Specialty Automobile, Credit Life,
Recreational Vehicle, Long-Haul Truck, Commercial Park and Dealer, Excess and
Surplus Lines and Extended Service Contracts.
Transportation
M/G Transport Services, Inc. and MGT Services, Inc. (collectively M/G
Transport), the Company's transportation subsidiaries, charter barges and broker
freight for the movement of dry bulk commodities such as petroleum coke, ores,
barite, fertilizers, sugar and other dry cargos primarily on the lower
Mississippi River and its tributaries.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Insurance
Insurance Premiums
Direct and assumed written premiums generated from AMIG's property and
casualty and life insurance subsidiaries for the year ended December 31, 1999
increased 7.8% to $493.2 million from $457.6 million in 1998. Net earned
premiums for the year increased 6.8% to $401.0 million from $375.5 million in
1998. The difference in growth rates between the direct and assumed written
premiums and net earned premiums is due primarily to the growth in the amount of
multi-year credit life insurance premium produced in 1999 compared to 1998.
The growth in direct and assumed written premiums is primarily the
result of volume increases in manufactured home and related coverages premium.
Manufactured home and related coverages direct and assumed written premium
increased 9.1% to $324.4 million in 1999 from $297.3 million in 1998. Direct
and assumed written premiums of all other specialty insurance products (both
property and casualty and life) increased approximately 5.3% to $168.8 million
in 1999 from $160.3 million in 1998. This increase is due primarily to an
overall increase in the volume of direct and assumed written premium produced
by AMIG's credit life companies. In total, direct and assumed written credit
life premium increased 72.2% to $21.2 million in 1999 from $12.3 million in
1998. Premium rate increases also contributed to AMIG's overall direct and
assumed premium growth, but to a lesser degree than volume increases.
20
<PAGE>
Other Insurance Income (Fee Income)
AMIG's other insurance income increased to $6.8 million in 1999 from
$2.5 million in 1998. The increase is primarily the result of the continued
growth of AMIG's warranty, loan facilitation and agency fee businesses. This
increase is consistent with AMIG's ongoing strategy to develop its fee income
revenue opportunities.
Investment Income and Realized Capital Gains
AMIG's net investment income (before taxes and excluding net realized
capital gains) increased 5.8% to $25.3 million in 1999 from $23.9 million in
1998. The increase in investment income was primarily the result of the
investment of positive cash flow generated from underwriting activities and the
continued growth of AMIG's investment portfolio. AMIG's investment portfolio
increased $23.4 million to $610.4 million in market value at December 31, 1999.
This increase in the market value of the investment portfolio was the result of
the investment of positive cash flow from underwriting activities and investment
income and net realized capital gains generated from the portfolio, offset, in
part, by a $31.2 million decrease in the unrealized appreciation in the market
value of securities held. The decrease in unrealized appreciation was primarily
the result of a significant decline in the market value of AMIG's investment in
the common stock of Firstar Corporation. The market value of AMIG's investment
in Firstar Corporation declined to $49.3 million at December 31, 1999 from $72.4
million at December 31, 1998. After-tax net realized capital gains decreased to
$2.3 million, $0.24 per share (diluted) in 1999, from $4.1 million, $0.44 per
share (diluted) in 1998.
Losses and Loss Adjustment Expenses (LAE)
Insurance Losses and LAE decreased 2.7% to $204.4 million in 1999 from
$210.0 million in 1998. This decrease was achieved despite the increase in
earned premium and is due primarily to a decrease in the level of
weather-related catastrophe losses, net of reinsurance, in 1999 compared to
1998. Although the number of weather-related catastrophes dropped to 27 in 1999
from 37 in 1998, their gross impact was much more severe in 1999, primarily
because of Hurricane Floyd. The Company's catastrophe reinsurance program,
however, substantially mitigated the financial impact of Hurricane Floyd and
other catastrophes in 1999. Net weather-related catastrophe losses (after the
effects of reinsurance recoveries and related reinstatement premiums) amounted
to $19.8 million, on a pre-tax basis, representing 5.9 percentage points of the
94.4% combined ratio (ratio of losses and expenses as a percent of earned
premiums) for the property and casualty operations in 1999. This compares to
net weather-related catastrophe losses in 1998 totaling $33.9 million, on a
pre-tax basis, representing approximately 9.2 percentage points of the 96.9%
combined ratio for the property and casualty operations.
Commissions, Other Policy Acquisition Costs and Other Operating and
Administration Expenses
Commissions, other policy acquisition costs and other operating and
administrative expenses increased 14.8% to $180.8 million in 1999 from $157.5
million in 1998. This increase is due primarily to the aforementioned continued
growth in net earned premiums and other insurance income coupled with the
effects of improvements in the underlying loss experience and changes in the
level of reinsurance activities.
Overall Property and Casualty Underwriting Results
AMIG's property and casualty operations generated a pre-tax underwriting
income (property and casualty insurance premiums less losses, commissions and
operating expenses) of $22.1 million in 1999 compared to $11.1 million in 1998.
This resulted in a combined ratio of 94.4% in 1999 compared to 96.9% in 1998.
Transportation
Transportation revenues decreased 5.2% to $31.3 million in 1999 from
$33.1 million in 1998. The decrease was primarily the result of a reduced
demand for the petroleum coke and barite (a drilling mud used by offshore
refineries) products that affected shipping patterns in 1999 compared to 1998.
In total, transportation's pre-tax profits decreased to $1.8 million in 1999
from $4.4 million in 1998.
21
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Insurance
Insurance Premiums
Direct and assumed written premiums generated from AMIG's property and
casualty and life insurance subsidiaries for the year ended December 31, 1998
increased 5.2% to $457.6 million from $435.0 million in 1997. Net earned
premiums for the year increased 20.7% to $375.5 million from $311.2 million in
1997. The disparity in growth rates between the direct and assumed written
premiums and net earned premiums is due primarily to changes in a quota-share
reinsurance agreement in 1998 compared to 1997.
The growth in direct and assumed written premiums is primarily the
result of volume increases in manufactured home and related coverages premium.
Manufactured home and related coverages direct and assumed written premium
increased 13.2% to $297.3 million in 1998 from $262.7 million in 1997. Volume
decreases in the production of certain other specialty property and casualty
insurance programs partially offset the increase in manufactured home and
related coverages in 1998 compared to 1997. Premium rate increases also
contributed to AMIG's overall direct and assumed premium growth, but to a lesser
degree than the aforementioned volume increases.
Investment Income and Realized Capital Gains
AMIG's net investment income (before taxes and excluding net realized
capital gains) increased 12.2% to $23.9 million in 1998 from $21.3 million in
1997. The increase in investment income was primarily the result of the
investment of positive cash flow generated by underwriting activities and the
continued growth of AMIG's investment portfolio. AMIG's investment portfolio
increased by $91.5 million to $587 million in market value at December 31, 1998.
The portfolio increase was due primarily to three factors: 1) investment of cash
flow from underwriting activities, 2) investment income and net realized capital
gains generated from the portfolio and 3) unrealized appreciation in the market
value of the securities held. This increase was driven by the relatively strong
stock market in 1998 which caused a significant increase in the value of AMIG's
equity investments, including its investment in the common stock of Firstar
Corporation that increased in market value from $44.6 million at
December 31, 1997 to approximately $72.4 million at December 31, 1998.
After-tax net realized capital gains increased to $4.1 million, $0.44 per share
(diluted) in 1998, from $2.7 million, $0.30 per share (diluted) in 1997.
Losses and Loss Adjustment Expenses (LAE)
Insurance Losses and LAE increased 22.7% to $210.0 million in 1998 from
$171.2 million in 1997. This increase is due primarily to an increase in the
level of weather-related catastrophe losses, net of reinsurance, compared to the
prior year and a change in a quota-share reinsurance agreement that occurred in
1998. Weather-related catastrophe losses amounted to $33.9 million, on a
pre-tax basis, representing approximately 9.2 percentage points of the 96.9%
combined ratio (ratio of losses and expenses as a percent of earned premiums)
for the property and casualty operations in 1998. This compares to
weather-related catastrophe losses in 1997 totaling $13.8 million, on a pre-tax
basis, representing approximately 4.5 percentage points of the 95.8% combined
ratio for the property and casualty operations.
Commissions, Other Policy Acquisition Costs and Other Operating and
Administration Expenses
Commissions, other policy acquisition costs and other operating and
administrative expenses increased 22.5% to $157.5 million in 1998 from $128.6
million in 1997. This increase is due primarily to the continued growth in net
earned premiums and other insurance income coupled with a change in the level of
reinsurance activities.
Overall Property and Casualty Underwriting Results
AMIG's property and casualty operations generated a pre-tax underwriting
income of $11.4 million in 1998 compared to $12.9 million in 1997. This resulted
in a combined ratio of 96.9% in 1998 compared to 95.8% in 1997.
Transportation
Transportation revenues decreased 5.2% to $33.1 million in 1998 from
$34.9 million in 1997. This fluctuation was due primarily to decreases in the
loadings of barite, a drilling mud used by offshore refineries. Transportation's
pre-tax profits amounted to $4.4 million in both 1998 and 1997.
22
<PAGE>
1997 Discontinued Operations
On September 29, 1997, the Company's sportswear subsidiary sold
substantially all of its assets for approximately $13.3 million in cash
resulting in an after-tax loss on the disposal of approximately $3.3 million.
The cash proceeds from this transaction were primarily used to reduce the
Company's short-term bank borrowings. The results of operations and the related
loss on disposal for these operations are categorized in the consolidated
financial statements as "Discontinued Operations" and are reported separately
from continuing operations. Financial results have not been affected by this
discontinued subsidiary since the date of sale.
LIQUIDITY AND CAPITAL RESOURCES
Holding Company Operations
Midland and AMIG are holding companies which rely primarily on dividends
and management fees from their subsidiaries to assist in servicing their debt,
paying their operating expenses and paying dividends to their respective
stockholders. The payment of dividends to these holding companies from many of
AMIG's insurance subsidiaries is restricted by state regulatory agencies. Such
restrictions, however, have not had, and are not expected to have, a significant
impact on the Company's or AMIG's liquidity or their ability to meet their long
or short-term operating, financing or capital obligations.
Midland issues commercial paper, generally below the bank prime
borrowing rates, and has $47 million of conventional short-term credit lines
available at costs, not exceeding prime borrowing rates. Additional short-term
borrowing lines are available at the discretion of various lending institutions
with comparable rates. Outstanding interest bearing debt, not allocable to
either the insurance or transportation operations, as of December 31, 1999
amounted to approximately $47.1 million. The December 31, 1999 balance of
outstanding interest bearing debt consisted of short-term borrowings on
conventional lines of credit of $18.0 million, $5.5 million in commercial paper,
$0.6 million related to a collateralized equipment obligations, $18.6 million in
mortgage obligations and $2.0 million in other short-term borrowings.
Expenditures for the acquisition of business, property, plant and
equipment, other than for barge acquisitions discussed below, amounted to
$3.2 million, $4.9 million and $7.6 million for years ended December 31, 1999,
1998 and 1997, respectively. The Company declared $2.6 million in dividends
payable to its shareholders during 1999 compared to $2.3 million in 1998.
In October 1999, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock over a
six-month period.
Insurance
AMIG generates cash inflows primarily from insurance premiums,
investment income and proceeds from sale of marketable securities and maturities
of debt security investments. The principal cash outflows for the insurance
operations relate to the payment of claims, commissions, premium taxes,
operating expenses, income taxes, dividends to the Company and the purchase of
marketable securities. In each of the years presented, funds generated from the
insurance operating activities were used primarily to purchase investment grade
marketable securities, accounting for the majority of the cash used in investing
activities. The insurance products written by the Company's insurance
subsidiaries are primarily property-related coverages that result in relatively
rapid claim payments. The average maturity and duration of AMIG's debt security
investment portfolio as of December 31, 1999 was approximately 4.5 and 3.4
years, respectively, which management believes provides adequate asset/liability
matching. AMIG also has a $40 million long-term credit facility available on a
revolving basis at various rates. As of December 31, 1999, $20 million was
outstanding on this credit facility. Cash flow from the insurance operations is
expected to remain sufficiently positive to meet AMIG's future operating
requirements and to provide for reasonable dividends to the Company.
As of December 31, 1999, AMIG's property and casualty statutory surplus
was $220.1 million resulting in a premium to surplus ratio of 2.0 for the year
ended December 31, 1999.
23
<PAGE>
Transportation
M/G Transport generates its cash inflows primarily from affreightment
revenue. The primary outflows of cash relate to the payment of barge charter
costs, debt service obligations, operating expenses, income taxes, dividends to
the Company and the acquisition of capital equipment. Like the insurance
operations, cash flow from the transportation operations is expected to remain
sufficiently positive to meet future operating requirements while providing for
reasonable dividends to the Company.
The transportation subsidiaries entered into a fifteen-year operating
lease for 20 new steel roll-top barges in the third quarter of 1999. Aggregate
rental payments over the next fifteen years will approximate $8.2 million.
There were no barge acquisitions during 1998. However, M/G Transport acquired 41
steel roll-top barges in 1997. The total cost of these barges was approximately
$11.9 million. The 1997 acquisitions were financed primarily with internally
generated capital and short-term bank borrowings. There are currently no
additional acquisition commitments outstanding. Any additional acquisitions
will likely be generated through a combination of internally financed funds,
external borrowings or lease transactions. As of December 31, 1999, the
transportation subsidiaries had $5.1 million of collateralized equipment
obligations outstanding.
OTHER MATTERS
Market Risk
Market risk is the risk that the Company will incur losses due to
adverse changes in market rates and prices. The Company's market risk exposures
are substantially related to AMIG's investment portfolio and changes in interest
rates and equity prices. Each risk is defined in more detail as follows:
Interest rate risk is the risk that AMIG will incur economic losses due
to adverse changes in interest rates. The risk arises from many of AMIG's
investment activities, as AMIG invests substantial funds in interest-sensitive
assets. AMIG manages the interest rate risk inherent in its investment assets
relative to the interest rate risk inherent in its liabilities. One of the
measures AMIG uses to quantify this exposure is duration. By definition,
duration is a measure of the sensitivity of the fair value of a fixed income
portfolio to changes in interest rates. Based upon the 3.4 year duration of
AMIG's fixed income portfolio at December 31, 1999, management estimates that a
100 basis point increase in interest rates ("rate shock") would decrease the net
fair value of its $482.0 million debt security portfolio by approximately 3.4%
or $16.4 million.
Equity price risk is the risk that AMIG will incur economic losses due
to adverse changes in a particular stock or stock index. AMIG's equity exposure
consists primarily of declines in the value of its equity security holdings. At
December 31, 1999, AMIG had approximately $128.4 million in equity holdings,
including $49.3 million of Firstar Corporation common stock. A 10% decrease in
the market value of Firstar Corporation's common stock would decrease the fair
value of its equity portfolio by approximately $4.9 million. At December 31,
1999, AMIG's portfolio of equity securities has a beta coefficient (a measure of
stock price volatility) of approximately 1.07. This means that, in general, if
the S&P Index decreases by 10%, management estimates that the fair value of its
equity portfolio will decrease by approximately 10.7%.
The active management of market risk is integral to AMIG's operations.
AMIG has investment guidelines that define the overall framework for managing
market and other investment risks, including the accountabilities and controls
over these activities.
24
<PAGE>
Other Comprehensive Income
For the Company, the only difference between net income and
comprehensive income is the net change in unrealized gain on marketable
securities. As discussed above, the primary component of the net change in
unrealized gains on marketable securities was the change in the market value of
the Company's equity investments during each of the years presented. For the
year ended December 31, 1999, such net unrealized gains decreased (net of
income tax effects) by $21.1 million. For the years ended December 31, 1998 and
1997, the net unrealized gains increased (net of income tax effects) by $26.4
million and $20.5 million, respectively.
Year 2000
The Year 2000 Issue arises from the common computer programming
convention of using a two digit shorthand to represent a calendar year
(i.e., "99" means 1999). Some computer systems and embedded chips may not
recognize the entry "00" as the two digit shorthand for calendar year 2000.
This could lead to erroneous results or, in the worst case, to system shutdowns.
The Company successfully completed its Year 2000 Work Plan and has not
experienced material adverse consequences on its operations resulting from
non-compliance of either its information technology or non-information
technology systems.
To date, Midland has not experienced material adverse consequences
related to the operations of customers or vendors, nor is it aware of exposures
related to customers or vendors. However, there can be no assurance that future
system failures of other companies on which the Company relies would not have an
adverse impact on Midland's operations. Cost associated with any such failure
cannot be reasonably estimated.
Through December 31, 1999, the Company had expended approximately $1.1
million on the Year 2000 Work Plan.
Impact of Inflation
Management does not consider the impact of the change in prices due to
inflation to be material in the analysis of the Company's overall operations.
PRIVATE SECURITIES REFORM ACT OF 1995-FORWARD LOOKING STATEMENTS DISCLOSURE
This Report contains forward looking statements. For purposes of this
Report, a "Forward Looking Statement", within the meaning of the Securities
Reform Act of 1995, is any statement concerning the year 2000 and beyond. The
actions and performance of the Company and its subsidiaries could deviate
materially from what is contemplated by the forward looking statements contained
in this Report. Factors which might cause deviations from the forward looking
statements include, without limitations, the following: 1) changes in the laws
or regulations affecting the operations of the Company or any of its
subsidiaries, 2) changes in the business tactics or strategies of the Company or
any of its subsidiaries, 3) acquisition(s) of assets or of new or complementary
operations, or divestiture of any segment of the existing operations of the
Company or any of its subsidiaries, 4) changing market forces or litigation
which necessitate, in management's judgment, changes in plans, strategy or
tactics of the Company or its subsidiaries and 5) adverse weather conditions,
fluctuations in the investment markets, changes in the retail marketplace or
fluctuations in interest rates, any one of which might materially affect the
operations of the Company and/or its subsidiaries. Any forward-looking
statement speaks only as of the date made. We undertake no obligation to update
any forward-looking statements to reflect events or circumstances arising after
the date on which they are made.
25
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31,
(Amounts in thousands, except per
share data) 1999 1998 1997
- ---------------------------------------- --------------------------------------
Revenues:
Insurance:
Premiums earned $400,991 $375,478 $311,159
Net investment income 25,292 23,908 21,332
Net realized investment gains 3,486 6,354 4,170
Other insurance income 6,793 2,508 1,557
Transportation 31,327 33,059 34,933
Other 1,237 1,055 617
--------------------------------------
Total 469,126 442,362 373,768
--------------------------------------
Costs and Expenses:
Insurance:
Losses and loss adjustment expenses 204,365 210,015 171,163
Commissions and other policy
acquisition costs 114,212 103,169 79,518
Operating and administrative expenses 66,541 54,309 49,118
Transportation operating expenses 29,255 28,287 30,079
Interest expense 4,067 4,991 4,983
Other operating and
administrative expenses 6,973 4,064 4,204
--------------------------------------
Total 425,413 404,835 339,065
--------------------------------------
Income from Continuing Operations
Before Federal Income Tax 43,713 37,527 34,703
Provision for Federal Income Tax 12,534 10,595 10,336
--------------------------------------
Income from Continuing Operations 31,179 26,932 24,367
--------------------------------------
Discontinued Operations:
Loss from discontinued operations less
related income tax credit of
$1,881 -- -- (3,492)
Loss on disposal of assets less related
income tax credit of $1,790 -- -- (3,325)
--------------------------------------
Loss from Discontinued Operations -- -- (6,817)
--------------------------------------
Net Income $ 31,179 $ 26,932 $ 17,550
======================================
Basic Earnings (Loss) Per Share of Common Stock:
Continuing operations $ 3.42 $ 2.99 $ 2.72
Discontinued operations -- -- (.76)
--------------------------------------
Total $ 3.42 $ 2.99 $ 1.96
======================================
Diluted Earnings (Loss) Per Share of Common Stock:
Continuing operations $ 3.30 $ 2.86 $ 2.63
Discontinued operations -- -- (.74)
--------------------------------------
Total $ 3.30 $ 2.86 $ 1.89
======================================
Cash Dividends Per Share of Common Stock $ .27 $ .25 $ .23
======================================
See notes to consolidated financial statements.
26
<PAGE>
CONSOLIDATED BALANCE SHEETS
THE MIDLAND COMPANY AND SUBSIDIARIES December 31,
(Amounts in thousands) 1999 1998
- ------------------------------------------------- ----------------------
ASSETS
Marketable Securities:
Fixed income (cost, $488,492 in 1999 and
$443,975 in 1998 ) $479,772 $453,422
Equity (cost, $46,400 in 1999 and
$37,736 in 1998) 131,087 136,748
----------------------
Total 610,859 590,170
----------------------
Cash 10,098 3,687
----------------------
Accounts Receivable-Net 60,426 59,341
----------------------
Reinsurance Recoverables and
Prepaid Reinsurance Premiums 43,151 33,955
----------------------
Property, Plant and Equipment-Net 62,585 67,837
----------------------
Deferred Insurance Policy Acquisition Costs 85,168 63,962
----------------------
Other Assets 15,770 18,268
----------------------
Total Assets $888,057 $837,220
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned Insurance Premiums $312,838 $255,115
----------------------
Insurance Loss Reserves 133,713 125,496
----------------------
Insurance Commissions Payable 20,291 20,272
----------------------
Funds Held Under Reinsurance Agreements and
Reinsurance Payables 3,097 14,624
----------------------
Long-Term Debt 44,288 54,563
----------------------
Other Notes Payable:
Banks 20,000 15,000
Commercial paper 5,550 6,522
----------------------
Total 25,550 21,522
----------------------
Deferred Federal Income Tax 28,171 39,305
----------------------
Other Payables and Accruals 62,107 57,491
----------------------
Commitments and Contingencies -- --
----------------------
Shareholders' Equity:
Common stock (issued and outstanding: 9,516
shares at December 31, 1999 and 9,352 shares
at December 31, 1998 after deducting treasury
stock of 1,412 shares and 1,576 shares,
respectively) 911 911
Additional paid-in capital 18,583 15,947
Retained earnings 207,005 178,398
Accumulated other comprehensive income 49,388 70,507
Treasury stock (at cost) (15,786) (15,293)
Unvested restricted stock awards (2,099) (1,638)
----------------------
Total 258,002 248,832
----------------------
Total Liabilities and Shareholders' Equity $888,057 $837,220
======================
See notes to consolidated financial statements.
27
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands) Years Ended December 31, 1999, 1998, and 1997
- -----------------------------------------------------------------------------------------------------------------------
Accumulated Unvested
Additional Other Compre- Restricted Compre-
Common Paid-In Retained hensive Treasury Stock hensive
Stock Capital Earnings Income Stock Awards Total Income
- -----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $911 $14,846 $138,423 $23,587 $(16,621) $(1,458) $159,688
Comprehensive income:
Net income 17,550 17,550 $17,550
Increase in unrealized gain
on marketable securities,
net of related income tax
effect of $11,060 20,536 20,536 20,536
--------
Total comprehensive income $38,086
========
Purchase of treasury stock (17) (17)
Issuance of treasury stock
for options exercised and
employee savings plan 92 512 604
Cash dividends declared (2,176) (2,176)
Restricted stock awards 626 1,808 (2,434)
Amortization and cancellation of
unvested restricted stock awards (205) (386) 1,432 841
----------------------------------------------------------------------------
Balance, December 31, 1997 911 15,359 153,797 44,123 (14,704) (2,460) 197,026
Comprehensive income:
Net income 26,932 26,932 $26,932
Increase in unrealized gain
on marketable securities,
net of related income tax
effect of $14,207 26,384 26,384 26,384
--------
Total comprehensive income $53,316
========
Purchase of treasury stock (1,271) (1,271)
Issuance of treasury stock
for options exercised and
employee savings plan 620 738 1,358
Cash dividends declared (2,331) (2,331)
Amortization and cancellation of
unvested restricted stock awards (32) (56) 822 734
----------------------------------------------------------------------------
Balance, December 31, 1998 911 15,947 178,398 70,507 (15,293) (1,638) 248,832
Comprehensive income:
Net income 31,179 31,179 $31,179
Decrease in unrealized gain
on marketable securities,
net of related income tax
effect of $(11,373) (21,119) (21,119) (21,119)
--------
Total comprehensive income $10,060
========
Purchase of treasury stock (3,709) (3,709)
Issuance of treasury stock
for options exercised and
employee savings plan 315 1,985 2,300
Cash dividends declared (2,572) (2,572)
Federal income tax benefit
related to exercise of
stock options 940 940
Restricted stock awards 1,411 1,266 (2,677)
Amortization and cancellation of
unvested restricted stock awards (30) (35) 2,216 2,151
----------------------------------------------------------------------------
Balance, December 31, 1999 $911 $18,583 $207,005 $49,388 $(15,786) $(2,099) $258,002
============================================================================
See notes to consolidated financial statements.
</TABLE>
28
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE MIDLAND COMPANY AND SUBSIDIARIES
(Amounts in thousands, except Years Ended December 31,
per share data) 1999 1998 1997
- ---------------------------------------- --------------------------------------
Cash Flows from Operating Activities:
Net income $ 31,179 $ 26,932 $ 17,550
Loss from discontinued operations -- -- 6,817
--------------------------------------
Income from continuing operations 31,179 26,932 24,367
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 10,287 8,798 10,269
Net gains from sale of investments (3,486) (6,354) (4,170)
Increase in unearned insurance premiums 57,723 14,775 31,923
Increase in deferred insurance policy
acquisition costs (21,206) (8,372) (10,248)
Decrease in funds held under
reinsurance agreements and
reinsurance payables (11,527) (819) (11,506)
Decrease (increase) in reinsurance
recoverables and prepaid
reinsurance premiums (9,196) 15,061 3,789
Increase in insurance loss reserves 8,217 5,362 24,304
Decrease (increase) in other assets 5,402 (2,947) (2,308)
Increase in other accounts
payable and accruals 4,002 7,417 11,240
Increase in net accounts receivable (632) (602) (4,865)
Increase (decrease) in deferred
federal income tax 239 (1,082) (1,725)
Increase in insurance commissions
payable 19 1,239 5,212
Other-net 1,725 698 (427)
--------------------------------------
Net cash provided by
continuing operations 72,746 60,106 75,855
Net cash used in discontinued
operations -- -- (2,104)
--------------------------------------
Net cash provided by
operating activities 72,746 60,106 73,751
--------------------------------------
Cash Flows from Investing Activities:
Purchase of marketable securities (207,321) (277,853) (207,474)
Sale of marketable securities 130,296 191,014 88,687
Maturity of marketable securities 35,913 35,034 41,165
Decrease (increase) in cash equivalent
marketable securities (9,588) 6,937 15,404
Acquisition of property, plant and
equipment (3,173) (4,948) (19,538)
Net cash used in business acquisition (2,636) -- --
Proceeds from sale of property, plant
and equipment 345 6,003 1,561
Proceeds from sale of discontinued
operations -- -- 13,330
--------------------------------------
Net cash used in investing
activities (56,164) (43,813) (66,865)
--------------------------------------
Cash Flows from Financing Activities:
Repayment of long-term debt (10,275) (8,358) (3,664)
Increase (decrease) in net short-term
borrowings 4,028 (8,269) (2,909)
Purchase of treasury stock (3,709) (1,271) (17)
Dividends paid (2,515) (1,746) (2,677)
Issuance of treasury stock 2,300 1,358 604
Issuance of long-term debt -- 403 3,712
--------------------------------------
Net cash used in financing
activities (10,171) (17,883) (4,951)
--------------------------------------
Net Increase (Decrease) in Cash 6,411 (1,590) 1,935
Cash at Beginning of Period 3,687 5,277 3,342
--------------------------------------
Cash at End of Period $ 10,098 $ 3,687 $ 5,277
======================================
Interest Paid $ 4,008 $ 4,946 $ 6,148
Income Taxes Paid $ 11,500 $ 10,690 $ 4,655
See notes to consolidated financial statements.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE MIDLAND COMPANY AND SUBSIDIARIES
Years Ended December 31, 1999, 1998 and 1997
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company operates generally in two industries -insurance and
transportation with the most significant business activities being in insurance.
The accounting policies of the Company and its subsidiaries conform to
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to use numerous estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The accompanying
consolidated financial statements include estimates for items such as insurance
loss reserves, income taxes, various other liability accounts and deferred
insurance policy acquisition costs. Actual results could differ from those
estimates. Policies that affect the more significant elements of the
consolidated financial statements are summarized below.
Principles of Consolidation-The consolidated financial statements
include the accounts of the Company and all subsidiary companies. Material
intercompany balances and transactions have been eliminated.
Marketable Securities-Marketable securities are categorized as fixed
income securities (cash equivalents, debt instruments and preferred stocks
having scheduled redemption provisions) and equity securities (common and
preferred stocks which do not have redemption provisions). The Company
classifies all fixed income and equity securities as available-for-sale and
carries such investments at market value. Unrealized gains or losses on
investments, net of related income taxes, are included in shareholders' equity
as an item of accumulated other comprehensive income. Realized gains and losses
on sales of investments are recognized in income on a specific identification
basis.
Property and Depreciation-Property, plant and equipment are recorded at
cost. Depreciation and amortization are generally calculated using accelerated
methods over the estimated useful lives of the respective properties (buildings
and equipment - 15 to 35 years, furniture and equipment - 5 to 7 years, and
barges - 20 years).
Federal Income Tax-Deferred federal income taxes are recognized to
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for federal income tax purposes. The Company continually reviews
deferred tax assets to determine the necessity of a valuation allowance.
The Company files a consolidated federal income tax return which
includes all subsidiaries.
Insurance Income-Premiums for physical damage and credit accident and
health insurance, net of premiums ceded to reinsurers, are recognized as income
on a pro-rata basis over the lives of the policies. Credit life premiums are
recognized as income over the lives of the policies using a sum-of-the-digits
method. The Company does not consider anticipated investment income in
determining premium deficiencies (if any) on short-term contracts. Policy
acquisition costs, primarily commission expenses and premium taxes, are
capitalized and expensed over the terms of the related policies on the same
basis as the related premiums are earned. Selling and administrative expenses
that are not primarily related to premiums written are expensed as incurred.
Insurance Loss Reserves-Unpaid insurance losses and loss adjustment
expenses include an amount determined from reports on individual cases and an
amount, based on past experience, for losses incurred but not reported. Such
liabilities are necessarily based on estimates and, while management believes
that the amounts are fairly stated, the ultimate liability may be in excess of
or less than the amounts provided. The methods of making such estimates and for
establishing the resulting liabilities are continually reviewed and any
adjustments resulting therefrom are included in earnings currently. Insurance
loss reserves also include an amount for claim drafts issued but not yet paid.
Allowance for Losses-Provisions for losses on receivables are made in
amounts deemed necessary to maintain adequate reserves to cover probable future
losses.
Reinsurance-The Company reinsures certain levels of risk with other
insurance companies and cedes varying portions of its written premiums to such
reinsurers. Failure of reinsurers to honor their obligations could result in
losses to the Company as reinsurance contracts do not relieve the Company from
its obligations to policyholders. The Company evaluates
30
<PAGE>
the financial condition of its reinsurers and monitors concentrations of credit
risk arising from similar geographic regions, activities or economic
characteristics of the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies. In addition, the Company pays a percentage of
earned premiums to reinsurers in return for coverage against catastrophic
losses. The Company also assumes a limited amount of business on certain
reinsurance contracts. Related premiums and loss reserves are recorded based on
records supplied by the ceding companies.
Transportation Revenues-Revenues for river transportation activities are
recognized when earned based on contractual rates and the stage of
transportation on inland waterway.
Statements of Cash Flows-For purposes of the statements of cash flows,
the Company defines cash as cash held in operating accounts at financial
institutions. The amounts reported in the statements of cash flows for the
purchase, sale or maturity of marketable securities do not include cash
equivalents.
Fair Value of Financial Instruments-The book values of cash,
receivables, short-term notes payable, trade accounts payable and any financial
instruments included in other assets and accrued liabilities approximate their
fair values principally because of the short-term maturities of these
instruments. The fair value of investments is considered to be the market value
which is based on quoted market prices. The fair value of long-term debt is
estimated using interest rates that are currently available to the Company for
issuance of debt with similar terms and maturities.
Stock Option and Award Plans-The Company has various plans which provide
for granting options and common stock to certain employees and independent
directors of the Company and its subsidiaries. The Company accounts for
compensation expense related to such transactions using the "intrinsic value"
based method under the provisions of Accounting Principles Board Opinion No. 25.
New Accounting Standards-The Financial Accounting Standards Board issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
during 1998. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal
years beginning after June 15, 2000. Adoption of SFAS 133 is not expected to
have a material impact on the reported results of operations or financial
position of the Company.
In October 1998, the AICPA issued SOP 98-7 "Deposit Accounting for
Insurance and Reinsurance Contracts that Do Not Transfer Risk". SOP 98-7 is
effective for fiscal years beginning after June 15, 1999. Adoption of
SOP 98-7 is not expected to have a material impact on the reported results of
operations or financial position of the Company.
Reclassifications-Certain previously reported amounts in the
accompanying consolidated financial statements have been reclassified to conform
to the current year's classifications.
2. DISCONTINUED OPERATIONS
On September 29, 1997, the Company's sportswear subsidiary, CS Crable
Sportswear, Inc., sold substantially all of its assets to Brazos, Inc., a
subsidiary of Brazos Sportswear, Inc. The assets were sold for approximately
$13.3 million in cash resulting in an after-tax loss on the disposal of
approximately $3.3 million. The results of operations and the related loss on
disposal for these operations are categorized in the consolidated financial
statements as "Discontinued Operations" and reported separately from continuing
operations. There have been no material financial results from this
discontinued unit since the aforementioned date of sale. Revenues related to
the discontinued operations amounted to $22.8 million in 1997.
31
<PAGE>
3. MARKETABLE SECURITIES
Thousands of Dollars
-------------------------------------------
Gross Unrealized Market
1999 Cost Gains Losses Value
- -----------------------------------------------------------------------
Governments $140,514 $ 255 $ 2,323 $138,446
Municipals 171,926 658 4,169 168,415
Corporates 122,413 16 3,157 119,272
Cash Equivalents 38,674 -- -- 38,674
Other-Notes Receivable 8,655 -- -- 8,655
Accrued Interest 6,310 -- -- 6,310
-------------------------------------------
Total 488,492 929 9,649 479,772
-------------------------------------------
Equity Securities 45,970 85,980 1,293 130,657
Accrued Dividends 430 -- -- 430
-------------------------------------------
Total 46,400 85,980 1,293 131,087
-------------------------------------------
Total Marketable Securities $534,892 $ 86,909 $10,942 $610,859
===========================================
Thousands of Dollars
-------------------------------------------
Gross Unrealized Market
1998 Cost Gains Losses Value
- -----------------------------------------------------------------------
Debt Securities:
Governments $170,539 $ 4,320 $ 320 $174,539
Municipals 161,699 4,366 99 165,966
Corporates 77,000 1,496 316 78,180
Cash Equivalents 28,594 -- -- 28,594
Accrued Interest 6,143 -- -- 6,143
-------------------------------------------
Total 443,975 10,182 735 453,422
-------------------------------------------
Equity Securities 37,445 99,537 525 136,457
Accrued Dividends 291 -- -- 291
-------------------------------------------
Total 37,736 99,537 525 136,748
-------------------------------------------
Total Marketable Securities $481,711 $109,719 $ 1,260 $590,170
===========================================
At December 31, 1999 and 1998, the market value of the Company's
investment in the common stock of Firstar Corporation, which exceeded 10% of the
Company's shareholders' equity, was $52.0 million and $76.3 million,
respectively.
The following is investment information summarized by investment
category (amounts in 000's):
1999 1998 1997
------------------------------
Investment Income:
Interest on Fixed
Maturities $ 26,152 $24,565 $21,626
Dividends on
Equity Securities 2,132 1,624 1,493
Other (1,719) (1,221) (731)
------------------------------
Total 26,565 24,968 22,388
Less Investment Expenses (1,117) (884) (837)
------------------------------
Net Investment Income $ 25,448 $24,084 $21,551
==============================
Net Realized Investment Gains:
Fixed Income:
Gross Realized Gains $ 404 $ 4,420 $ 306
Gross Realized Losses (1,956) (371) (169)
Equity Securities:
Gross Realized Gains 7,290 5,683 5,859
Gross Realized Losses (2,252) (3,378) (1,826)
------------------------------
Net Realized Investment
Gains $ 3,486 $ 6,354 $ 4,170
==============================
Change in Unrealized
Investment Gains:
Fixed Income $(18,167) $ 2,443 $ 4,590
Equity Securities (14,325) 38,148 27,006
------------------------------
Change in Unrealized
Investment Gains $(32,492) $40,591 $31,596
==============================
The cost and approximate market value of debt securities held at
December 31, 1999, summarized by contractual maturities, are shown below.
Actual maturities may differ from contractual maturities when there exists a
right to call or prepay obligations with or without call or prepayment
penalties (amounts in 000's).
Market
Cost Value
-----------------------
One year or less $ 98,391 $ 98,182
After one year through five years 174,166 172,194
After five years through ten years 192,407 186,593
After 10 years 23,528 22,803
-----------------------
Total $488,492 $479,772
=======================
32
<PAGE>
4. RECEIVABLES-NET
Accounts receivable at December 31, 1999 and 1998 are generally due
within one year and consist of the following (amounts in 000's):
1999 1998
---------------------
Insurance $55,509 $53,764
Transportation 4,453 4,687
Other 1,271 1,643
---------------------
Total 61,233 60,094
Less Allowance for Losses 807 753
---------------------
Receivables-Net $60,426 $59,341
=====================
5. PROPERTY, PLANT AND EQUIPMENT-NET
At December 31, 1999 and 1998, property, plant and equipment stated at
original cost consist of the following (amounts in 000's):
1999 1998
------------------------
Land $ 1,341 $ 1,366
Buildings, Improvements,
Fixtures, etc. 59,933 56,944
Transportation Equipment 51,214 56,156
------------------------
Total 112,488 114,466
Less Accumulated Depreciation
and Amortization 49,903 46,629
------------------------
Property, Plant and Equipment-Net $ 62,585 $ 67,837
========================
Total rent expense related to the rental of equipment included in the
accompanying consolidated statements of income is (amounts in 000's) $6,566 in
1999, $5,496 in 1998 and $4,582 in 1997. Future rentals under non-cancelable
operating leases are approximately (amounts in 000's): $3,329 - 2000;
$2,850 - 2001; $2,552 - 2002; $1,040 - 2003; $478 - 2004 and $5,756 -
thereafter.
6. DEFERRED INSURANCE POLICY ACQUISITION COSTS
Acquisition costs incurred and capitalized during 1999, 1998 and 1997
amounted to $135.4 million, $111.5 million and $89.8 million, respectively.
Amortization of deferred acquisition costs was $114.2 million, $103.2 million
and $79.5 million for 1999, 1998 and 1997, respectively.
7. NOTES PAYABLE TO BANKS
At December 31, 1999 and 1998, the Company had conventional lines of
credit with commercial banks of $47 million and $50 million, respectively. The
lines of credit in use under these agreements at December 31, 1999 and 1998
amounted to $18 million and $11 million, respectively. Borrowings under these
lines of credit constitute senior debt. Annual commitment fees of $81,000 are
currently paid to the lending institutions to maintain these credit agreements.
Additionally, at December 31, 1999 and 1998, the Company had other
short-term bank borrowings outstanding of $2 million and $4 million,
respectively. These borrowings also constitute senior debt.
The aforementioned notes payable, together with outstanding commercial
paper, had weighted average interest rates of 6.69% and 6.06% at December 31,
1999 and 1998, respectively.
8. LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998 is summarized as follows
(amounts in 000's):
1999 1998
----------------------
Equipment Obligations, Due Through-
6.45% July 1, 2000 $ 1,330 $ 1,710
7.10% January 1, 2001 642 1,227
6.79% September 30, 2003 936 1,149
6.50% October 31, 2003 2,800 3,500
Mortgage Notes, Due Through-
5.40% December 1, 2003 -- 7,559
6.83% December 20, 2005 18,580 19,195
Unsecured Notes Under a
$40 million Credit Facility,
Payments Beginning 2003-
*7.32% November 1, 2006 20,000 20,000
Capitalized Lease Obligations -- 223
----------------------
Total Obligations 44,288 54,563
Current Maturities 3,554 3,225
----------------------
Non Current Portion $40,734 $51,338
======================
*Rate in effect on December 31, 1999. The interest rate on this borrowing is
adjusted quarterly to the LIBOR rate plus a margin of 1%.
Equipment and real estate obligations are collateralized by
transportation equipment and real estate with a net book value of $34,366,000
at December 31, 1999.
The aggregate amount of repayment requirements on long-term debt for
the five years subsequent to 1999 are (amounts in 000's): 2000 - $3,554;
2001 - $1,650; 2002 - $1,717; 2003 - $6,713; 2004 - $5,865.
At December 31, 1999 and 1998, the carrying value approximated the fair
value of the Company's long-term debt.
33
<PAGE>
9. FEDERAL INCOME TAX
The provision for federal income tax is summarized as follows
(amounts in 000's):
1999 1998 1997
--------------------------------
Current provision $12,295 $11,677 $12,061
Deferred provision (credit) 239 (1,082) (1,725)
--------------------------------
Total continuing operations 12,534 10,595 10,336
Discontinued operations -- -- (3,671)
--------------------------------
Total $12,534 $10,595 $ 6,665
================================
The federal income tax provision related to income from continuing
operations for the years ended December 31, 1999, 1998 and 1997 is different
from amounts derived by applying the statutory tax rates to income before
federal income tax as follows (amounts in 000's):
1999 1998 1997
--------------------------------
Federal income tax
at statutory rate $15,300 $13,134 $12,146
Tax effect of:
Tax exempt interest and
excludable dividend income (3,131) (2,354) (1,793)
Other-net 365 (185) (17)
--------------------------------
Provision for federal
income tax $12,534 $10,595 $10,336
================================
Significant components of the Company's net deferred federal income tax
liability are summarized as follows (amounts in 000's):
1999 1998
---------------------
Deferred tax liabilities:
Deferred insurance policy
acquisition costs $26,876 $21,123
Unrealized gain on
marketable securities 26,579 37,952
Accelerated depreciation 7,274 6,968
Other 319 407
---------------------
Sub-total 61,048 66,450
---------------------
Deferred tax assets:
Unearned insurance premiums 19,744 16,402
Pension expense 5,099 4,197
Insurance loss reserves 3,141 3,465
Other 4,893 3,081
---------------------
Sub-total 32,877 27,145
---------------------
Deferred federal income tax $28,171 $39,305
=====================
For 1999, $940,000 of income tax benefits applicable to deductible
compensation related to stock options exercised were credited to shareholders'
equity.
10. REINSURANCE
A reconciliation of direct to net premiums, on both a written and an
earned basis for the property and casualty companies, is as follows (amount in
000's):
Direct Assumed Ceded Net
--------------------------------------------
1999
- ----
Written $432,263 $39,778 $(32,178) $439,863
Earned 409,506 38,803 (55,620) 392,689
1998
- ----
Written $409,812 $36,436 $(54,478) $391,770
Earned 394,166 35,458 (60,573) 369,051
1997
- ----
Written $389,467 $34,497 $(81,253) $342,711
Earned 375,967 27,994 (98,406) 305,555
The amounts of recoveries pertaining to reinsurance contracts that were
deducted from losses incurred during 1999, 1998 and 1997 were (amounts in
000's): $62,003, $28,674 and $52,182, respectively.
11. INSURANCE LOSS RESERVES
Activity in the liability for unpaid insurance losses and loss
adjustment expenses (excluding claim checks issued but not yet paid) for the
property and casualty companies is summarized as follows (amounts in 000's):
1999 1998 1997
------------------------------------
Balance at January 1 $108,697 $108,334 $ 88,992
Less reinsurance
recoverables 20,430 26,433 24,208
------------------------------------
Net balance at January 1 88,267 81,901 64,784
------------------------------------
Incurred related to:
Current year 211,066 208,811 163,035
Prior years (10,178) (2,120) 5,230
------------------------------------
Total incurred 200,888 206,691 168,265
------------------------------------
Paid related to:
Current year 159,045 157,530 113,841
Prior years 40,785 42,795 37,307
------------------------------------
Total paid 199,830 200,325 151,148
------------------------------------
Net balance at
December 31 89,325 88,267 81,901
Plus reinsurance
recoverables 24,114 20,430 26,433
------------------------------------
Balance at December 31 $113,439 $108,697 $108,334
====================================
34
<PAGE>
12. BENEFIT PLANS
The Company has a qualified pension plan which provides for the payment
of annual benefits to substantially all employees upon retirement. Such
benefits are based on years of service and the employee's highest compensation
during five consecutive years of employment. The Company's funding policy is to
contribute annually an amount sufficient to satisfy ERISA funding standards.
Contributions are intended to provide not only for benefits attributed to
service to date but also for benefits expected to be earned in the future. The
Company also has a supplemental, unfunded pension plan.
The following tables, which include amounts related to both the
qualified and supplemental pension plans, illustrate (1) a reconciliation of the
plans' benefit obligation, assets and funded status, (2) the weighted average
assumptions used and (3) the components of the net periodic benefit cost
(amounts in 000's except for percentages):
1999 1998
-----------------------
Qualified Plan
Change in benefit obligation:
Benefit obligation
at beginning of year $ 25,864 $22,460
Service cost 1,475 1,159
Interest cost 1,961 1,734
Actuarial (gain)/loss (2,045) 1,777
Benefits paid (807) (1,266)
-----------------------
Benefit obligation at end of year $ 26,448 $25,864
=======================
Change in plan assets:
Fair value of plan assets
at beginning of year $ 25,937 $22,587
Actual return on plan assets 7,238 4,616
Benefits paid (807) (1,266)
-----------------------
Fair value of plan
assets at end of year $ 32,368 $25,937
=======================
Funded status:
Funded status at end of year $ 5,920 $ 73
Unrecognized net
actuarial (gain)/loss (13,938) (5,317)
Unrecognized prior service cost 1,296 379
Unrecognized net transition
asset (783) (948)
-----------------------
Accrued benefit cost $ (7,505) $(5,813)
=======================
1999 1998
-----------------------
Supplemental Plan
Benefit obligation
at beginning of year $ 7,985 $ 6,268
Service cost 139 210
Interest cost 566 600
Plan amendments (658) --
Actuarial (gain)/loss (848) 970
Gross benefits paid (89) (63)
-----------------------
Benefit obligation at end of year
(accumulated benefit obligation
of $ 6,321 and $6,648,
respectively) $ 7,095 $ 7,985
=======================
Funded status $ (7,095) $ (7,985)
Unrecognized actuarial (gain)/loss 1,563 3,202
Unrecognized prior service cost 413 443
------------------------
Accrued benefit cost $ (5,119) $ (4,340)
========================
1999 1998 1997
----------------------------
Qualified and
Supplemental Plans
Weighted-average
assumptions as of
December 31:
Discount rate 7.75% 7.00% 7.25%
Expected return
on plan assets 8.00% 8.00% 8.00%
Rate of compensation
increase 5.50% 5.50% 5.50%
Components of net
periodic benefit cost:
Service cost $ 1,614 $ 1,369 $ 1,224
Interest cost 2,527 2,334 1,984
Expected return on assets (1,663) (1,510) (1,367)
Amortization of:
Transition asset (165) (165) (165)
Prior service cost 114 106 112
Actuarial (gain)/loss 133 152 34
----------------------------
Net periodic benefit cost 2,560 2,286 1,822
Curtailment credit -- -- (559)
----------------------------
Total net periodic
benefit cost $ 2,560 $ 2,286 $ 1,263
============================
35
<PAGE>
13. STOCK OPTION AND AWARD PLANS
Under the Company's stock option plans, all of the outstanding stock
options at December 31, 1999 were non-qualified options and had an exercise
price of not less than 100% of the fair market value of the common stock on the
date of grant. 216,000 of these stock options were exercisable at December 31,
1999 and 30,000 options become exercisable in 2000. A summary of stock option
transactions follows:
1999 1998 1997
------------------------------------------------------------
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
(000's) Option (000's) Option (000's) Option
Shares Price Shares Price Shares Price
------------------------------------------------------------
Outstanding,
beginning
of year 380 $10.07 420 $10.13 456 $ 9.77
Exercised (164) 9.38 (40) 10.65 (36) 8.34
Expired -- -- -- -- (27) 8.93
Granted 30 26.09 -- -- 27 12.63
-------- -------- --------
Outstanding,
end of year 246 $12.49 380 $10.07 420 $10.13
============================================================
Weighted avg.
fair value
of options
granted $ 8.64 $ 4.74
======== ========
Information regarding such outstanding options at December 31, 1999
follows:
Outstanding
Remaining Options
Life (000's) Price
- ------------------------------------------
One year 162 $ 9.00
Three years 18 16.71
Five years 18 16.92
Seven years 18 12.63
Nine years 30 26.09
------
Total outstanding 246
======
Weighted average price $12.49
========
The Company implemented a restricted stock award program during 1993.
Under this program, grants of the Company's common stock will vest after a
five-year incentive period, conditioned upon the recipient's employment
throughout the period. During the vesting period, shares issued are
nontransferable, but the shares are entitled to all of the rights of outstanding
shares. In 1993, 96,000 shares were initially awarded under the program and
71,000 shares were eventually distributed in 1998. In 1995, 1997 and 1999,
147,000, 195,000 and 119,500 shares, respectively, were also awarded and
124,000, 171,000 and 117,000 shares, respectively, remain outstanding at
December 31, 1999. The value of the awards is being amortized as compensation
expense over a five year vesting period.
The Company applies APB opinion 25 and related interpretations in
accounting for the stock option plans. Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates for awards under these plans consistent with the method of SFAS
No. 123, the Company's 1999 and 1997 net income and earnings per share would
have been reduced to the pro forma amounts indicated below (1998 would not have
been affected) (amounts in 000's, except per share data):
1999 1997
---------------------
Net Income
As reported $31,179 $17,550
Pro forma $31,011 $17,467
Net Income per Common Share-basic
As reported $3.42 $1.96
Pro forma $3.40 $1.95
Net Income per Common Share-diluted
As reported $3.30 $1.89
Pro forma $3.28 $1.88
The fair values of the 1999 and 1997 option grants were estimated on the
date of the grant using the Black-Scholes option-pricing model with the
following (weighted average) assumptions: dividend yields of 1.3%, expected
volatility of 26.6% and 26.7%, risk-free interest rates of 4.7% and 6.4% and
expected lives of 7 years, respectively.
At December 31, 1999, 1,129,000 common shares are authorized for future
option award or stock grants.
36
<PAGE>
14. EARNINGS PER SHARE
The following table is a reconciliation of the number of shares used to
compute Basic and Diluted earnings per share. No adjustments are necessary to
the income used in the Basic or Diluted calculations for the years ended
December 31, 1999, 1998 or 1997.
Shares in 000's
------------------------
1999 1998 1997
------------------------
Shares used in basic
EPS calculation
(shares outstanding) 9,111 9,018 8,956
Effect of dilutive
stock options 122 228 164
Effect of dilutive
restricted stock grants 230 166 172
------------------------
Shares used in diluted
EPS calculation 9,463 9,412 9,292
========================
On April 9, 1998, the Company approved a three-for-one stock split
effective May 21, 1998 for holders of record on April 30, 1998. Accordingly,
the number of shares have been adjusted for the prior periods to reflect the
impact of this stock split and previously reported per share amounts have been
restated.
At December 31, 1999, 30,000 stock options at a price of $26.09 were
outstanding and were not comprehended in the computation of diluted earnings per
share because their price was greater than the average market value of the
common stock. All outstanding stock options at December 31, 1998 had exercise
prices that were less than the average market price of the Company's common
stock and, therefore, were included in the computation of diluted earnings per
share. Options to purchase 54,000 shares of common stock at prices ranging from
$16.71 to $16.92 per share were outstanding as of December 31, 1997 and were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common stock.
15. CONTINGENCIES
Various litigation and claims against the Company and its subsidiaries
are in process and pending. Based upon a review of open matters with legal
counsel, Management believes that the outcome of such matters will not have a
material effect upon the Company's consolidated financial position or results of
operations.
16. SHAREHOLDERS' EQUITY
In 1998, The Midland Company effected a three-for-one stock split and
increased its number of shares of common stock authorized without par value
(stated value of $.083 a share) to 20,000,000 shares from 5,000,000 shares. The
Company also has 500,000 shares of preferred stock authorized, without par
value, none of which have been issued.
In October 1999 the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock over a
six-month period.
The insurance subsidiaries are subject to state regulations which limit
by reference to statutory investment income and policyholders' surplus the
dividends that can be paid to their parent company without prior regulatory
approval. Dividend restrictions vary between the companies as determined by the
laws of the domiciliary states. Under these restrictions, the maximum dividends
that may be paid by the insurance subsidiaries in 2000 without regulatory
approval total approximately $20,888,000; such subsidiaries paid cash dividends
of $5,990,000 in 1999, $4,725,000 in 1998 and $1,240,000 in 1997.
Net income as determined in accordance with statutory accounting
practices, which differ in certain respects from generally accepted accounting
principles, for the Company's insurance subsidiaries was $21,652,000,
$22,583,000 and $17,538,000 for 1999, 1998 and 1997, respectively.
Shareholders' equity on the same basis was $229,710,000 and $227,647,000 at
December 31, 1999 and 1998.
17. INDUSTRY SEGMENTS
The Company operates in several industries and Company management
reviews operating results by several different classifications (e.g., product
line, legal entity, distribution channel). Reportable segments are determined
based upon revenues and/or operating profits and include manufactured housing
insurance, all other insurance and transportation. Manufactured housing
insurance includes primarily insurance similar to homeowners insurance for
manufactured houses. All other insurance includes various personal lines such
as site-built dwelling, collateral protection and watercraft insurance, as well
as commercial lines such as manufactured housing park and dealer insurance. The
Company writes insurance throughout the United States with larger concentrations
in the southern and southeastern states. Transportation includes barge
chartering and freight brokerage operations primarily on the lower Mississippi
River and its tributaries.
37
<PAGE>
<TABLE>
Listed below is financial information required to be reported for each
industry segment. Certain amounts are allocated and certain amounts are not
allocated (e.g., assets and investment gains) to each segment for management
review. Operating segment information based upon how it is reviewed by the
Company is as follows for the years ended December 31, 1999, 1998 and 1997
(amounts in 000's):
Manufactured Unallocated Corporate
Housing Other Insurance and All Intersegment
Insurance Insurance Amounts Transportation Other Elimination Total
- ------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
1999
- ----
Revenues-External customers $283,332 $124,452 $31,327 $ 1,081 $440,192
Net investment income 15,526 10,631 $ 19 177 391 $ (1,296) 25,448
Net realized investment gains n/a n/a 3,486 3,486
Interest expense n/a n/a 1,406 517 3,490 (1,346) 4,067
Depreciation and amortization 2,120 931 2,945 4,291 10,287
Income-Continuing operations
before taxes 45,370 6,678 (1,122) 1,806 (9,019) 43,713
Income tax expense 14,219 1,169 (304) 637 (3,187) 12,534
Acquisition of fixed assets
and businesses n/a n/a 5,452 84 273 5,809
Identifiable assets n/a n/a 812,791 31,683 58,021 (14,438) 888,057
1998
- ----
Revenues-External customers $258,638 $119,348 $33,059 $ 879 $411,924
Net investment income 14,875 9,923 $ 34 323 262 $ (1,333) 24,084
Net realized investment gains n/a n/a 6,354 6,354
Interest expense n/a n/a 1,461 795 4,097 (1,362) 4,991
Depreciation and amortization 1,989 918 3,190 2,701 8,798
Income-Continuing operations
before taxes 31,609 11,207 (2,598) 4,389 (7,080) 37,527
Income tax expense 10,039 2,774 (909) 1,395 (2,704) 10,595
Acquisition of fixed assets n/a n/a 2,805 561 1,582 4,948
Identifiable assets n/a n/a 747,451 41,576 57,165 (8,972) 837,220
1997
- ----
Revenues-External customers $219,394 $ 93,322 $34,933 $ 398 $348,047
Net investment income 13,935 8,359 $ 24 286 318 $ (1,371) 21,551
Net realized investment gains n/a n/a 4,170 4,170
Interest expense n/a n/a 1,417 849 5,084 (2,367) 4,983
Depreciation and amortization 1,704 738 3,157 4,670 10,269
Income-Continuing operations
before taxes 36,764 3,819 (2,590) 4,399 (7,689) 34,703
Income tax expense 12,100 629 (906) 1,300 (2,787) 10,336
Acquisition of fixed assets n/a n/a 3,555 13,366 2,617 19,538
Identifiable assets n/a n/a 660,464 44,544 62,055 (6,600) 760,463
The amounts shown for manufactured housing insurance, other insurance
and unallocated insurance comprise the consolidated amounts for Midland's
insurance operations subsidiary, American Modern Insurance Group, Inc. Amounts
for 1997 do not include amounts related to discontinued sportswear operations
(a separate segment that, as discussed elsewhere herein, was sold in 1997).
Intersegment revenues were not significant for 1999, 1998 or 1997.
In 1999, 1998 and 1997, revenues from one customer amounted to
$64,621,000, $61,865,000 and $41,011,000, respectively.
</TABLE>
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of The Midland Company:
We have audited the accompanying consolidated balance sheets of The
Midland Company and its subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of The Midland Company and its
subsidiaries at December 31, 1999 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Cincinnati, Ohio
February 10, 2000
MANAGEMENT'S REPORT
The consolidated financial statements and accompanying notes of The
Midland Company and its subsidiaries are the responsibility of the Company's
management, and have been prepared in conformity with generally accepted
accounting principles. They necessarily include amounts that are based on
management's best estimates and judgments. Other financial information contained
in this annual report is presented on a basis consistent with the financial
statements.
In order to maintain the integrity, objectivity and fairness of data
in these financial statements, the Company has developed and maintains a
comprehensive internal control structure which is supplemented by a program of
internal audits. Management believes that the Company's internal control
structure is adequate to provide reasonable, but not absolute, assurance that
assets are safeguarded and the objectives of accuracy and fair presentation of
financial data are met in all material respects.
The financial statements have been audited by Deloitte & Touche LLP,
Certified Public Accountants, independent auditors, in accordance with generally
accepted auditing standards, including sufficient tests of the accounting
records to enable them to express an informed opinion as to whether the
financial statements, considered in their entirety, present fairly the Company's
financial position and results of operations in conformity with generally
accepted accounting principles. Deloitte & Touche LLP reviews the results of
its audit both with management and with the Audit Committee.
The Audit Committee, comprised entirely of outside Directors, meets
periodically with management, internal auditors and independent auditors
(separately and jointly) to assure that each is fulfilling its responsibilities.
39
<PAGE>
<TABLE>
QUARTERLY DATA
THE MIDLAND COMPANY AND SUBSIDIARIES
1999 1998
- ----------------------------------------------------------------------------- -----------------------------------------
(Amounts in thousands, First Second Third Fourth First Second Third Fourth
except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------- -----------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
Revenues $114,084 $116,347 $117,845 $120,850 $107,237 $110,431 $112,538 $112,156
======================================= =========================================
Net income $ 7,860 $ 5,211 $ 7,250 $ 10,858 $ 6,040 $ 3,638 $ 7,299 $ 9,955
======================================= =========================================
Basic earnings per common share $ .86 $ .57 $ .80 $ 1.19 $ .67 $ .40 $ .81 $ 1.11
======================================= =========================================
Diluted earnings per common share $ .83 $ .55 $ .77 $ 1.15 $ .64 $ .39 $ .77 $ 1.06
======================================= =========================================
Dividends per common share $ .0675 $ .0675 $ .0675 $ .0675 $ .0625 $ .0625 $ .0625 $ .0625
======================================= =========================================
Price range of common stock (Nasdaq):
High $ 27.75 $ 29.31 $ 26.88 $ 23.50 $ 27.13 $ 31.67 $ 30.75 $ 22.50
======================================= =========================================
Low $ 22.13 $ 19.25 $ 21.00 $ 19.88 $ 19.42 $ 22.88 $ 22.50 $ 20.00
======================================= =========================================
Note: The Company's stock began trading on the Nasdaq National Market on
June 2, 1999 under the symbol "MLAN". Prior to that date Midland shares
traded on the American Stock Exchange under the symbol "MLA".
Previously reported share information has been adjusted to reflect a
three-for-one common stock split effective May 21, 1998.
</TABLE>
OTHER INFORMATION
TRANSFER AGENT AND REGISTRAR INDEPENDENT AUDITORS
Fifth Third Bank Deloitte & Touche LLP
38 Fountain Square, Mail Drop #1090FS 250 East Fifth Street
Cincinnati, Ohio 45263 Cincinnati, Ohio 45202
SHAREHOLDERS' MEETING
The next meeting of the shareholders will be held at 10:00 a.m. on Thursday,
April 13, 2000 at the Company's offices, 7000 Midland Boulevard, Amelia, Ohio
45102.
DIVIDEND REINVESTMENT PLAN
The Plan provides for the acquisition of additional shares of the Company
without brokerage fees through automatic dividend reinvestment. Enrollment
forms and information about the Plan are available from Fifth Third Bank
(1-800-837-2755).
FORM 10-K
A copy of the Company's 1999 Annual Report to the Securities and Exchange
Commission on Form 10-K may be obtained by writing to the Company -
Attention: Chief Financial Officer or from the Company's website
www.midlandcompany.com.
40
<PAGE>
OFFICERS AND DIRECTORS
THE MIDLAND COMPANY AND SUBSIDIARIES
BOARD OF DIRECTORS
George R. Baker
Corporate Director/Advisor
James E. Bushman (a) (b) (c)
President and Chief Executive Officer
Cast-Fab Technologies, Inc.
James H. Carey (a) (b)
Corporate Director/Advisor
Michael J. Conaton (c)
Vice Chairman
Jerry A. Grundhofer (d)
President and Chief Executive Officer
Firstar Corporation
J. P. Hayden, Jr. (c)
Chairman of the Executive
Committee of the Board
J. P. Hayden III (c)
Chairman and Chief Operating Officer
John W. Hayden (c)
President and Chief Executive Officer
Robert W. Hayden
Formerly Vice President of the Company
William T. Hayden (d)
Attorney
William J. Keating (b) (c)
Formerly Chairman, Chief Executive Officer
and Publisher-Cincinnati Enquirer and
Formerly Chairman of the Board-Associated Press
John R. LaBar
Formerly Vice President and
Secretary of the Company
David B. O'Maley (b) (d)
Chairman, President and CEO
Ohio National Financial Services
John M. O'Mara (a) (c)
Corporate Director/Financial Consultant
Glenn E. Schembechler (a)
Professor Emeritus
University of Michigan
John I. Von Lehman
Executive Vice President,
Chief Financial Officer and Secretary
(a) Member of Audit Committee
(b) Member of Compensation Committee
(c) Member of Executive Committee
(d) Member of Governance Committee
OFFICERS
J. P. Hayden III
Chairman and Chief Operating Officer
John W. Hayden
President and Chief Executive Officer
J. P. Hayden, Jr.
Chairman of the Executive
Committee of the Board
Michael J. Conaton
Vice Chairman
John I. Von Lehman
Executive Vice President,
Chief Financial Officer and Secretary
Paul T. Brizzolara
Senior Vice President and
Chief Legal Officer and
Assistant Secretary
W. Todd Gray
Treasurer
Charles J. Jenkins
Vice President-Management
Information Systems
Michael L. Flowers
Vice President and Assistant Secretary
Mark E. Burke
Director of Taxation
Ronald L. Gramke
Assistant Treasurer
Edward J. Heskamp
Assistant Treasurer
Mary Ann C. Pettit
Assistant Secretary
Geraldine M. Stigall
Assistant Secretary
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Exhibit (21) - Subsidiaries of the Registrant
December 31, 1999
The subsidiaries of the Registrant as of December 31, 1999, all of which are
included in the consolidated financial statements, are as follows:
Percentage
State of of Voting
Incorporation Stock Owned
------------- -----------
M/G Transport Services, Inc. Ohio 100
Midland - Guardian Co. Ohio 100
MGT Services, Inc. Ohio 100
M/G Sportswear, Inc. Ohio 100
SUBSIDIARIES OF MIDLAND - GUARDIAN CO.:
American Modern Insurance Group, Inc. Ohio 100
Marbury Agency, Inc. Ohio 100
SUBSIDIARIES OF AMERICAN MODERN INSURANCE GROUP, INC.:
American Modern Home Insurance Company Ohio 100
American Family Home Insurance Company Florida 100
American Modern Life Insurance Company Ohio 100
Lloyds Modern Corporation Texas 100
American Modern Home Service Company Ohio 100
Modern Services Group, Inc. Ohio 100
SUBSIDIARIES OF AMERICAN MODERN HOME INSURANCE CO.:
American Modern Lloyds Insurance Company Texas 100
American Southern Home Insurance Company Florida 100
American Western Home Insurance Company Oklahoma 100
G.U.I.C. Insurance Company Pennsylvania 100
SUBSIDIARY OF AMERICAN WESTERN HOME INSURANCE CO.:
Modern Life Insurance Company of Arizona, Inc. Arizona 100
SUBSIDIARY OF MODERN SERVICES GROUP, INC.:
Sunbelt General Agency, Inc. Alabama 100
The Atlas Insurance Agency, Inc. Ohio 100
Midwest Enterprises, Inc. Florida 100
Manufactured Homes Acceptance Corporation Ohio 100
MHAC Insurance Agency, Inc. Ohio 100
Service Sentry Warranty Corporation Ohio 100
North American Insurance Agency Corporation Michigan 100
The name of one wholly - owned subsidiary of The Midland Company is not shown
above as such individual listing is not required.
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 479,772,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 131,087,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 610,859,000
<CASH> 10,098,000
<RECOVER-REINSURE> 24,114,000
<DEFERRED-ACQUISITION> 85,168,000
<TOTAL-ASSETS> 888,057,000
<POLICY-LOSSES> 133,713,000
<UNEARNED-PREMIUMS> 312,838,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 23,388,000
<NOTES-PAYABLE> 69,838,000
0
0
<COMMON> 911,000
<OTHER-SE> 257,091,000
<TOTAL-LIABILITY-AND-EQUITY> 888,057,000
400,991,000
<INVESTMENT-INCOME> 25,292,000
<INVESTMENT-GAINS> 3,486,000
<OTHER-INCOME> 39,357,000
<BENEFITS> 204,365,000
<UNDERWRITING-AMORTIZATION> 114,212,000
<UNDERWRITING-OTHER> 66,541,000
<INCOME-PRETAX> 43,713,000
<INCOME-TAX> 12,534,000
<INCOME-CONTINUING> 31,179,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,179,000
<EPS-BASIC> 3.42
<EPS-DILUTED> 3.30
<RESERVE-OPEN> 88,267,000
<PROVISION-CURRENT> 211,066,000
<PROVISION-PRIOR> (10,178,000)
<PAYMENTS-CURRENT> 159,045,000
<PAYMENTS-PRIOR> 40,785,000
<RESERVE-CLOSE> 89,325,000
<CUMULATIVE-DEFICIENCY> (10,178,000)
</TABLE>
