UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Sections 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002
Commission File Number — 1-6026
THE MIDLAND COMPANY
Incorporated in Ohio
I.R.S. Employer Identification No. 31-0742526
7000 Midland Boulevard
Amelia, Ohio 45102-2607
Tel. (513) 943-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value.
Indicate by check mark whether the registrant (1) has filed all other reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes X No
At June 30, 2002, the aggregate market value of the voting and non-voting common stock held by nonaffiliates, which includes shares held by executive officers and directors, of the registrant at June 30, 2002 was $442,721,000 based on a closing price of $25.24 per share.
As of March 13, 2003, 17,605,768 shares of no par value common stock were issued and outstanding.
Documents Incorporated by Reference
Portions of the Annual Report to Shareholders for the year ended December 31, 2002 are incorporated by reference into Parts I, II and IV.
Portions of the Registrant’s Proxy Statement dated March 13, 2003 to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 10, 2003 are incorporated by reference into Part III.
| ITEM 1. | ||||||||
| ITEM 2. | ||||||||
| ITEM 3. | ||||||||
| ITEM 4. | ||||||||
| ITEM 5. | ||||||||
| ITEM 6. | ||||||||
| ITEM 7. | ||||||||
| ITEM 7A. | ||||||||
| ITEM 8. | ||||||||
| ITEM 9. | ||||||||
| ITEM 10. | ||||||||
| ITEM 11. | ||||||||
| ITEM 12. | ||||||||
| ITEM 13. | ||||||||
| ITEM 14. | ||||||||
| ITEM 15. | ||||||||
| EX-13 | ||||||||
| EX-21 | ||||||||
| EX-99.1 | ||||||||
| EX-99.2 | ||||||||
THE MIDLAND COMPANY
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2002
Certain statements made in this report are forward-looking and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These statements include certain discussions relating to future revenue, underwriting income, premium volume, investment income and other investment results, business strategies, profitability, liquidity, capital adequacy, anticipated capital expenditures and business relationships, as well as any other statements concerning the year 2003 and beyond. The forward-looking statements involve risks and uncertainties that may cause results to differ materially from those anticipated in those statements. Factors that might cause results to differ from those anticipated include, without limitation, adverse weather conditions, changes in underwriting results affected by adverse economic conditions, fluctuations in the investment markets, changes in the retail marketplace, changes in the laws or regulations affecting the operations of Midland or its subsidiaries, changes in the business tactics or strategies of Midland, its subsidiaries or its current or anticipated business partners, the financial condition of Midland’s business partners, acquisitions or divestitures, changes in market forces, litigation and the other risk factors that have been identified in Midland’s filings with the SEC, any one of which might materially affect the operations of Midland or its subsidiaries. Any forward-looking statements speak only as of the date made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.
PART I
| ITEM 1. |
Business. Midland hereby incorporates by reference the inside cover and pages 2 through 13, 16 through 27 and 41 and 42 (Note 17) of its 2002 Annual Report to Shareholders. Midland was incorporated in Ohio in 1968 with its original predecessor company dating back to 1938. The number of persons employed by Midland was 1,011 at December 31, 2002. |
|
|
Property and Casualty Loss Reserves Midland’s consolidated financial statements include the estimated liability (reserves) for unpaid losses and loss adjustment expenses (LAE) of its property and casualty insurance subsidiaries. The liability is presented net of amounts recoverable from salvage and subrogation and includes amounts recoverable from reinsurance for which receivables are recognized. |
||
| Midland establishes reserves for losses that have been reported and certain legal expenses on the “case basis” method. Claims incurred but not reported (“IBNR”) and other adjustment expenses are estimated using statistical procedures. Salvage and subrogation recoveries are accrued using the “case basis” method for large claims and statistical procedures for smaller claims. | ||
| Midland’s objective is to set reserves that are adequate; that is, the amounts originally recorded as reserves should at least equal the amounts ultimately expected to be required to settle losses. The property and casualty divisions’ reserves aggregate its best estimates of the total ultimate cost of claims that have been incurred but have not yet been paid. The estimates are based on past claims experience and reflect current claims trends as well as social, legal and economic conditions, including inflation. The reserves are not discounted. |
| Management reviews the loss and loss adjustment expense reserve development on a regular basis to determine whether the reserving assumptions and methods are appropriate. Reserves initially determined are compared to the amounts ultimately paid. Management regularly makes statistical estimates of the projected amounts necessary to settle outstanding claims, compares these estimates to the recorded reserves and adjusts the reserves as necessary. The adjustments are reflected in current operations. | ||
| The principle reason for differences between the loss and LAE liability reported in the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and that reported in the annual statements filed with state insurance departments in accordance with statutory accounting practices (“SAP”) relates to the reporting of reinsurance recoverables as receivables for GAAP purposes and as a reduction in reserves for SAP purposes. | ||
|
Changes in Loss and LAE Reserves: Midland’s table outlining changes in loss and LAE expenses was set forth in footnote 11 on page 38 of the 2002 Annual Report and is hereby incorporated by reference herein. This table is further discussed in Management’s Discussion and Analysis on pages 24 and 25 of the 2002 Annual Report and is incorporated by reference herein. |
||
|
Analysis of Loss and LAE Reserve Development The following table presents the development of Midland’s property and casualty insurance subsidiaries estimated liability for the ten years prior to 2002. The top line of the table illustrates the estimated liability for unpaid losses and LAE recorded at the balance sheet date at the end of each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported. |
||
| The upper portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate was increased or decreased as more information became known about the frequency and severity of claims for individual years. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. | ||
| The table shows the cumulative redundancy developed with respect to the previously recorded liability for all years as of the end of 2002. For example, the 1994 reserve of $37,481,000 has been re-estimated as of year-end 2002 to be $31,228,000, indicating a redundancy of $6,253,000. | ||
| 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, 2002, the Company had paid $31,014,000 of the currently estimated $31,228,000 of losses and LAE that had been incurred as of the end of 1994; thus an estimated $214,000 of losses incurred as of the end of 1994 remain unpaid as of the current financial statement date. | ||
| In using this information, it should be noted that this table does not present accident or policy year development data which readers may be more accustomed to analyzing. Each amount in each column includes amounts applicable to the year over the column and all prior years. For example, the amounts included in the 1994 column include amounts related to 1994 and all prior years. | ||
| The reserve development is unfavorable for 1995 and 1996 due to unfavorable loss development in our commercial liability line products. Midland decided to exit the commercial liability line in September 2001. |
| Analysis of Loss and Loss Adjustment Expense Development |
| (Amounts in 000's) |
| Year Ended | ||||||||||||||||||||||||||
| December 31 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | ||||||||||||||||||||
Reserve for Unpaid |
||||||||||||||||||||||||||
Losses, Net of
Reinsurance |
$ | 20,405 | $ | 27,744 | $ | 37,481 | $ | 47,712 | $ | 64,784 | $ | 81,901 | ||||||||||||||
Net Reserve Re-estimated
as of: |
||||||||||||||||||||||||||
One Year Later |
18,425 | 25,668 | 30,134 | 51,483 | 70,014 | 79,781 | ||||||||||||||||||||
Two Years Later |
18,451 | 22,686 | 32,074 | 53,467 | 67,310 | 77,148 | ||||||||||||||||||||
Three Years Later |
16,871 | 21,154 | 31,880 | 52,418 | 66,442 | 76,110 | ||||||||||||||||||||
Four Years Later |
16,616 | 20,966 | 31,734 | 51,688 | 66,060 | 76,620 | ||||||||||||||||||||
Five Years Later |
16,505 | 20,688 | 31,155 | 51,087 | 65,674 | 76,359 | ||||||||||||||||||||
Six Years Later |
16,445 | 20,629 | 31,130 | 51,298 | 66,702 | |||||||||||||||||||||
Seven Years Later |
16,441 | 20,962 | 31,113 | 51,543 | ||||||||||||||||||||||
Eight Years Later |
16,542 | 20,913 | 31,228 | |||||||||||||||||||||||
Nine Years Later |
16,488 | 20,972 | ||||||||||||||||||||||||
Ten Years Later |
16,540 | |||||||||||||||||||||||||
Net Cumulative |
||||||||||||||||||||||||||
Redundancy
(Deficiency) |
$ | 3,865 | $ | 6,772 | $ | 6,253 | $ | (3,831 | ) | $ | (1,918 | ) | $ | 5,542 | ||||||||||||
Net Cumulative |
||||||||||||||||||||||||||
Amount of
Reserve Paid
Through: |
||||||||||||||||||||||||||
One Year Later |
$ | 11,730 | $ | 9,684 | $ | 19,040 | $ | 31,471 | $ | 37,307 | $ | 42,795 | ||||||||||||||
Two Years Later |
14,397 | 18,445 | 26,471 | 41,785 | 51,461 | 57,677 | ||||||||||||||||||||
Three Years Later |
15,923 | 19,930 | 29,237 | 47,434 | 58,716 | 65,610 | ||||||||||||||||||||
Four Years Later |
16,312 | 20,427 | 30,425 | 49,596 | 61,913 | 69,376 | ||||||||||||||||||||
Five Years Later |
16,381 | 20,558 | 30,770 | 50,051 | 63,728 | 71,621 | ||||||||||||||||||||
Six Years Later |
16,420 | 20,598 | 30,846 | 50,685 | 64,363 | |||||||||||||||||||||
Seven Years Later |
16,435 | 20,953 | 30,971 | 50,886 | ||||||||||||||||||||||
Eight Years Later |
16,542 | 20,968 | 31,014 | |||||||||||||||||||||||
Nine Years Later |
16,540 | 20,972 | ||||||||||||||||||||||||
Ten Years Later |
16,540 | |||||||||||||||||||||||||
Net Reserve — December 31 |
$ | 37,481 | $ | 47,712 | $ | 64,784 | $ | 81,901 | ||||||||||||||||||
Reinsurance Recoverables |
14,597 | 13,785 | 24,208 | 26,433 | ||||||||||||||||||||||
Gross Reserve-December 31 |
$ | 52,078 | $ | 61,497 | $ | 88,992 | $ | 108,334 | ||||||||||||||||||
Net Re-estimated Reserve |
$ | 31,228 | $ | 51,543 | $ | 66,702 | $ | 76,359 | ||||||||||||||||||
Re-estimated Reinsurance |
$ | 12,162 | $ | 14,892 | $ | 24,925 | $ | 24,644 | ||||||||||||||||||
Gross Re-estimated Reserve |
$ | 43,390 | $ | 66,435 | $ | 91,627 | $ | 101,003 | ||||||||||||||||||
Gross Cumulative Redundancy
(Deficiency) |
$ | 8,688 | $ | (4,938 | ) | $ | (2,635 | ) | $ | 7,331 | ||||||||||||||||
[Additional columns below]
[Continued from above table, first column(s) repeated]
| Year Ended | ||||||||||||||||||||||
| December 31 | 1998 | 1999 | 2000 | 2001 | 2002 | |||||||||||||||||
Reserve for Unpaid |
||||||||||||||||||||||
Losses, Net of
Reinsurance |
$ | 88,267 | $ | 89,325 | $ | 95,022 | $ | 102,858 | $ | 115,584 | ||||||||||||
Net Reserve Re-estimated
as of: |
||||||||||||||||||||||
One Year Later |
78,089 | 82,373 | 90,843 | 94,487 | ||||||||||||||||||
Two Years Later |
77,774 | 80,928 | 90,613 | |||||||||||||||||||
Three Years Later |
76,477 | 80,620 | ||||||||||||||||||||
Four Years Later |
76,833 | |||||||||||||||||||||
Five Years Later |
||||||||||||||||||||||
Six Years Later |
||||||||||||||||||||||
Seven Years Later |
||||||||||||||||||||||
Eight Years Later |
||||||||||||||||||||||
Nine Years Later |
||||||||||||||||||||||
Ten Years Later |
||||||||||||||||||||||
Net Cumulative |
||||||||||||||||||||||
Redundancy
(Deficiency) |
$ | 11,434 | $ | 8,705 | $ | 4,409 | $ | 8,371 | ||||||||||||||
Net Cumulative |
||||||||||||||||||||||
Amount of
Reserve Paid
Through: |
||||||||||||||||||||||
One Year Later |
$ | 40,785 | $ | 43,532 | $ | 52,634 | $ | 54,160 | ||||||||||||||
Two Years Later |
55,959 | 57,381 | 66,936 | |||||||||||||||||||
Three Years Later |
63,511 | 65,654 | ||||||||||||||||||||
Four Years Later |
67,707 | |||||||||||||||||||||
Five Years Later |
||||||||||||||||||||||
Six Years Later |
||||||||||||||||||||||
Seven Years Later |
||||||||||||||||||||||
Eight Years Later |
||||||||||||||||||||||
Nine Years Later |
||||||||||||||||||||||
Ten Years Later |
||||||||||||||||||||||
Net Reserve — December 31 |
$ | 88,267 | $ | 89,325 | $ | 95,022 | $ | 102,858 | $ | 115,584 | ||||||||||||
Reinsurance Recoverables |
20,430 | 24,114 | 16,720 | 19,309 | 16,119 | |||||||||||||||||
Gross Reserve-December 31 |
$ | 108,697 | $ | 113,439 | $ | 111,742 | $ | 122,167 | $ | 131,703 | ||||||||||||
Net Re-estimated Reserve |
$ | 76,833 | $ | 80,620 | $ | 90,613 | $ | 94,487 | ||||||||||||||
Re-estimated Reinsurance |
$ | 17,784 | $ | 21,764 | $ | 15,944 | $ | 17,738 | ||||||||||||||
Gross Re-estimated Reserve |
$ | 94,617 | $ | 102,384 | $ | 106,557 | $ | 112,225 | ||||||||||||||
Gross Cumulative Redundancy
(Deficiency) |
$ | 14,080 | $ | 11,055 | $ | 5,185 | $ | 9,942 | ||||||||||||||
|
Seasonality and Reinsurance Incurred losses, and thus the results of operations, for Midland are dependent in some respect on seasonal weather patterns. In addition, during 2002, growth in our motorcycle product was more significant in respect to the growth in our premium volume, as motorcycle gross written premium increased 52.5% from 2001 levels to $60.4 million. The growth in motorcycle increases the seasonality of our product mix as non-catastrophe losses are expected to be higher in the second and third quarters due to more frequent use of motorcycles. |
||
| Midland attempts to mitigate its risk to such unpredictable weather patterns by diversifying the geographic areas covered and by reinsuring certain levels of risk with other insurance companies. By reinsuring certain levels and types of insurable risk with other insurance companies, Midland limits its exposure to losses to that portion of the insurable risk it retains. However, failure of the reinsurer to honor their obligation could result in losses to Midland, as the reinsurance contracts do not relieve Midland of its obligations to policyholders. Midland continually evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies and does not believe it holds any significant concentration of credit risk arising from any single reinsurer or any similar geographic region, activity or economic characteristic associated with its reinsurers. Midland fully expects its reinsurers to honor their obligations. As of December 31, 2002 Midland is owed $4.9 million from reinsurers for claims that have been paid and for which a contractual obligation to collect from a reinsurer exists. Midland has not experienced any significant uncollectible reinsurance amounts or coverage disputes with its reinsurers historically and the composition of its reinsurers has not changed significantly in recent years. | ||
|
Significant Customer As indicated in Industry Segments, Note 17 to Midland’s 2002 consolidated financial statements, in 2002 and 2001, revenues (earned premiums net of amounts ultimately ceded to reinsurers) received for sales through one customer, Conseco Agency, Inc., amounted to $78,643,000 and $80,674,000, respectively. The receivable balance for American Modern Insurance Group, a wholly owned subsidiary of Midland, from its largest customer, Conseco Agency, Inc., decreased from $20.7 million as of December 31, 2001 to $11.1 million as of December 31, 2002. Conseco Agency filed for Chapter 11 bankruptcy on January 31, 2003, following the Chapter 11 filing of its’ parent company on December 18, 2002. The Conseco Agency receivable is current at December 31, 2002. While we anticipate collection of the entire amount that is owed, it is possible that American Modern might not collect the full amount. If that happened, it could negatively impact our financial condition and results. |
||
| American Modern’s receivable balance from Conseco Agency is secured by a pledge of the Agency’s expirations and renewals on American Modern’s in-force policies written through Conseco Agency. On February 3, 2003, the bankruptcy judge in the Conseco Agency Chapter 11 proceedings approved a motion filed by Conseco Agency seeking authority to continue doing business with American Modern, and with Conseco’s other insurance partners, on a business as usual basis. | ||
| Various suitors have expressed an interest in Conseco. As of February 28, 2003, the most likely scenarios involved either a sale of Conseco Agency as a going concern under section 363 of the Bankruptcy Code, or a recapitalization of the Agency’s parent under a Plan of Reorganization. Since we do not yet know what will transpire, we cannot be certain of the future course of American Modern’s business relationship with Conseco Agency. However, American Modern’s management believes that the company is well positioned to continue its business relationship with Conseco Agency, and/or its successors, regardless of what may happen in Conseco’s Chapter 11 proceedings. | ||
|
Website Address Midland’s website address is www.midlandcompany.com. Midland’s annual, quarterly and other periodic filings are available on or through this website. |
| ITEM 2. |
Properties. Midland owns its 275,000 square foot principal offices located in Amelia, Ohio. Midland’s insurance subsidiaries lease office space in Montgomery, Alabama, Atlanta, Georgia, St. Louis, Missouri, Grand Rapids, Michigan and West Des Moines, Iowa. Midland’s transportation subsidiaries lease offices in Metairie, Louisiana. |
|
| ITEM 3. |
Legal Proceedings. None. |
|
| ITEM 4. |
Submission of Matters to a Vote of Security Holders. None during the fourth quarter. |
PART II
| ITEM 5. |
Market for the Registrant’s Common Stock and Related Security Holder
Matters. Incorporated by reference to pages 41 (Note 16) and 44 of Midland’s 2002 Annual Report to Shareholders. The number of holders of Midland’s common stock at December 31, 2002 was approximately 2,100. Midland’s common stock is registered on the NASDAQ National Market (MLAN). The table required by Regulation S-K Item 201(d) which appears under Item 12 is hereby incorporated by reference. |
|
| ITEM 6. |
Selected Financial Data. Incorporated by reference to “Six Year F |