The Midland Company

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The Midland Company

7000 Midland Boulevard
P.O. Box 1256
Cincinnati, Ohio 45201-1256
U.S.A.
Telephone: (513) 943-7100
Fax: (513) 943-7111
Web site: http://www.midlandcompany.com

Public Company
Founded: 1938 as Midland Discount Corporation
Employees: 1,200
Sales: $718.2 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: MLAN
NAIC: 524126 Direct Property & Casualty Insurance Carrier; 524113 Direct Life Insurance Carrier; 483211 Inland Water Freight Transportation

The Midland Company generates the vast majority of its revenue through specialty insurance, targeting loss types that occur with more frequency but less severity than other types of coverage. Subsidiary The American Modern Insurance Group, offers nearly a half-century of experience to its core business sector, manufactured housing. In an effort to diversify, the company has tapped into the motorcycle, watercraft, recreational vehicle, collectible automobile, and snowmobile markets. A much smaller subsidiary operates in the river transportation business and produces just 4 percent of total revenues. The family of one of the original founders leads the company and controls much of the stock.

Finding Their Niche: 1930s–80s

J. Page Hayden, Sr., and J.R. LaBar founded Midland Discount Corporation as an automobile finance company in 1938. The company began broadening its business three years later with the addition of consumer finance. As the 1940s drew to a close, Midland entered the mobile home finance arena. In 1956, the company dropped out of the auto finance sector entirely.

To fuel dreamed-of expansion, Midland began trading over the counter in 1961. The American Modern Home Insurance Company was formed in 1965 and M/G Transport Inc., a specialized river transportation concern, followed in 1968. As the 1960s wound down, Midland Company began trading on the American Stock Exchange and took a stab at the mobile home manufacturing and retailing businesses.

In 1980, the consumer finance business was dropped, putting the specialty insurance and river transportation operations in the spotlight. The last mobile home receivables and five retail branches were sold in 1984 for $70 million in cash, ending Midland's direct involvement in the financing of manufactured housing, according to American Banker. The company continued other finance activities and made plans for new endeavors.

The insurance business continued to grow: American Modern Home Group topped $100 million in premiums written in 1987. In the river transportation end of the business, MGT Services Inc. was formed, in 1989, as M/G Transport's freight brokerage operation. Finally, the company shifted gears yet one more time, when it established CS Crable Sportswear that year.

Weathering the Storms: The Early 1990s

American Modern was hit by more than $2.3 million in losses related to Hurricane Andrew in 1992. Despite the devastation, the company produced record results for the year. The waterway transportation subsidiaries suffered under depressed pricing conditions, according to the Cincinnati Business Courier. Expenses related to litigation settlements—one for dumping waste into the Ohio and Mississippi Rivers and another related to insurance licensing—added additional downward pressure on Midland.

Moreover the sportswear division, with sales of $33 million, was in the midst of the construction of a new facility.

"On a brighter note, the company's 1994 decision to broker shipping deals, rather than operate a shipping company, is paying off, with M/G now 'very nicely profitable,' " CEO Michael Conaton told Cincinnati Business Courier in October 1996. His predictions of a turnaround for the sportswear division proved to be premature, though; the company would sell off the unprofitable business in 1997.

Midland experienced the doldrums from 1993 through 1996. Earnings growth was weak and the stock lost nearly 10 percent of its value during the time period. The 1996 hurricane season was particularly tough on the company. Earnings fell to around $1 million, down from $9.6 million in 1995.

Brighter Outlook: Late 1990s

The situation improved in 1997, operating results were strong, the company received more coverage by financial analysts, and the weather was less inclement. The stock price made impressive gains in response, growing 136 percent from the beginning of 1997 to May 1998, according to the Business Courier.

"Investors could see the stock coming around from its '96 problems," analyst John Roberts of Hilliard Lyons Inc. in Louisville told the Business Courier. "They started to push it up, but it's still very attractive now. When you're looking at small, well-managed insurers, Midland is very cheap."

The insurance business continued to drive the company in 1999. Nearly 70 percent of premium volume was generated by the sale of manufactured housing insurance. In a move to diversify its revenue stream American Modern bought businesses providing loan facilitation, warranty, insurance sales and telemarketing services to its core customers. The Michigan-based companies would help bump up its fee revenue and expand its services to dealers.

A 3-for-1 stock split and a switch to NASDAQ from the American Stock Exchange in 1999 was intended to increase Midland Company stock visibility and the number of shares outstanding. While the company shined performance-wise, and even outpaced others in its core industry, its stock had not been able to keep up.

An insider stock sale, planned to dilute the 62 percent Hayden family stake in the company, was set aside in September, when the company deemed it was undervalued. Insurance stocks in general were experiencing a slump at the time.

Although the company had added other insurance lines such as homeowners, lower valued homes, dwelling fire, mortgage fire, collateral protection, watercraft, specialty auto, recreational vehicle, long-haul truck, commercial, and excess and surplus, insurance for manufactured housing still produced the lion's share of written premiums.

Change was in the works by means of partnerships and acquisitions. A managing general agency and two insurance service businesses had been acquired and agreements to underwrite specialty insurance for Countrywide and GEICO had been struck.

Insurance industry consulting firm Ward Financial Group recognized American Modern as one of the nation's "top 50" property and casualty insurers in 2000. The rating period covered the years 1995 to 1999. It was the second consecutive year for the specialty insurer to make the list. American Modern had been found to outperform the industry in a number of areas, including premium growth rate.

Fine Tuning: 2000–04

Rising interest rates cut into manufactured housing industry sales during the first half of 2000, but Midland Company's manufactured housing insurance business continued to produce solid margins. Moreover, while the majority of companies trading on NASDAQ took a hit as the stock exchange tumbled in the second half of 2000, Midland Company was one of a few that posted new highs. Thus, despite the deteriorating climate, for a fourth straight year the company celebrated record results: 2000 net income was $35.5 million and gross written premiums amounted to $541 million.

The company entered into a strategic alliance with Amica Mutual Insurance Company in 2001. The deal, which allowed Amica to sell Midland's manufactured housing policies, gave American Modern a new distribution outlet.

Assets topped $1 billion during the year and Midland Company was named to the Forbes "200 Best Small Companies" list. But the highlights were accompanied by some challenges. After a decade of offering the service, American Modern stopped writing commercial liability coverage. Ended were unprofitable manufactured housing park and dealership programs. All open claims were reviewed and reserves were strengthened. During 2001, the company also saw an increase in its fire loss ratio in manufactured housing programs. The upward trend historically had been tied to deteriorating economic conditions. American Modern countered with rate increases and reviews of underwriting.

Midland faced additional concerns, the insurance environment was increasingly competitive, the bond market would yield lower rates cutting into investments, and claims were up. The developments would dampen both premium growth and earnings.

Midland Company's next income fell to $27.2 million in 2001, down from $35.5 million in 2000. Net operating income was off due to commercial-liability line losses and higher-than-normal fire losses in personal line business. Total revenue grew to nearly $592.3 million, up from $538.9 million. Midland succeeded in creating diversification in its products and distribution during the year.

Company Perspectives:

Our Mission: To enhance shareholder value by being an Indispensable Partner to customers in chosen markets by providing value-added specialty insurance products and services. Our Vision: We will create sustainable competitive advantage by providing our policyholders, associates, and business partners with products, services and relations they value more than those offered by our competitors. Our Values: Integrity, WinWin Solutions, Teamwork, Personal Growth, Humility, Creativity, Propriety, Sharing/Caring, Strong Work Ethic.

An early 2002 deal with the U.S. subsidiary of London-based broker Bell & Clements Ltd. was struck to provide excess and surplus (E&S) coverage in the states. The September 11, 2001 attacks on New York and Washington, D.C., had stimulated growth in the E&S market, which had already experienced an upward tick.

Premium growth outside manufactured housing climbed in excess of 20 percent in 2003, but the improvement was offset by problems within the motorcycle line. In other areas, the watercraft line was solid, the collector car line was promising, and the recreational vehicle line was being fine-tuned.

The core manufactured housing segment had been strengthened over the year, producing growth despite a drop in new shipments, an increase in repossessions, and a tightening of lending standards. Dwelling fire product for site-built homes, an increasingly significant business area gaining a national presence, met needs not offered by standard insurance carriers. But California brush fires prevented the niche from turning a profit for the year.

M/G Transport continued to operate in a small geographic area, the lower Mississippi River below Baton Rouge and the Gulf Inter Coastal Waterway, but in 2003 it opened an office in St. Louis, Missouri, to sell fee-based management for other companies' barges. MGT moved only dry commodities, primarily petroleum coke, barite, sugar, and coal.

Principal Subsidiaries

American Modern Insurance Group.

Key Dates:

1938:: Midland Discount Corporation is formed as an auto finance company.
1941:: The company adds consumer finance business.
1949:: The company enters mobile home finance.
1961:: The company begins trading over the counter to fund expansion.
1965:: American Modern Home Insurance Company is formed.
1968:: M/G Transport Inc. is established to operate in river transportation.
1989:: CS Crable Sportswear is formed.
1999:: The company moves from the American Stock Exchange to the NASDAQ.
2000:: The company enjoys its fourth straight year of record results.
2001:: Assets top $1 billion.