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                                                                    EXHIBIT 10.4

                               THE MIDLAND COMPANY

                              ANNUAL INCENTIVE PLAN
                           (EFFECTIVE JANUARY 3, 2000)

         1.       PURPOSE. The Purpose of the Annual Incentive Plan (the "Plan")
is to provide cash incentive awards to key employees of the Company that
recognize and reward the achievement of pre-established performance goals.

         2.       EFFECTIVE DATE OF PLAN. The Plan shall be effective as of
January 3, 2000, upon approval of the Plan by the Board of Directors of The
Midland Company (the "Company").

         3.       PLAN ADMINISTRATION. The Plan shall be administered by a
committee consisting of not less than two (2) persons (the "Committee"), the
members of which shall be designated by the Chairman of the Company. The
Committee shall have full power and authority, subject to the provisions of the
Plan and applicable law, to (a) establish, amend, suspend or waive such rules
and regulations and delegate such authority to management as it deems necessary
or advisable for the proper administration of the Plan, (b) construe, interpret
and administer the Plan and any instrument or agreement relating to the Plan,
and (c) make all other determinations and take all other actions necessary or
advisable for the administration of the Plan. Unless otherwise expressly
provided in the Plan, each determination made and each action taken by the
Committee, or its duly authorized agents (hereinafter collectively referred to
as "Committee"), pursuant to the Plan or any instrument or agreement relating to
the Plan (a) shall be within the sole discretion of the Committee, (b) may be
made at any time, and (c) shall be limited to Participants (as hereinafter
defined) in the Plan, their legal representatives and beneficiaries and
employees of the Company.

         4.       ELIGIBILITY. The Committee, in its sole discretion, determines
those key employees of the Company and its subsidiaries who shall be eligible to
participate in the Plan during any twelve-month period or other period of time
determined by the Committee (a "Plan Period"). Participation in the Plan by a
Participant (as hereinafter defined) during a given Plan Period does not entitle
continued participation by such Participant in any subsequent Plan Period.

         5.       AWARDS. Prior to or within ninety (90) days after the
commencement of each Plan Period, the Committee shall designate the following:

                  5.1      The employees who will participate (the
         "Participants") in the Plan for the Plan Period.

                  5.2      The Corporate Financial Criteria, as defined herein,
         which will apply to awards for the Plan Period.

                  5.3      The Performance Goals, as defined herein, to be met
         by the Company and the Participants for Participants to earn awards for
         the Plan Period and a payout matrix or formula for such Corporate
         Financial Criteria and Performance Goals.

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                  5.4      The award will be a bonus payment in an amount
         obtained by multiplying the following amounts: (1) a Participant's
         salary, as determined by the Committee, (2) a specified percentage
         (expressed as a decimal or fixed by a formula which will determine such
         percentage) determined by the Committee to apply to the Participant for
         the Plan Period; and (3) a percentage determined by the formula or
         matrix reflecting the achievement of the Performance Goals.

         After the beginning of a Plan Period, the Committee may designate
additional employees who will participate in the Plan for the Plan Period (also
"Participants" for purposes hereof).

         Participants will be eligible to receive the incentive described herein
if they are employed as of the date on which the incentive is paid. Participants
who leave the employment of the Company before the date the incentive is paid,
whether involuntarily or voluntarily, are ineligible to receive payment of the
incentive; provided, however, that the Committee may, in its sole and complete
discretion, determine to pay an award in the event termination was the result of
death, disability, retirement, or a reduction in workforce.

         Awards under the Plan shall be paid to the Participants in cash.

         6.       CORPORATE FINANCIAL CRITERIA. For each Plan Period, the
Committee shall establish the corporate financial criteria (the "Corporate
Financial Criteria") for use in determining an award for a Participant for such
Plan Period.

         7.       PERFORMANCE GOALS. For each Plan Period, the Committee shall
establish specific performance goals for the Corporate Financial Criteria and
may, in its sole discretion, establish any other performance goals it shall deem
appropriate for use in measuring actual employee or corporate performance (the
"Performance Goals"). Performance Goals established by the Committee may be
described by means of a matrix or formula, providing for goals resulting in the
payment of awards in such Plan.

         8.       DETERMINATION & PAYMENT OF AWARDS.

                  8.1      As soon as practicable after the end of the Plan
         Period, the Committee will determine the amount of the award earned by
         each Participant, based upon application of the criteria specified in
         Section 5; provided, however, that the Committee may, in its sole
         discretion, increase or decrease the amount which would otherwise be
         payable under the Plan. The Committee will make payments promptly after
         determination of the awards unless payment of an award has been
         deferred pursuant to Section 10.6 hereof.

                  8.2      Notwithstanding anything herein to the contrary, in
         no event shall any Participant receive any payment hereunder unless the
         Company earns a profit as determined by the Company's Board of
         Directors for any Plan Period.

         9.       TERMINATION, SUSPENSION OR MODIFICATION OF THE PLAN. The Board
of Directors may at any time, with or without notice, terminate, suspend, or
modify the Plan in whole or in part, except that the Board of Directors shall
not amend the Plan in violation of the law. The Committee may also correct any
defect, supply an omission


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or reconcile any inconsistency in the Plan in the manner and to the extent it
shall deem desirable to carry the Plan into effect.

         10.      MISCELLANEOUS.

                  10.1     No Assignments. No award under this Plan shall be
         subject in any manner to anticipation, alienation, sale, transfer,
         assignment, pledge, encumbrance, charge, garnishment, execution, or
         levy of any kind, either voluntary or involuntary, including any such
         liability which is for alimony or other payments for the support of a
         spouse or former spouse, or for any other relative of Participant prior
         to actually being received by Participant or his/her designated
         beneficiary, and any attempt to anticipate, alienate, sell, transfer,
         assign, pledge, encumber, charge, or otherwise dispose of any right to
         such award shall be void.

                  10.2     No Right of Employment. Neither the adoption of the
         Plan nor the determination of eligibility to participate in the Plan
         nor the granting of an award under the Plan shall confer upon any
         Participant any right to continue in the employ of the Company or any
         of its subsidiaries or interfere in any way with the right of the
         Company or the subsidiary to terminate such employment at any time.

                  10.3     Tax Withholding. The Company shall have the right to
         withhold the amount of any tax attributable to amounts payable under
         the Plan.

                  10.4     Governing Law. The Plan and all determinations under
         the Plan shall be governed by and construed in accordance with the laws
         of the State of Ohio.

                  10.5     Other Plans. Nothing in this Plan shall be construed
         as limiting the authority of the Committee, Board of Directors, the
         Company or any subsidiary of the Company to establish any other
         compensation plan or as in any way limiting its or their authority to
         pay bonuses or supplemental compensation to any persons employed by the
         Company or an subsidiary of the Company, whether such person is a
         Participant in this Plan and regardless of how the amount of such
         compensation or bonus is determined.

                  10.6     Deferrals of Awards. A participant may elect to defer
         payment of his/her cash award under the Plan if deferral of an award
         under the Plan is permitted pursuant to the terms of a deferred
         compensation program of the Company existing at the time the election
         to defer is permitted to be made, and the Participant complies with the
         terms of such program.


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