<PAGE>

                                                                      EXHIBIT 13

                               THE MIDLAND COMPANY

                               2003 ANNUAL REPORT

                                   FUNDAMENTAL

                                              Strength

                                   FUNDAMENTAL

                                              Value

<PAGE>

Company Profile

         The Midland Company is a highly focused provider of specialty insurance
products and services through its American Modern Insurance Group subsidiary,
which contributes approximately 96 percent of the company's revenues. The
company also maintains an investment in a niche river transportation business,
M/G Transport Services, Inc. (M/G).

         American Modern is a leader in manufactured housing insurance products
and services, and has expanded with additional offerings to serve the
motorcycle, watercraft, recreational vehicle, collectible automobile and
snowmobile markets. American Modern distributes its products and services
through diverse channels.

         The people, the products and the vision of The Midland Company focus on
leveraging the competitive advantage of specialty expertise.

         The company has a solid track record of fundamental strength and
fundamental value. It delivers this strength and value through its multiple
company structure, its unique specialty products, its expert claims service, and
its deep relationships across diverse distribution channels.

         The company also has a consistent record of increasing shareholder
value. Midland stock has outperformed all relevant indices over the past 5-,
10-, 15- and 20-year periods, and has steadily increased book value over the
same periods. Annual shareholder dividends have increased for 18 consecutive
years.

         Headquartered in Cincinnati, Ohio, the company has 1,200 associates, is
licensed in all 50 states and enjoys an A+ (Superior) rating from A.M. Best.

                          TOTAL RETURN TO SHAREHOLDERS

                                  [BAR CHART]

<TABLE>
<CAPTION>
Ticker                  5 YRS           10 YRS       15 YRS       20 YRS
------                  -----           ------       ------       ------
<S>                     <C>             <C>          <C>          <C>
MLAN                    15.51%          13.61%       13.51%       16.23%
SPX                     -0.56%          11.04%       12.18%       12.93%
S5PROP                   3.72%          10.87%         n/a          n/a
RTY                      7.20%           7.97%        9.26%        8.33%
</TABLE>

THE MIDLAND COMPANY'S MISSION STATEMENT

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

<TABLE>
<S>                                                           <C>
Financial Highlights                                              1
Letter to Shareholders                                          2-5
Our Products                                                    6-7
Our People                                                      8-9
Our Vision                                                    10-11
Investment Results                                               12
M/G Transport                                                    13
Six Year Financial Summary Data                               14-15
Private Securities Reform Act of 1995--
    Forward Looking Statements Disclosure                        16
Management's Discussion and Analysis                          16-27
Income Statements                                                28
Balance Sheets                                                   29
Changes in Shareholders' Equity                                  30
Cash Flows                                                       31
Notes to Financial Statements                                 32-42
Independent Auditors' Report                                     43
Management's Report                                              43
Quarterly Data and Other Information                             44
Officers and Directors                                           45
</TABLE>

            Please refer to "Forward Looking Statements" on page 16.

<PAGE>

Financial Highlights

<TABLE>
<CAPTION>
                                                                                                  For the Years Ended
                                                                                                      December 31,

(Amounts in thousands, except per share data)                                                  2003              2002
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>              <C>
THE MIDLAND COMPANY AND SUBSIDIARIES
OPERATING PERFORMANCE

Revenues                                                                                   $  718,187       $    643,708
Net Income Before Cumulative Effect of Change
   in Accounting Principle & Capital Gains (Losses)*                                       $   20,308       $     24,789
Cumulative Effect of Change in Accounting Principle                                                --             (1,463)
Net Capital Gains (Losses)                                                                      2,968             (4,485)
                                                                                           ----------       ------------
Net Income                                                                                 $   23,276       $     18,841
                                                                                           ==========       ============

PER SHARE DATA
Basic Earnings (Losses) Per Common Share:
   Net Income Before Cumulative Effect of Change
     in Accounting Principle & Capital Gains (Losses)*                                     $     1.17       $       1.43
   Cumulative Effect of Change in Accounting Principle                                             --              (0.08)
   Net Capital Gains (Losses)                                                                    0.17              (0.26)
                                                                                           ----------       ------------
     Total                                                                                 $     1.34       $       1.09
                                                                                           ==========       ============
   Average Shares Outstanding for EPS--Basic                                                   17,417             17,323

Diluted Earnings (Losses) Per Common Share:
   Net Income Before Cumulative Effect of Change
     in Accounting Principle & Capital Gains (Losses)*                                     $     1.13       $       1.39
   Cumulative Effect of Change in Accounting Principle                                             --              (0.08)
   Net Capital Gains (Losses)                                                                    0.17              (0.25)
                                                                                           ----------       ------------
     Total                                                                                 $     1.30       $       1.06
                                                                                           ==========       ============
   Average Shares Outstanding for EPS--Diluted                                                 17,937             17,789
Cash Dividends                                                                             $     .190       $       .175
Book Value                                                                                 $    20.18       $      17.59

FINANCIAL POSITION
Total Assets                                                                               $1,179,505       $  1,090,674
Shareholders' Equity                                                                       $  356,058       $    308,908

Combined Ratio (American Modern's Property and Casualty Companies)                              103.1%             101.9%
</TABLE>


* Non-GAAP financial measure. Items excluded from this measure are significant
  components in understanding and assessing financial performance. The company
  believes that this non-GAAP financial measure provides a clearer picture of
  the core operations than the GAAP measure of net income, as it removes
  potential issues of timing regarding investment gains and losses and any
  fluctuations done solely to changes in accounting rules.

<TABLE>
<CAPTION>
                                         1999        2000         2001         2002          2003
                                         ----        ----         ----         ----          ----
<S>                                   <C>         <C>         <C>          <C>            <C>
Revenues (millions)                   $  472.5    $  538.9    $   592.3    $   643.7      $  718.2

Net Income                            $   1.65    $   1.89    $    1.51    $    1.06      $   1.30

Book Value                            $  13.56    $  15.73    $   16.53    $   17.59      $  20.18
Market Value                          $  10.38    $  13.88    $   21.90    $   19.00      $  23.62
</TABLE>

                                 REVENUES GROW
                                 11.6% IN 2003
                             (dollars in millions)

                                  [BAR CHART]

MIDLAND'S REVENUES CONTINUED TO CLIMB IN 2003. OVER THE PAST FIVE YEARS REVENUE
HAS GROWN AT A COMPOUND ANNUAL RATE OF 10.2 PERCENT.

                                   NET INCOME
                                   PER SHARE


                                  [BAR CHART]

HIGHER-THAN-NORMAL CATASTROPHE LOSSES, LOSSES FROM THE MOTORCYCLE LINE AND FROM
THE RUN-OFF OF COMMERCIAL LIABILITY PROGRAMS IMPACTED EARNINGS BY APPROXIMATELY
$1.23 PER A SHARE IN 2003. RATE INCREASES AND OTHER ACTIONS HAVE POSITIONED THE
COMPANY FOR IMPROVEMENT IN 2004 AND BEYOND.

                               BOOK VALUE, MARKET
                                VALUE PER SHARE

                                  [BAR CHART]

OVER THE PAST FIVE YEARS, BOOK VALUE HAS GROWN AT A COMPOUND ANNUAL RATE OF 8.7
PERCENT, WHILE MARKET VALUE HAS GROWN AT COMPOUND ANNUAL RATE OF 14.4 PERCENT.

                                                         THE MIDLAND COMPANY   1

<PAGE>

OUR PRODUCTS

PRODUCT MIX

[PIE CHART]

<TABLE>
<S>                     <C>
Manufactured Housing    47.0%
Site Built Dwellings    12.1%
Motor Sport              8.5%
Mortgage Fire            4.8%
Watercraft               4.8%
Collateral Protection    4.5%
Recreational Vehicles    4.4%
Bell & Clements          3.3%
Credit Life & Related    2.5%
Long-Haul Track          1.9%
All Other                6.2%
</TABLE>

WITH ITS DEEP ROOTS AND RICH RELATIONSHIPS IN MANUFACTURED HOUSING, THAT LINE
STILL COMPRISES ABOUT HALF THE COMPANY'S TOTAL PREMIUMS. THE COMPANY HAS
PURPOSEFULLY ADDED BALANCE IN RECENT YEARS TO FURTHER LEVERAGE ITS EXPERIENCE
ACROSS OTHER SPECIALTY LINES.

GIVE CUSTOMERS WHAT THEY WANT. That's fundamental to the success of any company.
At Midland, we focus on specialized insurance products and services that require
specialized knowledge and expertise.

         We focus on products that customers tell us they want, products that
standard insurers don't offer or perhaps don't fully understand. It is OUR
BUSINESS to understand specialty lines and to serve specialty customers, whether
that means policyholders or the agents, brokers and dealers with whom we
partner. Through our wholly owned subsidiary American Modern Insurance Group, we
provide insurance for manufactured homes, site-built dwellings, motorcycles,
watercraft, recreational vehicles and collector cars. We also offer credit life,
collateral and mortgage fire protection.

         In our target markets, losses are frequent but generally not severe. We
set ourselves apart by our ability to evaluate these specialized risks,
appropriately price our products and serve our customers with outstanding
expertise.

         MANUFACTURED HOUSING IS THE CORE OF OUR BUSINESS. We have nearly 50
years of experience in this sector and are undisputed experts. Our 5.3 percent
top-line growth in this area during 2003 - despite the drop in new home
shipments, the increase in repossessions and the tightening of lending standards
- is a testament to the fundamental strength and value we deliver.

         Quite simply, the challenges of the manufactured housing industry
present opportunities for American Modern. Our depth in understanding the market
means we can respond quickly to challenges and opportunities. And we have.
During 2003, we successfully demonstrated our agility in responding to market
conditions by developing a new Builder's Risk policy aimed at the needs of
customers and the mortgage lending industry. This new policy provides protection
for homeowners from loan closing to course of construction, and then transitions
into a homeowner's policy once the owner takes occupancy.

         Manufactured housing will be a centerpiece in our 2004 product strategy
as we look to grow what we know best. We are committed to the market and
confident in our ability to serve and expand it.

         EQUALLY IMPORTANT IS OUR GROWING EXPERTISE IN OTHER SPECIALTY LINES. We
have made solid progress in diversifying our product portfolio to provide a
strong base for attracting new customers, new partners and new profits.

         Lines such as motorcycle, watercraft, recreational vehicle and
collector car now make up an increasingly higher percentage of American Modern's
property and casualty premium. This diversification adds balance to our product
line and value to our company.

         We have experienced some growing pains along the way. For example, we
addressed profitability challenges in the motorcycle line during 2003 with
product modifications and rate adequacy. These actions should improve
profitability during 2004 as we continue to expand our expertise in this niche.

         And, we have refocused on expanding the reach of our Dwelling Fire
product, which meets the needs of an increasingly large portion of the housing
market that may not be eligible for the offerings of standard lines carriers.

         Strategic alliances with standard multi-line insurers and excess and
surplus brokers create further opportunities to leverage our unique skills. In
becoming the go-to specialist for general insurers looking to round out their
offerings, American Modern is building a stronger reputation and a stronger
company.

         FINANCIAL SERVICES ALSO ADD VALUE. Credit life and disability products,
debt cancellation and suspension products, collateral protection and mortgage
fire products and loan-tracking services generate opportunities, too. We
approach these opportunities with the specialty mindset that defines us:
understand the niche; understand the customer; understand the business and
master it.

         All of American Modern's specialty insurance products and financial
services require knowledge and expertise that fall outside the standard
insurance market. The fundamental strength and fundamental value we provide
comes from knowing our markets and developing the products to serve them.

2 THE MIDLAND COMPANY
<PAGE>

FUNDAMENTAL STRENGTH

[SPEAK PICTURE]                         OUR CUSTOMERS SPEAK
                                        TO US ABOUT WHAT THEY WANT.


Midland delivers superior                     [PICTURE]
specialty insurance products
that customers demand.

                                                              FUNDAMENTAL VALUE

                                                           THE MIDLAND COMPANY 3
<PAGE>

OUR PEOPLE

                                POLICIES IN FORCE
                                 (in thousands)

                                   [BAR CHART]

<TABLE>
<CAPTION>
                                    1999       2000         2001         2002           2003
                                    ----       ----         ----         ----           ----
<S>                                <C>        <C>         <C>           <C>            <C>
(thousands)
Policies in Force                  966.7      1,003.3     1,019.4       1,257.1        1,323.3
</TABLE>

AMERICAN MODERN'S POLICIES IN FORCE ROSE APPROXIMATELY 5.3 PERCENT IN 2003,
DRIVEN BY IMPROVEMENTS IN CUSTOMER RETENTION AND GROWTH IN CASUALTY LINES OF
BUSINESS.

                                DISTRIBUTION MIX

                                  [PIE CHART]

<TABLE>
<S>                      <C>
Agency                   39.2%
Point of Sale            24.5%
Lender                   15.1%
Financial Services       12.1%
Strategic Alliances       3.3%
All Other                 5.8%
</TABLE>

AMERICAN MODERN HAS DEVELOPED STRONG RELATIONSHIPS IN MULTIPLE DISTRIBUTION
CHANNELS TO PROVIDE CUSTOMERS WITH CONVENIENT ACCESS TO ITS SPECIALTY PRODUCTS.
THESE CHANNELS INCLUDE INSURANCE AGENTS, FINANCIAL INSTITUTIONS, DEALERS,
MANUFACTURERS AND OTHER INSURANCE COMPANIES THROUGH STRATEGIC ALLIANCES. THE
AGENCY CHANNEL CONTRIBUTES AN INCREASINGLY LARGER PERCENTAGE OF DIRECT AND
ASSUMED WRITTEN PREMIUMS.

NOTHING IS MORE FUNDAMENTAL TO THE SUCCESS OF A BUSINESS THAN GOOD PEOPLE.
"People" include the customers who trust us to understand their needs and the
employees and partners who make it possible for us to act on that understanding.

         ATTRACTING GOOD CUSTOMERS AND KEEPING THEM FOR THE LONG HAUL IS
CRITICAL. Product, price, service and convenience all play crucial roles in
customer retention and conversion. Through American Modern, we've leveraged all
four to achieve high customer retention rates for a specialty lines insurer.

         Our strong customer relationships are the result of our ability to
provide a distinctive mix of exceptional service, competitive pricing and
specialized products that customers cannot readily find elsewhere.

         THE DEDICATION AND EXPERTISE OF OUR ASSOCIATES ARE UNIQUE. Our
knowledge, like our products, is specialized according to the unique niches in
which we operate. That knowledge helps us underwrite by product and by channel.
It helps us set pricing that is fair to the company and fair to the
policyholder. It helps us understand the risks we assume, and it helps us deal
with claims when they occur.

         We have the depth needed to get the job done. Our 240 full-time claims
adjusters, processors and service representatives have an average of
approximately six years of experience. These claims representatives often are
the face of our company, the people that policyholders remember. That's why
speed and compassion are hallmarks of our claims team. For example, we settled
more than 90.0 percent of our 4,555 claims from Hurricane Isabel in less than a
month.

         We support our people with technology that improves efficiency and
convenience. modernLINK(R) enables Web-based quotes and real-time interfaces
with third-party service providers for credit, insurance-to-value, address
verification and other information. It also allows customers to pay premiums
through electronic funds transfer or credit cards. We will continue to enhance
these systems in the coming years, beginning with the addition of our motorcycle
line on modernLINK(R) in spring 2004.

         MULTIPLE CHANNELS OF DISTRIBUTION HELP OUR BUSINESS GROW.
Diversification is a key strategy not only in the products we offer, but also in
how we let customers know these products are available. Our customers hear about
American Modern from many sources - at the point of their purchase of a home or
recreational vehicle, through general and independent agents, from their lenders
and through financial service transactions.

         American Modern focuses on cultivating strong relationships with each
of these audiences so they know that American Modern is a trusted and respected
specialty insurer that will provide their customers the best in products and
service.

         This diversification strategy has proven its worth time and time again,
particularly in the manufactured housing industry, where new home purchases have
been down and Point-of-Sale distribution challenged. American Modern was able to
grow its manufactured housing premium in 2003 despite these obstacles because of
our strength in the General Agent channel.

         STRATEGIC ALLIANCES WITH STANDARD INSURERS PROVIDE YET ANOTHER CHANNEL
OF DISTRIBUTION, ANOTHER POINT OF CONTACT AND ANOTHER POINT OF SALE.

         Again, it comes down to knowing the specific needs of specific niches -
markets, channels and partners. It comes down to listening. It comes down to
delivering. We have a team of experienced professionals focusing on the
expansion of our strategic alliance channel...a strategy that occupies a central
position in the fabric of our future vision.

         At Midland, we have the fundamental advantage of a diverse, talented
and richly experienced team of professionals that can and will deliver the
fundamental value our customers, partners and shareholders deserve.

4 THE MIDLAND COMPANY
<PAGE>

FUNDAMENTAL STRENGTH

[LISTEN PICTURE]                               OUR TALENTED PEOPLE
                                            LISTEN TO THE MARKETPLACE.


Outstanding employees and strong                     [PICTURE]
partners make the difference.

                                    [PICTURE]

                                                               FUNDAMENTAL VALUE

                                                           THE MIDLAND COMPANY 5
<PAGE>

OUR VISION

OUR VISION IS CLEAR BECAUSE OUR FOUNDATION IS SOLID. Our products and our people
provide fundamental strength and fundamental value. To policyholders. To
business partners. To shareholders. Our track record bears that out:

         -        In 2003, for the fifth consecutive year, American Modern was
                  named as one of the Ward Financial Group's Top 50 property and
                  casualty insurance companies. This honor salutes companies for
                  achieving outstanding financial results in the areas of
                  safety, consistency and performance over a five-year period.
                  Fewer than 2 percent of the nation's insurers make this list.

         -        Independent ratings also attest to our strength, with A.M.
                  Best affirming American Modern's A+ (Superior) rating.

         -        Midland's stock continues to outperform all relevant indexes
                  over the past 5-, 10-, 15- and 20-year periods.

         -        Our Board of Directors recently increased the company's
                  indicated annual dividend for the 18th consecutive year.

         This record of performance, along with strategies based on unchanging
core operating principles, positions Midland for a future of promise.

         AT THE CENTER OF THAT PROMISE IS OUR CORE BUSINESS. Manufactured
housing remains a viable option to the American dream of homeownership, with
manufactured home shipments representing 23.1 percent of all new single family
housing starts over the last 10 years. Despite the industry's challenges in
recent years, the market will recover, and American Modern will be there when it
does.

         There already are signs that new opportunities are on the horizon.
Berkshire Hathaway acquired Clayton Homes, a national builder, seller and
financier of manufactured housing. Clayton has agreed to acquire Oakwood Homes,
adding more stability to the market. And U.S. Bancorp, the eighth largest
financial services company in the United States and long-time Midland partner,
has become active in the manufactured housing lending market.

         Amid these positive signs, American Modern is refocusing on customer
retention, making it easy to do business with us and making the value we deliver
clear. We know manufactured housing insurance better than anyone else, and this
depth creates long-term value for policyholders and shareholders.

         PROFITABILITY IS KEY. As we continue to expand and refine our specialty
mindset, our focus will be on profitable growth, with extra emphasis on profit.
Rate corrections continue to work through our book, with annual manufactured
housing product rate increases averaging just under 7 percent over the last two
years. We expect continued corrective action in 2004, particularly in our
motorcycle lines, where price increases of 20 to 25 percent have been approved.

         We also are seeing sustained improvement in our fire loss ratios, both
for manufactured housing and site-built dwelling products. And overall, the
profit on premium flow increased in 2003 even amid the year's higher catastrophe
claims.

         OUR MISSION IS 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. In more ways than ever,
Midland is that partner.

         Policyholders turn to us for protection that fits their needs.
Strategic business partners turn to us for specialty expertise that adds value
to what they deliver. Banks turn to us for help in protecting their investment
through loan tracking, collateral protection, debt cancellation programs and
credit life protection.

         We are proud to say that, in 2003, we successfully reinforced the
fundamental strengths that define American Modern. These fundamental strengths
are the foundation for our vision and our future. We will continue to bring
these strengths to bear in 2004 and beyond to deliver fundamental value to our
policyholders, partners and shareholders.

6 THE MIDLAND COMPANY
<PAGE>


FUNDAMENTAL STRENGTH                      OUR VISION IS CLEAR

   [SEE PICTURE]

Midland will create a sustainable               [PICTURE]
competitive advantage by providing
our policyholders, associates and
business partners with products,
services, and relationships they
value more than those offered by
our competitors.

                                       [PICTURE]                [PICTURE]

                                                               FUNDAMENTAL VALUE

                                                           THE MIDLAND COMPANY 7
<PAGE>

American Modern Insurance Group High Quality Diversified Investment Portfolio

                                 MARKET VALUES
                             (dollars in millions)

                                  [BAR CHART]

<TABLE>
<CAPTION>
                                    1999        2000         2001         2002          2003
                                    ----        ----         ----         ----          ----
<S>                              <C>         <C>         <C>          <C>            <C>
(millions)
Governments                      $  140.5    $   156.8   $   141.1    $    112.5     $    173.6
Municipals                       $  170.9    $   178.9   $   190.4    $    176.4     $    191.1
Corporate                        $  121.0    $   133.9   $   176.4    $    231.0     $    248.0
Cash Equivalents                 $   40.9    $    66.1   $    43.7    $     73.2     $     65.8
Equities                         $  126.3    $   146.0   $   147.3    $    136.1     $    171.1
Other                            $   11.8    $    11.4   $     8.1    $      7.6     $      6.1

                                 $  611.4    $   693.1   $   707.0    $    736.8     $    855.7
</TABLE>


        PORTFOLIO PROFILE

80% FIXED INCOME
 ($685 MILLION)

   -  "AA" AVERAGE QUALITY

   -  4.1 YEARS AVERAGE DURATION

20% EQUITIES
 ($171 MILLION)



THE MARKET VALUE OF THE INVESTMENT PORTFOLIO ROSE 16.0 PERCENT IN 2003, WHILE
INVESTMENT INCOME CONTINUED TO REFLECT AN ONGOING LOWER INTEREST RATE
ENVIRONMENT.

                             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.)

<TABLE>
<CAPTION>
                                             PERIODS ENDING DECEMBER 31, 2003
                                            ----------------------------------
                                            1 YEAR         3 YEARS     5 YEARS
------------------------------------------------------------------------------
<S>                                         <C>            <C>         <C>
EQUITIES:
   AMERICAN MODERN-COMPOSITE                 34.5%          2.2%        0.6%
   AMERICAN MODERN-EXCLUDING INVESTMENT
     IN US BANCORP                           25.9%         -6.0%       -0.3%
   AMERICAN MODERN-US BANCORP ONLY           43.2%         11.7%        1.9%
   S&P 500                                   28.7%         -4.1%       -0.6%
FIXED INCOME TOTAL RETURN                     6.6%          7.3%        6.3%
FIXED INCOME PRE-TAX EQUIVALENT YIELD         5.5%
   AS OF DECEMBER 31, 2003
</TABLE>

8 THE MIDLAND COMPANY
<PAGE>

A UNIQUE INVESTMENT IN A NICHE RIVER TRANSPORTATION BUSINESS.

M/G TRANSPORT SERVICES, INC.

M/G Transport, the barge affreightment subsidiary of Midland, continues to fill
a profitable niche in the barge transportation marketplace and today accounts
for approximately four percent of Midland's total revenues.

         M/G ended 2003 with revenues of $28.2 million, a 21 percent increase
over the $23.3 million at year-end 2002. The revenue improvement was primarily
due to an increase in loadings, which rose from 2,461 last year to 3,127 in
2003.

         While 2003 was a year of improving financial results, it was also a
year of investment in the future. During the year, M/G purchased 57 open hopper
barges at a total cost of $9.4 million, underscoring M/G's optimistic view of
future prospects. At the end of 2003, M/G was operating a total of 238 barges,
including 217 that are owned or on a long-term operating lease. M/G also plans
to acquire 25 more used barges in early 2004 to meet customer needs. The average
age of its fleet at year-end was 10 years, as compared to an industry average of
approximately 15 years.

         In late 2003, M/G executed two new contracts that will add
approximately 3.0 million tons annually to its book of business. M/G continues
to primarily operate its equipment on the Lower Mississippi River below Baton
Rouge and the Gulf Inter-Coastal Waterway. However, in late 2003, M/G opened an
office in St. Louis, Missouri to market its expertise in the management of other
entities' barges for a fee.

         M/G operates barges that move only dry cargoes. Commodities moved by
M/G are primarily petroleum coke, barite, sugar, and coal. M/G's operating
philosophy is to provide an unequaled service to large industrial accounts on
the Lower Mississippi River below Baton Rouge. By concentrating its equipment in
this smaller geographic area, M/G can react more quickly to customers' needs

[M/G LOGO]

                                                           THE MIDLAND COMPANY 9
<PAGE>

SIX YEAR FINANCIAL SUMMARY DATA

THE MIDLAND COMPANY AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                  For the Years Ended December 31,

(Amounts in thousands, except per share data)       2003        2002        2001        2000        1999         1998
-----------------------------------------------------------------------------------------------------------------------
<S>                                              <C>         <C>          <C>         <C>         <C>         <C>
INCOME STATEMENT DATA
Revenues:
   Insurance:
     Premiums earned                             $ 638,038   $ 577,668    $ 508,233   $ 456,120   $ 400,991   $ 375,478
     Net investment income                          32,972      35,455       33,802      30,774      25,292      23,908
     Net realized investment gains (losses)(a)       4,566      (6,900)       2,023       4,646       3,486       6,354
     Other insurance income(d)                      14,090      13,692       12,883      13,263      10,205       5,678
   Transportation                                   28,240      23,285       34,826      33,119      31,327      33,059
   Other                                               281         508          484         979       1,237       1,055
                                                 ----------------------------------------------------------------------
        Total                                      718,187     643,708      592,251     538,901     472,538     445,532
                                                 ----------------------------------------------------------------------
Costs and Expenses:
   Insurance:
     Losses and loss adjustment expenses           392,232     341,015      292,188     240,680     204,365     210,015
     Commissions and other policy
        acquisition costs                          177,622     169,477      145,777     137,053     114,212     103,169
     Operating and administrative expenses(d)       87,714      80,985       80,316      77,539      76,926      61,543
   Transportation operating expenses                26,645      22,641       32,898      28,828      29,255      28,287
   Interest expense                                  3,742       3,849        4,368       4,132       4,067       4,991
                                                 ----------------------------------------------------------------------
        Total                                      687,955     617,967      555,547     488,232     428,825     408,005
                                                 ----------------------------------------------------------------------
Income Before Federal Income Tax and
   Cumulative Effect of Change in
   Accounting Principle                             30,232      25,741       36,704      50,669      43,713      37,527
Provision for Federal Income Tax                     6,956       5,437        9,482      15,206      12,534      10,595
                                                 ----------------------------------------------------------------------
Income Before Cumulative Effect of Change
   in Accounting Principle                          23,276      20,304       27,222      35,463      31,179      26,932
Cumulative Effect of Change
   in Accounting Principle--Net(c)                      --      (1,463)          --          --          --          --
                                                 ----------------------------------------------------------------------
Net Income                                       $  23,276   $  18,841    $  27,222   $  35,463   $  31,179   $  26,932
                                                 ======================================================================
Basic Earnings (Losses) Per Share
   of Common Stock(b):
Income Before Cumulative Effect of Change
   in Accounting Principle                       $    1.34   $    1.17    $    1.58   $    1.96   $    1.71   $    1.49
Cumulative Effect of Change
   in Accounting Principle(c)                           --       (0.08)          --          --          --          --
                                                 ----------------------------------------------------------------------
   Total                                         $    1.34   $    1.09    $    1.58   $    1.96   $    1.71   $    1.49
                                                 ======================================================================
Diluted Earnings (Losses) Per Share
   of Common Stock(b):
Income Before Cumulative Effect of Change
   in Accounting Principle                       $    1.30   $    1.14    $    1.51   $    1.89   $    1.65   $    1.43
Cumulative Effect of Change
   in Accounting Principle(c)                           --       (0.08)          --          --          --          --
                                                 ----------------------------------------------------------------------
   Total                                         $    1.30   $    1.06    $    1.51   $    1.89   $    1.65   $    1.43
                                                 ======================================================================
Cash Dividends Per Share of Common Stock(b)      $    .190   $    .175    $    .160   $    .150   $    .135   $    .125
                                                 ======================================================================
</TABLE>

10 THE MIDLAND COMPANY
<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                  For the Years Ended December 31,

(Amounts in thousands, except per share data)         2003           2002        2001           2000          1999        1998
--------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>           <C>            <C>           <C>          <C>
BALANCE SHEET DATA
Total Cash and Marketable Securities              $   848,708   $   745,733   $  715,295     $ 701,048     $ 620,957    $ 593,857
Total Assets                                        1,179,505     1,090,674    1,053,942       993,850       888,057      837,220
Total Debt                                             95,842        90,401       84,141        85,045        69,838       76,085
Unearned Insurance Premiums                           383,869       406,311      403,855       357,185       312,838      255,115
Loss Reserves                                         204,833       164,717      148,674       135,887       133,713      125,496
Shareholders' Equity                                  356,058       308,908      291,876       283,177       258,002      248,832
Book Value Per Share(b)                           $     20.18   $     17.59   $    16.53     $   15.73     $   13.56    $   13.30
Common Shares Outstanding(b)                           17,643        17,566       17,660        18,001        19,032       18,704

OTHER DATA
AMIG's Property and Casualty Operations
Direct and Assumed Written Premiums               $   663,972   $   588,243   $  555,548     $ 500,984     $ 472,041    $ 446,248
Net Written Premium                                   616,709       561,515      523,105       471,336       439,863      391,770

Loss and Loss Adjustment Expense Ratio (GAAP)(d)         62.0%         59.3%        57.8%         52.9%         51.2%        56.1%
Underwriting Expense Ratio (GAAP)(d)                     41.1%         42.6%        43.1%         44.3%         44.0%        41.7%
Combined Ratio (GAAP)(d)                                103.1%        101.9%       100.9%         97.2%         95.2%        97.8%

M/G Transport's Transportation Operations
Net Revenues                                      $    28,240   $    23,285   $   34,826     $  33,119     $  31,327    $  33,059
Net Income                                                815           296        1,079         1,809         1,169        2,994
Total Assets                                           30,990        22,469       24,952        27,412        30,564       39,167
Shareholders' Equity                                   11,446        10,805       10,509         9,728        10,919       18,749
</TABLE>

FOOTNOTES:

(a)      Net Realized Investment Gains (Losses) in 2003, 2002 and 2001 include
         the effect of SFAS 133 adjustments of $0.8 million, $(0.2) million and
         $1.1 million, respectively.

(b)      Previously reported share information has been adjusted to reflect a
         three-for-one common stock split effective May 21, 1998 and a 2-for-1
         stock split effective July 17, 2002.

(c)      On January 1, 2002, the Company adopted SFAS 142 and recorded an
         impairment charge related to goodwill of $1.5 million, net of tax of
         $0.8 million.

(d)      Certain prior year amounts have been reclassified to conform with
         current year presentation.

                                                          THE MIDLAND COMPANY 11
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations

THE MIDLAND COMPANY AND SUBSIDIARIES

FORWARD LOOKING STATEMENTS

         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, but are not limited to 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 2004 and
beyond. In some cases you can identify forward-looking statements by such terms
as "may," "will," "could," "would," "expect," "plan," "intend," "anticipate,"
"believe," "estimate," "project," "predict," "potential" and similar expressions
or the negative versions of such expressions. 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 the
company or its subsidiaries, changes in the business tactics or strategies of
the company, its subsidiaries or its current or anticipated business partners,
acquisitions or divestitures, changes in market forces, litigation and the other
risk factors that have been identified in the company's filings with the SEC,
any one of which might materially affect the operations of the company 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.

INTRODUCTION

         The discussions of "Results of Operations" and "Liquidity, Capital
Resources and Changes in Financial Condition" address our three reportable
segments, which are manufactured housing insurance, all other insurance products
and services and transportation. A summary description of the operations of each
of these segments is included below.

         Our specialty insurance operations are conducted through our
wholly-owned subsidiary, American Modern Insurance Group, Inc. (American Modern)
which controls six property and casualty insurance companies, two credit life
insurance companies, three licensed insurance agencies and three service
companies. American Modern is licensed, through its subsidiaries, to write
insurance premiums in all 50 states and the District of Columbia. Approximately
47% of American Modern's property and casualty and credit life gross written
premium relates to physical damage insurance and related coverages on
manufactured homes, generally written for a term of 12 months with many
coverages similar to homeowner's insurance policies. All other insurance
products and services include other specialty insurance products such as
site-built dwelling, motorcycle, watercraft, recreational vehicle, extended
service contract, mortgage fire, collateral protection, credit life, long-haul
truck physical damage, commercial property, excess and surplus lines and also
includes the results of our fee producing subsidiaries.

         M/G Transport Services, Inc. and MGT Services, Inc. (collectively M/G
Transport) operates a fleet of dry cargo barges for the movement of dry bulk
commodities such as petroleum coke, ores, barite, sugar and other cargoes
primarily on the lower Mississippi River and its tributaries.

OVERVIEW OF RECENT TRENDS AND OTHER DEVELOPMENTS

Motorcycle

         In the second half of 2000, American Modern acquired the motorsport
book (motorcycle and, to a lesser extent, snowmobile and watercraft) from
GuideOne Insurance Company. As a result of this acquisition, motorcycle gross
written premium contributed significantly to American Modern's overall growth in
2001 and 2002. In 2003, motorcycle accounted for approximately 9% of the
property and casualty gross written premiums. The underwriting results of the
motorcycle product have been less than expected, due partly to product
positioning, inadequate rate levels and higher than expected losses. Losses from
the motorcycle product were heavy in 2003 and adversely impacted 2003 earnings
by $0.58 per share (diluted).

         American Modern has established a priority to improve the performance
of the motorcycle product even if volume declines. Motorcycle gross written
premium actually decreased 3.5% in 2003 to $58.2 million from $60.4 million in
the prior year. In 2003, rate increases averaging 21% were approved and
additional double digit rate increases will be sought in 2004. We expect these
rate increases to have a 19% impact on motorcycle's net earned premium in 2004.
We have added expertise to our staff and have refined our product offering to
better match the needs of the target market. All of these initiatives are
expected to improve the combined ratio for the motorcycle product from 132% in
2003 to between 115% and 120% in 2004. Although we believe that these actions
will significantly benefit the motorcycle operating performance in 2004 and in
future years, the product is projected to remain unprofitable in 2004. We
believe motorcycle will be profitable beyond 2004 and enhances our total product
package offered to agents.

Commercial Liability Run-off

         In September 2001, American Modern exited the manufactured housing park
and dealer commercial liability business. We have no outstanding unearned
premium related to this business at December 31, 2003. During 2003, we
experienced higher than expected losses related to this line. The run-off
commercial liability line reduced the 2003 earnings per share by $0.44
(diluted). Due to the adverse development, we strengthened our loss reserves and
have in excess of $30.0 million in total loss reserves at December 31, 2003 to
address run-off claims. Management believes that the loss reserves are
sufficient relative to this line, however, future loss development may dictate
additional reserve actions.

12 THE MIDLAND COMPANY
<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

Site-Built Dwelling

         During the third quarter of 2002, American Modern de-emphasized its
standard homeowner programs in favor of its dwelling fire programs which have
more restrictive coverages. American Modern undertook a careful review of all of
its site-built dwelling programs with the intent of targeting those properties
that fell outside the parameters of the standard homeowner's insurance market.
As a result of these actions, American Modern has achieved positive growth from
its ongoing site-built programs, which are primarily fire dwelling programs.
American Modern has also experienced the intended decrease in de-emphasized
programs, which are primarily homeowners programs. More specifically, gross
written premium from American Modern's ongoing site-built programs increased
68.2% to $79.0 million in 2003 from $47.0 million in 2002. Conversely, gross
written premium from de-emphasized site-built programs decreased 89.7% to $3.5
million in 2003 from $33.9 million in the prior year.

Manufactured Housing Premium

         Manufactured homes have historically represented approximately one out
of every five to six new single family housing starts in the United States. The
industry became over built during the period between 1997 and 1999 as credit
became readily available. New manufactured home sales were slower than
historical averages during 2002 and shipments in 2003 were below 2002 levels. As
a result, during 2001 and 2002, American Modern experienced a decrease in its
manufactured housing insurance premium volume due to a decline in the premium
generated through its point of sale and lender channels of distribution coupled
with American Modern's decision to terminate unprofitable business. Beginning in
2002 and 2003, American Modern benefited from rate increases. As a result of
these rate increases, the manufacturing housing gross written premium increased
5.3% to $320.2 million in 2003 from $304.1 million in 2002. Additionally, these
rate increases contributed to the improvement in profitability of this line,
demonstrated by the manufactured housing combined ratio of 94.8% for 2003 and
100.7% in 2002.

Other Products

         Other products include watercraft, snowmobile, recreational vehicle,
physical damage on long-haul trucks, extended service contracts, collateral
protection, mortgage fire and excess and surplus lines. The growth in American
Modern's other property and casualty specialty insurance products has also
contributed to American Modern's overall growth in recent years as well as in
2003. During 2003, gross written premium from American Modern's other property
and casualty insurance products (excluding manufactured housing, site-built
dwelling and motorcycle) increased collectively 42.1% to $203.0 million from
$142.9 million in the prior year. The watercraft, mortgage fire, collateral
protection and the excess and surplus lines products are primarily driving this
growth.

Fire Loss Ratio

         American Modern experienced higher than normal levels of losses caused
by fire in its manufactured housing and site-built lines during the second half
of 2000 and continuing through most of 2001 and 2002. In response to this trend,
American Modern began aggressively pursuing rate increases in its manufactured
housing products and site-built programs in 2002 and 2003 and most of these rate
increases have now been implemented. Beginning in the second quarter of 2003 and
continuing throughout the remainder of 2003, the manufactured housing and
site-built fire loss ratios have decreased to what we consider to be normal
levels. For example, the manufactured housing fire loss ratio in 2003 was 19.2%
compared to 22.9% in 2002 and 24.7% in 2001.

Changing Mix of American Modern's Distribution Channels

         Over the last several years, American Modern has experienced a
significant increase in the percentage of its gross written premium generated
through its agency channel driven by its growth in motorcycle and site-built
dwelling premium and also due to American Modern's successful conversion of
agency books of business to American Modern from other insurance companies. Also
during this time frame, American Modern's premium volume generated by its lender
and point of sale channels decreased as a result of the slowdown in new
manufactured housing sales and the decision to terminate certain unprofitable
books of business.

Shift Away from Chattel Financing

         Manufactured housing sales have traditionally been financed as personal
property through a financing transaction referred to as chattel financing. Over
the last several years, several large chattel lenders have ceased, or
substantially reduced, lending for manufactured housing. As a result,
manufactured housing sales have slowed and there has been a shift to more
traditional mortgage loan financing on manufactured homes. American Modern has
or had relationships with several of the chattel lenders who reduced their
lending or exited this market. This, coupled with American Modern's decision to
terminate certain unprofitable business in the lender channel, has resulted in a
decrease in the amount of premium volume American Modern has generated through
its lender channel.

OVERVIEW OF PROPERTY AND CASUALTY UNDERWRITING RESULTS

         For the year 2003, American Modern's property and casualty combined
ratio (losses and expenses as a percent of earned premium) was 103.1%, up from
101.9% in the prior year. The increase in the combined ratio is primarily due to
significant increases in losses related to the motorcycle and discontinued
commercial lines products, higher-than-normal catastrophe losses and the
addition of $10.7 million to our net incurred but not yet reported (IBNR) loss
reserves. These losses are discussed in more detail later on in this narrative.

                                                        THE MIDLAND COMPANY   13
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)

THE MIDLAND COMPANY AND SUBSIDIARIES

RECLASSIFICATION OF POLICY SERVICE FEES

         American Modern charges a service fee to those policyholders who elect
to pay their insurance premium in installments. Historically, American Modern
treated these fees as a recovery of processing costs and recorded the fees as an
offset to the related operating expense. American Modern has reclassified these
fees as revenues for reporting purposes. This reclassification has no impact on
net income, however, the change added 1.3 and 1.1 percentage points to the
year-to-date and quarterly combined ratios of the property and casualty
operations for 2002 and 2001, respectively. On a pre-tax basis, these fees
amounted to $7.9 million, $7.0 million and $5.7 million in 2003, 2002 and 2001,
respectively. All prior period data have been reclassified to conform to the
current method of presenting these policy service fees.

RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED
DECEMBER 31, 2002

INSURANCE

Overview of Premium Volume

         The following chart shows American Modern's gross written premium, net
written premium and net earned premium by business segment for the years ended
December 31, 2003 and 2002 ($000):

<TABLE>
<CAPTION>
                                          DECEMBER 31, 2003
                                  ---------------------------------
                                     GROSS        NET         NET
                                    WRITTEN     WRITTEN     EARNED
BUSINESS SEGMENT                    PREMIUM     PREMIUM     PREMIUM
------------------------------    ----------    -------     -------
<S>                               <C>           <C>         <C>
MANUFACTURED HOUSING              $    320.2    $301.7      $ 325.0
ALL OTHER INSURANCE
   AND SERVICES:
     OTHER PROPERTY & CASUALTY
        SPECIALTY PRODUCTS             343.7     315.0        299.0
     LIFE OPERATIONS                    16.1      11.9         14.1
                                  ---------------------------------
          TOTAL                   $    680.0    $628.6      $ 638.1
                                  =================================
</TABLE>

<TABLE>
<CAPTION>
                                            December 31, 2002
                                  --------------------------------
                                   Gross        Net         Net
                                  Written     Written     Earned
Business Segment                  Premium     Premium     Premium
------------------------------    --------   ---------   ---------
<S>                               <C>        <C>         <C>
Manufactured Housing              $  304.1   $   290.2   $   325.3
All Other Insurance
   and Services:
     Other Property & Casualty

        Specialty Products           284.1       271.3       240.3
     Life Operations                  46.8        11.8        12.0
                                  --------------------------------
          Total                   $  635.0   $   573.3   $   577.6
                                  ================================
</TABLE>

Manufactured Housing

         Although the manufactured housing industry continues to be depressed,
American Modern's gross written premium related to this product increased 5.3%
to $320.2 million in 2003 from $304.1 million in 2002. This increase was
primarily the result of rate increases approved in 2002 and 2003, which were
partially offset by a decline in in-force policies.

         The manufactured housing combined ratio, including catastrophe losses,
decreased from 100.7% in 2002 to 94.8% in 2003. This improvement was due to rate
increases and a decline in fire loss ratio related to this product.

         Losses and loss adjustment expenses are discussed further for the total
insurance segment. Several other items, such as investment income, are allocated
to product lines, but are more meaningfully discussed in total and have been
included in the sections that follow.

All Other Insurance

         Gross written premiums in American Modern's other property and casualty
specialty products (non-manufactured housing products) collectively increased
21.0% to $343.7 million in 2003 compared to $284.1 million in the prior year.
Driving this growth in gross premium written in 2003 were the site built
dwelling fire, watercraft, mortgage fire, collateral protection and the excess
and surplus lines insurance products.

         Credit life gross written premium decreased due to industry regulatory
actions which mandate a monthly pay product on real estate secured loans rather
than a single premium. This change affects gross written premium, which
decreased 65.6% in 2003, but has little impact on net earned premium. Net earned
premium actually increased slightly over the prior year due to additional
volume. A large percentage of our credit life business is ultimately ceded back
to an insurance affiliate of the producing agent.

COMBINED INSURANCE (MANUFACTURED HOUSING AND ALL OTHER INSURANCE)

Insurance Investment Income and Realized Capital Gains

         Although net investment income is allocated to segments and product
lines, the investment portfolio is generally managed as a whole and therefore is
more meaningfully discussed in total. Both the cost and market value of American
Modern's investment portfolio increased in 2003, whereas net investment income
(before taxes and excluding net realized investment gains and losses) decreased
7.0% to $33.0 million in 2003 from $35.5 million in 2002. This decrease is due
to the current depressed interest rate environment which is adversely affecting
reinvestment rates relative to American Modern's fixed income portfolio. The
annualized pre-tax equivalent investment yield on American Modern's fixed income
investments was 5.5% in 2003 compared to 6.0% in 2002.

14 THE MIDLAND COMPANY
<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

         Our realized investment gains and losses are comprised of three items:
embedded derivatives, other-than-temporary impairments and capital gains and
losses from the sale of securities.

         After-tax income from embedded derivatives, which are included on a
pre-tax basis in net realized capital gains (losses), amounted to $0.5 million,
$0.03 per share (diluted) in 2003. This compares to an after-tax loss in 2002 of
$(0.2) million, $(0.01) per share diluted.

         Also included in net realized capital gains (losses) in 2003 were
after-tax losses of $(1.2) million, $(0.07) per share (diluted), resulting from
the write-down (other-than-temporary impairment) of several lower rated
securities in American Modern's investment portfolio. This compares to after-tax
impairment losses of $(3.0) million, $(0.17) per share (diluted) in 2002.

         Excluding the impact of derivative and impairment losses, American
Modern's after-tax net realized capital gains (losses) increased to $3.7
million, $0.20 per share (diluted) in 2003 from a loss in 2002 of $(1.3)
million, $(0.07) per share (diluted).

Insurance Losses and Loss Adjustment Expenses (LAE)

         American Modern's losses and loss adjustment expenses increased 15.0%
in 2003 to $392.2 million from $341.0 million in 2002. This increase was the
result of premium growth plus increases in catastrophe losses, motorcycle
losses, losses from the commercial lines product that we exited in 2001 and the
strengthening in 2003 to the property and casualty incurred but not reported
loss reserves (IBNR). During 2003, American Modern's property and casualty
operations incurred losses of $12.0 million related to prior years. The adverse
development was primarily attributable to the exited commercial lines, which
experienced a lower number of new claims but with increased severity.

         Catastrophe losses were $37.5 million on a pre-tax basis in 2003
compared to $32.6 million in 2002.

Insurance Commissions, Other Policy Acquisition Costs and Operating and
Administrative Expenses

         American Modern's commissions and other policy acquisition costs and
operating and administrative expenses increased 5.9% in 2003 to $265.3 million
from $250.5 million in 2002. This increase is attributable to the growth in net
earned premium and increases in depreciation expense and compensation expense
related to performance based stock awards. These increases were offset by
decreases in commission expense and legal expenses. With respect to commission
expense, in 2003 American Modern made significant progress in the implementation
of the "Pay for Performance" program. This new structure represents a
significant deviation from the more traditional industry commission structures
that are generally weighted more heavily with front-end commissions. Under the
Pay for Performance program, we have significantly reduced front-end commission
and shifted the bulk of the agent's compensation to a back-end loaded profit
share.

TRANSPORTATION

         M/G Transport, Midland's transportation subsidiary, reported a revenue
increase of 21.0% for 2003 to $28.2 million compared to $23.3 million in 2002.
Pre-tax income also increased significantly to $1.3 million in 2003 as compared
to $0.4 million in 2002.

         The increase in revenues was primarily due to the increase in
affreightment revenues from one revenue source that was regained in 2003. We
expect to retain this business and anticipate near double digit revenue growth
in 2004. Pre-tax income improved due to the increase in revenues.

RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED
DECEMBER 31, 2001

MANUFACTURED HOUSING

         Manufactured housing gross written premiums decreased 9.6% to $304.1
million in 2002 from $336.5 million in 2001. The manufactured housing insurance
product is our primary product offering and represented 47.8% of our total
property and casualty and credit life gross written premium in 2002. The
decrease in gross written premium related to this product offering was due
primarily to depressed market conditions within the manufactured housing segment
coupled with American Modern's decision to terminate certain unprofitable
businesses related to this product offering in 2001.

         While manufactured housing gross written premiums decreased in 2002,
the earned premiums for manufactured housing increased 2.2% to $325.3 million in
2002 from $318.3 million in 2001. This increase was primarily due to the
earnings related to multi-year premiums written in the prior year. The
manufactured housing combined ratio increased 2.5 percentage points in 2002 due
to an increase in catastrophe losses offset by an improvement in the fire loss
ratio in 2002 compared to 2001. Losses and loss adjustment expenses are
discussed further for the total insurance segment below. Several other items,
such as investment income, are allocated to product lines, but are more
meaningfully discussed in total and have been included in the sections that
follow.

         In 2002, Conseco Agency, American Modern's largest customer, accounted
for less than 10% of American Modern's total property and casualty gross written
premium as compared to approximately 16% in 2001. Approximately 90% of the
premium written through Conseco in 2002 resulted from the renewal of policies
from existing Conseco Agency policyholders and, therefore, was not dependent
upon new loan financing.

                                                          THE MIDLAND COMPANY 15
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)

THE MIDLAND COMPANY AND SUBSIDIARIES

ALL OTHER INSURANCE

         Gross written premiums in American Modern's other specialty property
and casualty products (non-manufactured housing products) collectively increased
29.7% to $284.1 million in 2002 compared to $219.0 million in the prior year.
Driving this growth were American Modern's site built dwelling and motorcycle
products, which together increased 84.2% in 2002 as compared to 2001.

         Credit life gross written premium increased 4.7% to $46.8 million in
2002 from $44.7 million in 2001. Due to recent industry regulations, the
industry is transitioning to a monthly pay product which will result in a
decrease in gross written credit life premium in 2003, however, earned premium
should not be affected by this change.

         American Modern's other insurance income increased 6.3% to $13.7
million in 2002 from $12.9 million in 2001 due to a $1.3 million increase in
policy service fee income which was offset by a decrease in revenues which
resulted from the closing of an unprofitable agency operation. American Modern
Insurance Group's portfolio tracking operation, Ameritrac(R), continued to
expand its client base and grow its loan-tracking portfolio. Ameritrac(R) and
our other wholly owned insurance agencies continued to be significant
contributors to American Modern's gross written property and casualty insurance
premiums as they collectively generated $89.9 million in premium volume in 2002.

         Excluding the impact of net investment income and net capital gains and
losses, the pre-tax loss from all other insurance collectively was $2.1 million
in 2002 compared to $5.9 million in 2001.

COMBINED INSURANCE (MANUFACTURED HOUSING AND ALL OTHER INSURANCE)

Insurance Investment Income and Realized Capital Gains

         Although net investment income is allocated to segments and product
lines, the investment portfolio is generally managed as a whole and therefore is
more meaningfully discussed in total. American Modern's net investment income
(before taxes and excluding net realized investment gains and losses) increased
5.0% to $35.5 million in 2002 from $33.8 million in 2001. Net investment income
increased due to cash flow generated from operations. Conversely, due to the
depressed interest rate environment, reinvestment rates relative to American
Modern's fixed income portfolio continue to be down. The annualized pre-tax
equivalent investment yield on American Modern's fixed income investments, which
is net interest income divided by the average amount of fixed income assets, was
6.0% in 2002 as compared to 6.2% in 2001.

         Excluding the impact of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and impairments, American Modern's pre-tax
net realized capital gains (losses) decreased from a gain in 2001 of $0.9
million to a loss of $2.0 million in 2002. The impact of embedded derivatives on
American Modern's net realized capital gains (losses), on a pretax basis, was a
$1.1 million gain in 2001 and loss of $0.2 million in 2002. We conduct quarterly
comprehensive reviews of individual portfolio holdings that have market values
less than their respective costs for "other-than-temporary" impairment. These
quarterly reviews led us to realize impairment losses of approximately $4.6
million in 2002, which are included in capital losses. The impairment losses
that were realized in 2002 emanated primarily from the higher-yielding corporate
bond and convertible portfolios. Other-than-temporary impairment losses realized
in 2001 were not material.

Insurance Losses and Loss Adjustment Expenses (LAE)

         Insurance losses and loss adjustment expenses increased 16.7% to $341.0
million in 2002 compared to $292.2 million in 2001. This increase was due to the
13.7% growth in net earned premium and an increase in the level of catastrophe
losses offset by an improvement in fire related losses in 2002. Pre-tax weather
related catastrophe losses increased to $32.6 million in 2002 from $21.0 million
in 2001. Hurricane Lili, in the fourth quarter of 2002, resulted in $10.2
million of pre-tax losses.

Insurance Commissions, Other Policy Acquisition Costs and Operating and
Administrative Expenses

         Insurance commissions, other policy acquisition costs and operating and
administrative expenses increased 10.8% to $250.5 million in 2002 from $226.1
million in 2001. This increase was due to the 13.7% growth in net earned
premium, the increase in policy acquisition costs related to the transition of
the motorcycle business, plus the increase in corporate expenses related to
special employee benefit studies and legal, audit and other fees incurred with
the company's intended stock offering in 2002 which was subsequently withdrawn
due to general market conditions. Offsetting these increases was a $0.8 million
decrease in compensation based expenses relating to bonuses and performance
based stock awards.

Overall Property and Casualty Underwriting Results

         American Modern's property and casualty operations produced a pre-tax
underwriting loss (property and casualty insurance earned premiums less incurred
losses, commissions and operating expenses) of $3.7 million in 2002 compared to
a pre-tax underwriting profit of $1.0 million in 2001. These results produced a
combined ratio of 101.9% in 2002 compared to 100.9% in 2001. The weaker results
in 2002 are primarily due to higher catastrophe losses in 2002 compared to the
prior year. Increased losses from the motorcycle and site-built dwelling product
lines were also contributing factors. Fire losses continue to be above normal
but have decreased in 2002 relative to the prior year.

16 THE MIDLAND COMPANY
<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

TRANSPORTATION

         Transportation revenues decreased 33.1% from $34.8 million in 2001 to
$23.3 million in 2002. The decrease in transportation revenues was primarily
attributable to a decrease in revenues from one major source of loadings. In
addition, due to unfavorable market conditions during 2002, we elected to reduce
our capacity by returning barges on short-term rentals and scrapping older
barges.

         Transportation operating expenses decreased 31.2% from $32.9 million in
2001 to $22.6 million in 2002 due to the decrease in loadings from one major
source and the reduction of capacity.

LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION

CONSOLIDATED OPERATIONS

Aggregate Contractual Obligations and Off Balance Sheet Arrangements

         We have certain obligations and commitments to make future payments
under contracts. As of December 31, 2003, the aggregate obligations on a
consolidated basis were as follows (amounts in 000's):

<TABLE>
<CAPTION>
                                          Payments Due By Period
                                       -----------------------------
                                       Less Than      2-5     After
                           Total        1 Year       Years   5 Years
                         ---------     ---------   --------  -------
<S>                      <C>           <C>         <C>       <C>
Long-term debt           $  62,217     $   1,574   $ 60,643  $    --
Other notes payable         33,625        33,625         --       --
Annual commitments
   under non-
   cancelable leases         7,373           833      2,959    3,581
Purchase obligations         4,699         3,227      1,472       --
Future other
   obligations               1,992         1,742        250       --
                         ---------     ---------   --------  -------
     Total               $ 109,906     $  41,001   $ 65,324  $ 3,581
                         =========     =========   ========  =======
</TABLE>

         The table above excludes contracts and agreements that are terminable
at will by the Company.

         Included in the above table is an operating lease arrangement of 20
barges used in the transportation operations. The lease was entered into in 1999
and its term is for 15 years. The barges can be purchased after 12 years at a
pre-determined price and, at the end of the lease period in 2014, the Company
can either return the barges or purchase the equipment at fair market value. The
15 year lease period was more attractive at that time than the traditional 5
year financing term for conventional long-term debt. As of December 31, 2003,
future lease payments required under this arrangement are (000's): 2004 - $478;
2005 through 2008 - $2,175; after 5 years -$3,581. M/G Transport's liquidity is
currently sufficient to handle the financial obligations under this agreement.

OTHER ITEMS

         On January 25, 2001 our Board of Directors approved an increase in the
number of shares authorized under our share repurchase program from 1,000,000
shares to 2,000,000 shares on a post split basis. Ten thousand shares were
repurchased in the open market under our share repurchase program during 2003
and a total of 586,000 shares remain authorized for repurchase under terms of
this authority. There were additional stock repurchase transactions consummated
in connection with our associate stock incentive programs during 2003. On April
25, 2002, our Board of Directors approved a two-year extension to the share
repurchase program that will run through the date of the Board's second
quarterly meeting in 2004. The resolution does not require us to repurchase our
shares, but rather gives management discretion to make purchases based on market
conditions and our capital requirements.

         We paid dividends to our shareholders of $3.3 million during 2003 and
$3.0 million in 2002.

         We expect that cash and other liquid investments, coupled with future
operating cash flows and our short-term borrowing capacity, will be readily
available to meet our operating cash requirements for the next 12 months.

HOLDING COMPANY OPERATIONS

         Midland and American Modern are holding companies which rely primarily
on dividends and management fees from subsidiaries to assist in servicing debt,
paying operating expenses and paying dividends to the respective shareholders.
The payment of dividends to these holding companies from American Modern'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 our, or American Modern's, liquidity or our and American Modern's
ability to meet our respective long or short-term operating, financing or
capital obligations.

         Midland has a commercial paper program under which qualified purchasers
may invest in the short-term unsecured notes of Midland. As of December 31,
2003, we had $3.6 million of commercial paper debt outstanding, $3.0 million of
which represented notes held either directly or indirectly by our executive
officers and directors. The effective annual yield paid to all participants in
this program was 1.0% as of December 31, 2003, a rate that is considered to be
competitive with the market rates offered for similar instruments. As of
December 31, 2003, Midland also had $75.0 million of conventional short-term
credit lines available at costs not exceeding prime borrowing rates, of which
$30.0 million was outstanding. These lines of credit contain minimal covenants
and are typically drawn and repaid over periods ranging from two weeks to three
months. Additional short-term borrowing lines are available at the discretion of
various lending institutions with

                                                          THE MIDLAND COMPANY 17
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)

THE MIDLAND COMPANY AND SUBSIDIARIES
comparable rates and terms. These short-term borrowings decreased $9.0 million
from $39.0 million since December 31, 2002. The reduction in short-term
borrowings was due primarily to the proceeds received in 2003 related to
American Modern's $6.0 million new long-term debt plus $3.1 million in federal
income tax refunds collected in 2003. We also have a mortgage obligation related
to the financing of our corporate headquarters building. As of December 31,
2003, the outstanding balance of this mortgage was $15.7 million. This mortgage
obligation includes normal and customary debt covenants for instruments of this
type. Monthly principal and interest payments are required until maturity in
December 2005. The effective interest rate on this obligation is 6.8%.

         On October 21, 2003 Midland filed a "universal shelf registration
statement" with the Securities and Exchange Commission. A shelf registration, or
delayed offering, of securities allows companies to register securities under
the Securities Act of 1933 for future sale, thereby avoiding potential
time-consuming delays inherent in the registration process. Under this process,
companies are permitted to register securities in advance of their expected sale
date and "put them on the shelf" for future use. This registration statement
will allow the company to offer from time to time up to $150 million in various
types of securities, including debt, preferred stock and common stock. On
February 5, 2004, the Company sold 1,150,000 shares previously registered
pursuant to this shelf registration. The net proceeds received of $25.1 million
will be used to fund the future growth of the insurance subsidiaries and for
other general corporate purposes.

INSURANCE

         American Modern generates cash inflows primarily from insurance
premium, investment income, proceeds from the 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, capital expenditures, income taxes, dividends and
inter-company borrowings and the purchase of marketable securities. In each of
the periods 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 market value of Midland's consolidated investment portfolio
(comprised primarily of the investment holdings of American Modern) increased
14.4% from $739.8 million at December 31, 2002, to $846.3 million at December
31, 2003. This increase was due to positive cash flow from operations in 2003
plus a $38.8 million increase in the unrealized appreciation in the market value
of securities held. The increase in the unrealized appreciation was due to a
$39.3 million increase in unrealized appreciation related to the equity
portfolio offset by a $0.4 million decrease in unrealized appreciation
pertaining to the fixed income portfolio. Midland's largest equity holding, 2.5
million shares of U.S. Bancorp, increased to $73.3 million as of December 31,
2003 from $52.2 million as of December 31, 2002.

         Securities with unrealized gains and losses by category (equity and
debt) and by time frame are summarized in the chart below:

<TABLE>
<CAPTION>
        UNREALIZED GAIN (LOSS) AS OF DECEMBER 31, 2003
-------------------------------------------------------------------
                                  UNREALIZED     FAIR       # OF
                                  GAIN (LOSS)    VALUE    POSITIONS
-------------------------------------------------------------------
<S>                               <C>          <C>        <C>
FIXED INCOME SECURITIES
Total Held In A Gain Position     $  28,712    $606,765       703
Held In A Loss Position
  For Less Than 6 Months               (351)     35,349        42
Held In A Loss Position
  For More Than 6 Months
And Less Than 12 Months                (525)     21,089        29
Held In A Loss Position
  For More Than 12 Months
  And Less Than 18 Months                --          --        --
Held In A Loss Position
  For More Than 18 Months
  And Less Than 24 Months               (92)        716         1
Held In A Loss Position
  For More Than 24 Months               (25)        443         2
                                  -------------------------------
    Fixed Income Total            $  27,719    $664,362       777
                                  ===============================

EQUITY SECURITIES
Total Held In A Gain Position     $  87,798    $164,267       212
Held In A Loss Position
  For Less Than 6 Months               (124)      2,189        12
Held In A Loss Position
  For More Than 6 Months
  And Less Than 12 Months               (82)      1,974         4
Held In A Loss Position
  For More Than 12 Months
  And Less Than 18 Months              (250)      1,991         8
Held In A Loss Position
  For More Than 18 Months
  And Less Than 24 Months              (332)      2,386         7
Held In A Loss Position
  For More Than 24 Months              (140)      1,293         2
                                  -------------------------------
    Equity Total                  $  86,870    $174,100       245
                                  ===============================

Total Per Above                   $ 114,589    $838,462     1,022
                                                          =======
Accrued Interest and Dividends                    7,860
                                  ---------------------
Total Per Balance Sheet           $ 114,589    $846,322
                                  =====================
</TABLE>

18 THE MIDLAND COMPANY
<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

         Based on the above valuations and the application of our
other-than-temporary impairment policy criteria, which is more fully discussed
in the Critical Accounting Policies section below, we believe the declines in
fair value are temporary at December 31,2003. However, the facts and
circumstances related to these securities may change in future periods, which
would result in "other-than-temporary" impairment in future periods.

         The average duration of American Modern's debt security investment
portfolio as of December 31, 2003 was 4.1 years which management believes
provides adequate asset/liability matching.

         The amounts expended for the development costs capitalized in
connection with the development of modernLINK(R), our proprietary information
systems and web enablement initiative, amounted to $3.0 million in 2003 and a
total of $12.9 million from inception in 2000 through December 31, 2003. The
initiative is being designed, developed and implemented in periodic phases to
ensure its cost effectiveness and functionality. This project may involve future
cash expenditures of $5.0 million to $8.0 million annually over the next five
years, with additional spending thereafter to expand system compatibility and
functionality. A portion of such expenditures will be capitalized and amortized
over the useful life. However, actual costs may be more or less than what we
estimate. The cost of the development and implementation is expected to be
funded out of operating cash flow. Significant changes to the technology
interface between American Modern and its distribution channel participants and
policyholders, while unlikely, could significantly disrupt or alter its
distribution channel relationships. If the new information systems are
ultimately deemed ineffective, it could result in an impairment charge to our
capitalized costs.

         American Modern has a $72.0 million long-term credit facility available
on a revolving basis at various rates. As of December 31, 2003, there was $36.0
million outstanding under these facilities of which $6.0 million was borrowed in
2003 for the purpose of providing additional capital to the property and
casualty companies.

         During the first quarter of 2002, American Modern entered into an
interest rate swap agreement with a consortium of three banks. Under the terms
of this agreement, the floating interest rate related to $30.0 million
outstanding under American Modern's long-term credit facility has been
effectively fixed at 5.6% until December 1, 2005, the maturity date. To adjust
this agreement to fair value, as of December 31, 2003, $1.4 million is included
in other payables and accruals.

         Accounts receivable is primarily comprised of premium due from both
policyholders and agents. In the case of receivables due directly from
policyholders, policies are cancelable in the event of non-payment and thus
offer minimal credit exposure. Approximately 81% of American Modern's accounts
receivables relate to premium due directly from policyholders as of December 31,
2003. In the case of receivables due from agents, American Modern has extended
payment terms that are customary and normal in the insurance industry.
Management monitors its credit exposure with its agents and related
concentrations on a regular basis. However, as collectibility of such
receivables is dependent upon the financial stability of the agent, American
Modern cannot assure collections in full. Where management believes appropriate,
American Modern has provided a reserve for such exposures. Since
December 31, 2002, American Modern's accounts receivable has decreased $7.2
million to $72.5 million as of December 31, 2003 due primarily to the $6.3
million decrease in the receivable balance due from GreenTree Insurance Agency,
Inc. (formerly Conseco Agency, Inc.) who is American Modern's largest customer.
GreenTree's receivable balance is current and amounts to $4.8 million at
December 31, 2003, down from $11.1 million at the prior year-end. Total accounts
receivable decreased $10.3 million due to the aforementioned decrease in the
GreenTree receivable plus the collection or utilization of $5.7 million in the
federal income tax receivable which existed at the prior year-end.

         Reinsurance recoverables and prepaid reinsurance premium consisted of
the following (amounts in 000's):

<TABLE>
<CAPTION>
                                                           AS OF DECEMBER 31,
                                                           ------------------
                                                        2003               2002
                                                        ----               ----
<S>                                                   <C>                <C>
Ceded Unearned Premium Recoverable                    $40,084            $51,317
Ceded Loss Reserves Recoverable                        25,838             21,070
Ceded Paid Losses Recoverable                           5,068              4,239
                                                      -------            -------
  Total                                               $70,990            $76,626
                                                      =======            =======
</TABLE>

         The decrease in ceded unearned premium recoverable to $40.1 million in
2003 was primarily due to American Modern's life operations, which was impacted
by the transition to a monthly pay premium from a single pay premium. This
decrease was partially offset by an increase in the property and casualty ceded
unearned premium recoverable, due to volume increases relative to new programs.

         The increase of $4.8 million in ceded loss reserves is attributable to
the reinsurance impact of strengthening the property and casualty loss reserves
in 2003.

         The increase in property, plant and equipment-net was partly due to
American Modern's capitalization of $3.0 million related to its modernLINK(R)
initiative in 2003.

         The decrease of $8.5 million in deferred insurance policy acquisition
costs was due to a program implemented in 2003 which reduces the prepaid
commission in favor of a contingency commission based on the performance of the
book of business.

                                                          THE MIDLAND COMPANY 19

<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)

THE MIDLAND COMPANY AND SUBSIDIARIES

         Unearned insurance premiums decreased $22.4 million due primarily to
the reduction in unearned premium related to life operations resulting from the
transition to a monthly pay premium.

         The increase of $40.1 million in insurance loss reserves was due to the
growth in the property and casualty products plus the need to strengthen the
reserves relative to the previously exited commercial lines product.

         The $9.0 million decrease in other notes payable - banks (short-term
borrowings) was due to the $6.0 million borrowed by American Modern under its
long-term revolving credit facility plus $3.1 million received in federal income
tax refunds.

         The $11.8 million increase in deferred federal income tax since
December 31, 2003 is due primarily to the $13.6 million increase in the
unrealized gain on marketable securities.

         Cash flow from the insurance operations is expected to remain
sufficiently positive to meet American Modern's future operating requirements
and to provide for reasonable dividends to Midland.

TRANSPORTATION

         M/G Transport generates its cash inflows primarily from affreightment
revenue. Its primary outflows of cash relate to the payment of barge charter
costs, debt service obligations, operating expenses, income taxes, dividends to
Midland and the acquisition of capital equipment. Like the insurance operations,
cash flow from the transportation subsidiaries is expected to remain
sufficiently positive to meet future operating requirements.

         In 2003, M/G Transport contributed to the increase in property, plant
and equipment and long-term debt. M/G Transport acquired 30 new and 27 used
barges in 2003 at a total cost of $9.4 million. These acquisitions were financed
with internally generated funds and the placement of $8.8 million in
conventional long-term debt financing. M/G Transport's property, plant and
equipment and long-term debt also increased with the capitalization of a lease
obligation. M/G Transport is committed to acquire 25 used barges in 2004 at a
cost of approximately $0.8 million. The transportation subsidiaries entered into
a fifteen-year lease in 1999 for transportation equipment. Aggregate rental
payments under this operating lease over the next eleven years will approximate
$6.4 million.

         As of December 31, 2003, the transportation subsidiaries have
$10.6 million of collateralized equipment obligations outstanding.

OTHER MATTERS

COMPREHENSIVE INCOME

         The only differences between our net income and comprehensive income
are the net after-tax change in unrealized gains on marketable securities, the
after-tax change in the fair value of the interest rate swap agreement and the
additional minimum liability requirements related to our defined benefit pension
plans. For the years ended December 31, 2003 and 2002, such changes increased or
(decreased), net of related income tax effects, by the following amounts
(amounts in 000's):

<TABLE>
<CAPTION>
                                                         2003            2002
                                                       ------------------------
<S>                                                    <C>              <C>
Changes in:
    Net unrealized capital gains                       $25,237          $ 3,379
    Fair value of interest rate swap hedge                 332           (1,264)
    Additional minimum pension liability                   313             (417)
                                                       ------------------------
     Total                                             $25,882          $ 1,698
                                                       ========================
</TABLE>

         Net unrealized investment gains in equity securities (net of income tax
effects) increased $25.5 million in 2003 and decreased by $6.5 million in 2002.
For fixed income securities, net unrealized gains decreased $0.3 million in 2003
and increased by $10.1 million in 2002.

         Changes in net unrealized gains on marketable securities result from
both market conditions and realized gains recognized in a reporting period. The
after-tax fair value of the interest rate swap agreement varies according to the
current interest rate environment relative to the fixed rate of the swap
agreement. Changes in the additional minimum pension liability are actuarially
determined based on the funded status of the plans and current actuarial
assumptions.

CRITICAL ACCOUNTING POLICIES

         Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates, assumptions and judgments that affect the reported amounts
of assets, revenues and expenses and related disclosures of contingent assets
and liabilities. We regularly evaluate our critical accounting policies,
assumptions and estimates, including those related to insurance revenue and
expense recognition, loss reserves, reinsurance levels and valuation and
impairment of intangible assets such as goodwill. We base our estimates on
historical experience and on various assumptions that we believe to be
reasonable under the

20   THE MIDLAND COMPANY

<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

circumstances. This process forms the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

         We believe the following critical accounting policies require
significant judgments and estimates in the preparation of our consolidated
financial statements.

Insurance Revenue and Expense Recognition

         Premium for physical damage and other property and casualty related
coverages, net of premium ceded to reinsurers, are recognized as income on a
pro-rata basis over the lives of the policies. Credit accident and health and
credit life premiums are recognized as income over the lives of the policies in
proportion to the amount of insurance protection provided. American Modern
generally does not consider anticipated investment income in determining premium
deficiencies (if any) on short-term contracts. Policy acquisition costs,
primarily prepaid 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 premium written are expensed as incurred.

Reserves for Insurance Losses

         American Modern's reserve for insurance losses is based on past
experience of settling known claims as well as estimating those not yet
reported. While management believes the amounts are fairly stated, the ultimate
liability, once fully developed, may be more than or less than that provided.
Management and its actuaries, both internal and external, regularly review these
liabilities and adjustments are made as necessary in the current period.
Management does not foresee any significant change in the manner in which it
records its reserve for insurance losses.

Reinsurance Risks

         By reinsuring certain levels and types of insurable risk with other
insurance companies, American Modern limits its exposure to losses to that
portion of the insurable risk it retains. However, if the reinsurer fails to
honor its obligations, American Modern could suffer additional losses as the
reinsurance contracts do not relieve American Modern of its obligations to
policyholders. American Modern regularly evaluates the financial condition of
its reinsurers to minimize its exposure to losses from reinsurer insolvencies.
In addition, American Modern may require reinsurers to establish trust funds and
maintain letters of credit to further minimize American Modern's exposure. We do
not believe there is any significant concentration of credit risk arising from
any single reinsurer. We expect that American Modern's reinsurers will satisfy
their obligations. As of December 31, 2003, American Modern was owed $5.1
million from reinsurers for claims that have been paid and for which a
contractual obligation to collect from a reinsurer exists.

Other-Than-Temporary Impairment

         American Modern invests in various securities including U.S. Government
securities, corporate debt securities, and corporate stocks. Investment
securities in general are exposed to various risks such as interest rate,
credit, and overall market volatility. Due to the level of risk associated with
these securities, it is reasonably possible that changes in the value of
investment securities will occur in the near term and that such changes could be
material.

         In order to evaluate for other-than-temporary impairment, we conduct
quarterly comprehensive reviews of individual portfolio holdings that have a
market value less than their respective carrying costs. As part of our review
for other-than-temporary impairment, we track the respective cost and market
values for all individual portfolio holdings with an unrealized loss. For
securities where the market value is less than 80% of cost, we more closely
monitor for signs of other-than-temporary impairment. We, with the assistance of
our external professional money managers, apply both quantitative and
qualitative criteria in our evaluation, including facts specific to each
individual investment such as, but not limited to, the length of time the fair
value has been below the cost, the extent of the decline, our intent to sell or
hold the security, the expectation for each individual security's performance,
the credit worthiness and related liquidity of the issuer and the issuer's
business sector.

         The evaluation for other-than-temporary impairment requires a
significant amount of judgement. As such, there are a number of risks and
uncertainties inherent in the process of monitoring impairments and determining
if a decline is other-than-temporary. These risks and uncertainties include the
risks that:

         1. The economic outlook is worse than anticipated and has a greater
adverse impact on a particular issuer than anticipated.

         2. Our assessment of a particular issuer's ability to meet all of its
contractual obligations changes based on changes in the facts and circumstances
related to the issuer.

         3. New information is obtained or facts and circumstances change that
cause a change in our ability or intent to hold a security to maturity or until
it recovers in value.

                                                        THE MIDLAND COMPANY   21

<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)

THE MIDLAND COMPANY AND SUBSIDIARIES

         When a security is considered other-than-temporarily impaired, we
monitor trends or circumstances that may impact other material investments in
our portfolio. For example, we review any other securities that are held in the
portfolio from the same issuer and also consider any circumstances that may
impact other securities of issuers in the same industry. At December 31, 2003,
we had no significant concentration of unrealized losses in any one issuer,
industry or sector.

         For fixed income and equity securities, we consider the following
factors, among others, to determine if a security is other-than-temporarily
impaired:

         -        the extent and duration to which market value is less than
                  cost

         -        historical operating performance

         -        issuer news releases, including those disclosing that the
                  issuer has committed an event of default (missed payment
                  beyond grace period, bankruptcy filing, loss of principal
                  customer or supplier, debt downgrade, disposal of segment,
                  etc.

         -        near term prospects for improvement of the issuer and/or its
                  industry to include relevant industry conditions and trends

         -        industry research and communications with industry specialists

         -        third party research reports

         -        credit rating reports

         -        financial models and expectations

         -        discussions with issuer's management by investment manager

         -        our ability and intent to hold the investment for a period of
                  time sufficient to allow for any anticipated recovery

         -        time to conversion with respect to a mandatory convertible
                  security

         For fixed income securities, we also consider the following factors:

         -        whether the unrealized loss is credit-driven or is a result of
                  changes in market interest rates

         -        the recoverability of principal and interest

         -        the issuer's ability to continue to make obligated payments to
                  security holders

         The investment portfolio is comprised of various asset classes which
are independently managed by external professional portfolio managers under the
oversight and guidelines established by our investment committee. We evaluate
the performance of the portfolio managers relative to benchmarks we believe
appropriate given the asset class. Investment managers will manage the portfolio
under these guidelines to maximize the return on their investment class. As part
of their investment strategy, the investment managers will buy and sell
securities based on changes in the availability of, and the yield on,
alternative investments. Investment managers may also buy and sell investments
to diversify risk, attain a specific characteristic such as duration or credit
quality, rebalance or reposition the portfolio or for a variety of other
reasons.

         It is our intent, and thus the intent of our investment managers, to
hold securities that have an unrealized gain or loss. For the securities with an
unrealized loss, which in our judgement we believe to be temporary, it is our
intent to hold the security for a period of time that will allow the security to
recover in value. However, if the investment managers believe returns would be
enhanced by reallocating the capital from the security, the manager may sell the
security and reallocate the capital, in which case the unrealized gain or loss
will be recognized as a realized gain or loss. As part of our comprehensive
quarterly review for other than temporary impairment, the investment managers
identify any securities in which they have the positive intent to sell in the
near term. In the case where investment managers have indicated their intent to
sell a security in the near term and there is an unrealized loss, we record an
other than temporary impairment at the balance sheet date, if such date is prior
to the sale of the security. At December 31, 2003, we had no securities with an
unrealized loss for which a decision was made to sell in the near term. For the
years ended December 31, 2003 and 2002, we incurred $1.9 million and $4.6
million in other-than-temporary impairment losses, respectively. There were no
such losses related to the year ended December 31, 2001. Impairment charges are
included in the consolidated financial statements in "net realized investment
gains (losses)."

Defined Benefit Pension Plans

         Midland maintains defined benefit pension plans for a limited number of
active participants. The defined benefit pension plans are not open to employees
hired after March 31, 2000. The pension expense is calculated based upon a
number of actuarial assumptions, including an expected long-term rate of return
and a discount rate. In determining our expected long-term rate of return and
our discount rate, we evaluate input from our actuaries, asset allocations,
long-term bond yields and historical performance of the invested pension assets
over a ten-year period. If other assumptions were used, the amount recorded as
pension expense would be different from our current estimate.

22   THE MIDLAND COMPANY

<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

Intangible Assets (Goodwill)

         As required by SFAS No. 142, we ceased amortizing goodwill effective
January 1, 2002. Based on the impairment test required by SFAS No. 142 in the
quarter ended March 31, 2002, a non-recurring charge of $1.5 million after-tax
was taken against income and is reported as cumulative effect of change in
accounting principle in the income statement. Prior to January 1, 2002, goodwill
was amortized on a straight-line basis over a 10-year period. The income
statement for the year ended December 31, 2001 includes an after-tax expense of
$0.4 million relating to goodwill amortization. As of December 31, 2003, our
remaining goodwill balance was $2.1 million and is included in other assets.

NEW ACCOUNTING STANDARDS

         The Financial Accounting Standards Board ("FASB") issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities, in
April 2003 and SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, in May 2003. The adoption of
SFAS Nos. 149 and 150 did not have a material impact on Midland's consolidated
financial position or results of operations.

         On July 1, 2003, Midland adopted the provisions of FASB Interpretation
No. 46 (FIN 46), "Consolidation of Variable Interest Entities." This
interpretation requires variable interest entities to be consolidated by the
primary beneficiary which represents the enterprise that will absorb the
majority of the variable interest entities' expected losses if they occur,
receive a majority of the variable interest entities' residual returns if they
occur, or both. Midland identified a lease arrangement for certain
transportation equipment in which Midland is deemed to be the primary
beneficiary as we maintain the majority of the variable interests in this leased
asset.

         In December 2003, the FASB issued SFAS No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and other Postretirement Benefits--an
amendment of FASB statements No. 87, 88 and 106". The revised statement (SFAS
No. 132(R) requires additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. SFAS No. 132(R) also requires
interim-period disclosure of components of net pension and other postretirement
benefit cost. Midland adopted this standard and all of its required disclosures.

IMPACT OF INFLATION

         We do not consider the impact of the change in prices due to inflation
to be material in the analysis of our overall operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Market risk is the risk that we will incur investment losses due to
adverse changes in market rates and prices. Our market risk exposures are
substantially related to American Modern'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 American Modern will incur economic
losses due to adverse changes in interest rates. The risk arises from many of
American Modern's investment activities, as American Modern invests substantial
funds in interest-sensitive assets. American Modern manages the interest rate
risk inherent in its investment assets relative to the interest rate risk
inherent in its liabilities. One of the measures American Modern 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 4.1 year duration of American Modern's fixed income
portfolio as of December 31, 2003, management estimates that a 100 basis point
increase in interest rates would decrease the market value of its $684.7 million
debt security portfolio by 4.1%, or $28.1 million.

         Equity price risk is the risk that American Modern will incur economic
losses due to adverse changes in a particular stock or stock index. American
Modern's equity exposure consists primarily of declines in the value of its
equity security holdings. As of December 31, 2003, American Modern had $171.1
million in equity holdings, including $69.5 million of U.S. Bancorp common
stock. A 10% decrease in the market value of U.S. Bancorp's common stock would
decrease the fair value of its equity portfolio by approximately $7.0 million.
As of December 31, 2003, the remainder of American Modern's portfolio of equity
securities had a beta coefficient (a measure of stock price volatility) of 1.08.
This means that, in general, if the S&P 500 Index decreases by 10%, management
estimates that the fair value of the remaining equity portfolio will decrease by
10.8%.

         The active management of market risk is integral to American Modern's
operations. American Modern has investment guidelines that define the overall
framework for managing market and other investment risks, including the
accountabilities and controls over these activities.

                                                        THE MIDLAND COMPANY   23

<PAGE>

CONSOLIDATED STATEMENTS OF INCOME

THE MIDLAND COMPANY AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                             Years Ended December 31,
(Amounts in thousands, except per share data  )                                    2003               2002               2001
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                <C>                 <C>
REVENUES:
     Insurance:
      Premiums earned                                                           $ 638,038          $ 577,668           $ 508,233
      Net investment income                                                        32,972             35,455              33,802
      Net realized investment gains (losses)                                        4,566             (6,900)              2,023
      Other insurance income                                                       14,090             13,692              12,883
     Transportation                                                                28,240             23,285              34,826
     Other                                                                            281                508                 484
                                                                                ------------------------------------------------
         Total                                                                    718,187            643,708             592,251
                                                                                ------------------------------------------------

COSTS AND EXPENSES:
     Insurance:
      Losses and loss adjustment expenses                                         392,232            341,015             292,188
      Commissions and other policy acquisition costs                              177,622            169,477             145,777
      Operating and administrative expenses                                        87,714             80,985              80,316
     Transportation operating expenses                                             26,645             22,641              32,898
     Interest expense                                                               3,742              3,849               4,368
                                                                                ------------------------------------------------
         Total                                                                    687,955            617,967             555,547
                                                                                ------------------------------------------------

INCOME BEFORE FEDERAL INCOME TAX AND CUMULATIVE
     EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                                      30,232             25,741              36,704

PROVISION FOR FEDERAL INCOME TAX                                                    6,956              5,437               9,482
                                                                                ------------------------------------------------

INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                  23,276             20,304              27,222

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                                    --             (1,463)                 --

NET INCOME                                                                      $  23,276          $  18,841           $  27,222
                                                                                ================================================
BASIC EARNINGS (LOSSES) PER SHARE OF COMMON STOCK:
     Income Before Cumulative Effect of Change in Accounting Principle          $    1.34          $    1.17           $    1.58
     Cumulative Effect of Change in Accounting Principle                               --              (0.08)                 --
                                                                                ------------------------------------------------
      Total                                                                     $    1.34          $    1.09           $    1.58
                                                                                ================================================

DILUTED EARNINGS (LOSSES) PER SHARE OF COMMON STOCK:
     Income Before Cumulative Effect of Change in Accounting Principle          $    1.30          $    1.14           $    1.51
     Cumulative Effect of Change in Accounting Principle                               --              (0.08)                 --
                                                                                ------------------------------------------------
      Total                                                                     $    1.30          $    1.06           $    1.51
                                                                                ================================================
</TABLE>

See notes to consolidated financial statements.

24   THE MIDLAND COMPANY

<PAGE>

CONSOLIDATED BALANCE SHEETS

THE MIDLAND COMPANY AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                                  December 31,
(Amounts in thousands)                                                                     2003                  2002
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                   <C>
ASSETS

MARKETABLE SECURITIES:
     Fixed income (cost, $643,735 in 2003 and $572,768 in 2002)                        $   671,454           $   600,920
     Equity (cost, $87,998 in 2003 and $91,239 in 2002)                                    174,868               138,838
                                                                                       ---------------------------------
         Total                                                                             846,322               739,758
CASH                                                                                         2,386                 5,975
ACCOUNTS RECEIVABLE--NET                                                                    81,297                91,633
REINSURANCE RECOVERABLES AND PREPAID REINSURANCE PREMIUMS                                   70,990                76,626
PROPERTY, PLANT AND EQUIPMENT--NET                                                          69,328                61,510
DEFERRED INSURANCE POLICY ACQUISITION COSTS                                                 87,873                96,396
OTHER ASSETS                                                                                21,309                18,776
                                                                                       ---------------------------------
         TOTAL ASSETS                                                                  $ 1,179,505           $ 1,090,674
                                                                                       =================================

LIABILITIES AND SHAREHOLDERS' EQUITY

UNEARNED INSURANCE PREMIUMS                                                            $   383,869           $   406,311
INSURANCE LOSS RESERVES                                                                    204,833               164,717
INSURANCE COMMISSIONS PAYABLE                                                               30,522                30,654
FUNDS HELD UNDER REINSURANCE AGREEMENTS AND REINSURANCE PAYABLES                             6,978                 2,977
LONG-TERM DEBT                                                                              62,217                47,163
OTHER NOTES PAYABLE:
     Banks                                                                                  30,000                39,000
     Commercial paper                                                                        3,625                 4,238
                                                                                       ---------------------------------
         Total                                                                              33,625                43,238
DEFERRED FEDERAL INCOME TAX                                                                 47,429                35,642
OTHER PAYABLES AND ACCRUALS                                                                 53,974                51,064
COMMITMENTS AND CONTINGENCIES                                                                   --                    --
SHAREHOLDERS' EQUITY:
     Common stock (issued and outstanding: 17,643 shares at December 31, 2003
      and 17,566 shares at December 31, 2002 after deducting treasury stock
      of 4,213 shares and 4,290 shares, respectively)                                          911                   911
     Additional paid-in capital                                                             23,406                22,516
     Retained earnings                                                                     299,752               279,826
     Accumulated other comprehensive income                                                 73,455                47,573
     Treasury stock (at cost)                                                              (41,442)              (41,605)
     Unvested restricted stock awards                                                          (24)                 (313)
                                                                                       ---------------------------------
         Total                                                                             356,058               308,908
                                                                                       ---------------------------------
         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                    $ 1,179,505           $ 1,090,674
                                                                                       =================================
</TABLE>

See notes to consolidated financial statements.

                                                        THE MIDLAND COMPANY   25

<PAGE>

Consolidated Statements of Changes in Shareholders' Equity

THE MIDLAND COMPANY AND SUBSIDIARIES

<TABLE>
<CAPTION>
(Amounts in thousands)                                    Years Ended December 31, 2003, 2002 and 2001
------------------------------------------------------------------------------------------------------------
                                                                                   ACCUMULATED
                                                          ADDITIONAL                 OTHER
                                                 COMMON    PAID-IN     RETAINED   COMPREHENSIVE    TREASURY
                                                  STOCK    CAPITAL     EARNINGS       INCOME         STOCK
------------------------------------------------------------------------------------------------------------
<S>                                              <C>      <C>          <C>        <C>              <C>
BALANCE, DECEMBER 31, 2000                        $911     $19,838     $239,679   $      54,396    $(30,404)
Comprehensive income:
    Net income                                                           27,222
    Decrease in unrealized gain on
      marketable securities, net of
      related income tax effect of $4,860                                                (8,521)
         Total comprehensive income
Purchase of treasury stock                                                                          (10,900)
Issuance of treasury stock
    for options exercised and
    other employee benefit plans                              (292)                                   2,625
Cash dividends declared                                                  (2,844)
Federal income tax benefit related to the
      exercise or granting of stock awards                     861
Amortization and cancellation of
    unvested restricted stock awards                           (21)                                     (19)
                                                  ----------------------------------------------------------
BALANCE, DECEMBER 31, 2001                         911      20,386      264,057          45,875     (38,698)
Comprehensive income:
    Net income                                                           18,841
    Increase in unrealized gain on
      marketable securities, net of
      related income tax effect of $2,117                                                 3,379
    Other, net of federal income tax of $906                                             (1,681)
         Total comprehensive income

Purchase of treasury stock                                                                           (3,893)
Issuance of treasury stock
    for options exercised and
    other employee benefit plans                               627                                    1,049
Cash dividends declared                                                  (3,072)
Federal income tax benefit related to the
      exercise or granting of stock awards                   1,570
Amortization and cancellation of
    unvested restricted stock awards                           (67)                                     (63)
                                                  ----------------------------------------------------------
BALANCE, DECEMBER 31, 2002                         911      22,516      279,826          47,573     (41,605)
COMPREHENSIVE INCOME:
    NET INCOME                                                           23,276
    INCREASE IN UNREALIZED GAIN ON
      MARKETABLE SECURITIES, NET OF
      RELATED INCOME TAX EFFECT OF $13,601                                               25,237
    OTHER, NET OF FEDERAL INCOME
      TAX OF $347                                                                           645
         TOTAL COMPREHENSIVE INCOME
PURCHASE OF TREASURY STOCK                                                                           (1,133)
ISSUANCE OF TREASURY STOCK
    FOR OPTIONS EXERCISED AND
    OTHER EMPLOYEE BENEFIT PLANS                               714                                    1,301
CASH DIVIDENDS DECLARED                                                  (3,350)
FEDERAL INCOME TAX BENEFIT RELATED TO THE
    EXERCISE OR GRANTING OF STOCK AWARDS                       182
AMORTIZATION AND CANCELLATION OF
    UNVESTED RESTRICTED STOCK AWARDS                            (6)                                      (5)
                                                  ----------------------------------------------------------
BALANCE, DECEMBER 31, 2003                        $911     $23,406     $299,752   $      73,455    $(41,442)
                                                  ==========================================================

<CAPTION>
(Amounts in thousands)                          Years Ended December 31, 2003, 2002 and 2001
--------------------------------------------------------------------------------------------
                                                    UNVESTED
                                                   RESTRICTED                        COMPRE-
                                                     STOCK                           HENSIVE
                                                     AWARDS          TOTAL           INCOME
--------------------------------------------------------------------------------------------
<S>                                                <C>             <C>               <C>
BALANCE, DECEMBER 31, 2000                          $ (1,243)      $283,177
Comprehensive income:
    Net income                                                       27,222          $27,222
    Decrease in unrealized gain on
      marketable securities, net of
      related income tax effect of $4,860                            (8,521)          (8,521)
                                                                                     -------
         Total comprehensive income                                                  $18,701
                                                                                     =======
Purchase of treasury stock                                          (10,900)
Issuance of treasury stock
    for options exercised and
    other employee benefit plans                                      2,333
Cash dividends declared                                              (2,844)
Federal income tax benefit related to the
      exercise or granting of stock awards                              861
Amortization and cancellation of
    unvested restricted stock awards                     588            548
                                                 --------------------------
BALANCE, DECEMBER 31, 2001                              (655)       291,876
Comprehensive income:
    Net income                                                       18,841          $18,841
    Increase in unrealized gain on
      marketable securities, net of
      related income tax effect of $2,117                             3,379            3,379
    Other, net of federal income tax of $906                         (1,681)          (1,681)
                                                                                     -------
         Total comprehensive income                                                  $20,539
                                                                                     =======
Purchase of treasury stock                                           (3,893)
Issuance of treasury stock
    for options exercised and
    other employee benefit plans                                      1,676
Cash dividends declared                                              (3,072)
Federal income tax benefit related to the
      exercise or granting of stock awards                            1,570
Amortization and cancellation of
    unvested restricted stock awards                     342            212
                                                 --------------------------
BALANCE, DECEMBER 31, 2002                              (313)       308,908
COMPREHENSIVE INCOME:
    NET INCOME                                                       23,276          $23,276
    INCREASE IN UNREALIZED GAIN ON
      MARKETABLE SECURITIES, NET OF

      RELATED INCOME TAX EFFECT OF $13,601                           25,237           25,237
    OTHER, NET OF FEDERAL INCOME
      TAX OF $347                                                       645              645
                                                                                     -------
         TOTAL COMPREHENSIVE INCOME                                                  $49,158
                                                                                     =======
PURCHASE OF TREASURY STOCK                                           (1,133)
ISSUANCE OF TREASURY STOCK
    FOR OPTIONS EXERCISED AND
    OTHER EMPLOYEE BENEFIT PLANS                                      2,015
CASH DIVIDENDS DECLARED                                              (3,350)
FEDERAL INCOME TAX BENEFIT RELATED TO THE
    EXERCISE OR GRANTING OF STOCK AWARDS                                182
AMORTIZATION AND CANCELLATION OF
    UNVESTED RESTRICTED STOCK AWARDS                     289            278
                                                 --------------------------
BALANCE, DECEMBER 31, 2003                          $    (24)      $356,058
                                                 ==========================
</TABLE>

See notes to consolidated financial statements.

26   THE MIDLAND COMPANY

<PAGE>

Consolidated Statements of Cash Flows

THE MIDLAND COMPANY AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                              Years Ended December 31,
(Amounts in thousands)                                                              2003                2002                2001
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                                                   $  23,276           $  18,841           $  27,222
     Adjustments to reconcile net income to net cash
        provided by operating activities:
            Depreciation and amortization                                             9,742               8,307               8,324
            Net realized losses (gains) from sale of investments                     (3,767)              6,680                (915)
            Cumulative effect of change in accounting for goodwill                       --               2,250                  --
            Increase in insurance loss reserves                                      40,116              16,043              12,787
            Increase (decrease) in unearned insurance premiums                      (22,442)              2,456              46,670
            Decrease (increase) in net accounts receivable                           10,336              (3,525)            (17,712)
            Decrease (increase) in deferred insurance policy acquisition costs        8,523               4,389              (9,211)
            Decrease (increase) in reinsurance recoverables
                and prepaid reinsurance premiums                                      5,636              (6,831)            (23,765)
            Increase (decrease) in funds held under reinsurance
                agreements and reinsurance payables                                   4,001              (3,320)              3,494
            Decrease (increase) in other assets                                      (2,788)               (805)              6,372
            Increase (decrease) in other accounts payable and accruals                3,535              (9,778)            (13,391)
            Provision (benefit) for deferred federal income tax                      (2,162)              2,828               3,526
            Increase (decrease) in insurance commissions payable                       (132)              3,767               4,706
            Other--net                                                                3,075               1,236                 166
                                                                                  -------------------------------------------------
                Net cash provided by operating activities                            76,949              42,538              48,273
                                                                                  -------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of marketable securities                                             (509,516)           (305,731)           (268,283)
     Sale of marketable securities                                                  333,637             243,363             181,999
     Maturity of marketable securities                                               86,626              58,772              38,549
     Decrease (increase) in cash equivalent marketable securities                    22,089             (34,774)             24,091
     Acquisition of property, plant and equipment                                   (15,019)            (10,667)             (9,735)
     Proceeds from sale of property, plant and equipment                                517                 159                 290
                                                                                  -------------------------------------------------
                Net cash used in investing activities                               (81,666)            (48,878)            (33,089)
                                                                                  -------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Issuance of long-term debt                                                      14,797                  --              10,000
     Increase (decrease) in other notes payable                                      (9,613)              7,716              (9,498)
     Dividends paid                                                                  (3,281)             (3,014)             (2,818)
     Issuance of treasury stock                                                       2,015               1,676               2,333
     Repayment of long-term debt                                                     (1,657)             (1,456)             (1,406)
     Purchase of treasury stock                                                      (1,133)             (3,893)            (10,900)
                                                                                  -------------------------------------------------
                Net cash provided by (used in) financing activities                   1,128               1,029             (12,289)
                                                                                  -------------------------------------------------
NET INCREASE(DECREASE) IN CASH                                                       (3,589)             (5,311)              2,895
CASH AT BEGINNING OF YEAR                                                             5,975              11,286               8,391
                                                                                  -------------------------------------------------
CASH AT END OF YEAR                                                               $   2,386           $   5,975           $  11,286
                                                                                  =================================================
INTEREST PAID                                                                     $   3,528           $   3,852           $   4,178
INCOME TAXES PAID                                                                 $   1,946           $   6,700           $   4,000
</TABLE>

An obligation of $2,649 was incurred when the Company capitalized a lease
related to a certain piece of transportation equipment upon adoption in 2003 of
FASB Interpretation No. 46.

See notes to consolidated financial statements.

                                                        THE MIDLAND COMPANY   27

<PAGE>

Notes to Consolidated Financial Statements

THE MIDLAND COMPANY AND SUBSIDIARIES

Years Ended December 31, 2003, 2002 and 2001

1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The Midland Company (the Company or Midland) operates in two
industries--insurance and transportation with the most significant business
activities being in insurance. Midland's insurance operations are conducted
through its wholly-owned subsidiary, American Modern Insurance Group, Inc.
(American Modern). M/G Transport Services, Inc. and MGT Services, Inc.
(collectively M/G Transport) operates a fleet of dry cargo barges for the
movement of dry bulk commodities such as petroleum coke, ores, barite, sugar and
other cargos primarily on the lower Mississippi River and its tributaries.

         The accounting policies of the Company and its subsidiaries conform to
accounting principles generally accepted in the United States of America. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to use
numerous estimates and assumptions that affect the reported amounts of assets,
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. Share information
has been adjusted for a 2 for 1 stock split effective July 17, 2002. Certain
prior year amounts have been reclassified to conform to current year
presentation.

         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,
convertible 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. At December 31, 2003 and 2002, the market value
of the Company's investment portfolio includes approximately $49.2 million and
$40.5 million, respectively, of convertible securities, some of which contain
embedded derivatives. The embedded derivatives are valued separately and the
change in market value of the embedded derivatives is included in net realized
investment gains and losses on the Consolidated Statements of Income.

         Available-for-sale securities are reviewed quarterly for possible
other-than-temporary impairment. The review includes an analysis of the facts
and circumstances of each individual investment such as the length of time the
fair value has been below cost, the expectation for that security's performance,
the credit worthiness of the issuer and the Company's intent to sell or its
ability to hold the security to maturity. A decline in value that is considered
to be other-than-temporary is recorded as a loss within Net Realized Investment
Loss in the Consolidated Statements of Income.

         PROPERTY AND DEPRECIATION--Property, plant and equipment are recorded
at cost. The Company periodically measures fixed assets for impairment.
Depreciation and amortization are generally calculated over the estimated useful
lives of the respective properties (buildings and equipment - 15 to 35 years,
furniture and equipment - 3 to 7 years, and barges - 20 years). Depreciation
expense recorded in 2003, 2002 and 2001 was (amounts in 000's): $8,956, $8,093
and $7,223, respectively.

         The Company is in the process of developing an information technology
system for its insurance operations. The system is known as modernLINK and its
development began in 2000 and will continue over the next several years. Certain
costs that are directly related with this system are capitalized. As components
of the system are implemented and placed into service, depreciation commences
using the straight-line method of depreciation over a four-year period. As of
December 31, 2003 and 2002, the unamortized balance of modernLINK's software
development costs was $8.8 million and $8.2 million, respectively.

         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 other property and
casualty related coverages, net of premiums ceded to reinsurers, are recognized
as income on a pro-rata basis over the lives of the policies. Credit accident
and health and credit life premiums are recognized as income over the lives of
the policies in proportion to the amount of insurance protection provided. The
Company does not consider anticipated investment income in determining premium
deficiencies (if any) on short-term contracts. Policy acquisition costs,
primarily pre-paid 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 the financial condition
of

28       THE MIDLAND COMPANY

<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

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. If freight services are in process at the end of a
reporting period, an allocation of revenue between reporting periods is made
based on relative transit time in each reporting period with expenses recognized
as incurred.

         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 carrying 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. Generally, the fair value of investments, including embedded
derivatives, 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.

         DERIVATIVE INSTRUMENTS--The Company accounts for its derivatives under
Statement of Financial Accounting Standard ("SFAS")133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. The standard
requires recognition of all derivatives as either assets or liabilities in the
balance sheet and requires measurement of those instruments at fair value
through adjustments to either accumulated other comprehensive income or current
earnings or both, as appropriate. During 2002, the Company entered into a series
of interest rate swaps to convert $30 million of floating rate debt to a fixed
rate. The interest rate swaps were designated as a cash flow hedge and were
deemed to be 100% effective. Thus, the changes in the fair value of the swap
agreements are recorded as a separate component of shareholders' equity and have
no impact on the Consolidated Statements of Income. At December 31, 2003 and
2002, $0.9 million and $1.3 million, respectively, in deferred losses, net of
tax, related to this hedge were recorded in accumulated other comprehensive
income. The Company has recorded the fair value of the interest rate swaps at
December 31, 2003 and 2002 of $1.4 million and $1.9 million, respectively, in
Other Payables and Accruals. For the year ended December 31, 2003, there were no
cash flow hedges that were discontinued related to forecasted transactions
deemed not probable of occurring.

         STOCK OPTION AND AWARD PLANS--Midland 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 (APB) Opinion
No. 25 and its related interpretations. Midland's equity compensation plans are
described more fully in Note 13.

         In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock based compensation and to require prominent disclosures
about the method of accounting for stock based employee compensation and the
effect of the method used on reported results.

         The fair values of the 2003, 2002 and 2001 option grants were estimated
on the date of the grant using the Black Scholes option-pricing model with the
following (weighted average) assumptions:

<TABLE>
<CAPTION>
                                        2003             2002             2001
                                       ----------------------------------------
<S>                                    <C>              <C>              <C>
Fair value of options granted          $ 6.07           $ 7.48           $ 5.69
Dividend yield                            1.1%             1.2%             1.3%
Expected volatility                      31.5%            29.1%            27.6%
Risk free interest rate                   3.6%             4.9%             4.8%
Expected life (in years)                    7                7                7
</TABLE>

         As Midland accounts for stock options using the "intrinsic value", no
compensation cost has been recognized for the stock option plans. Had the
Company accounted for all stock based employee compensation under the fair value
method (SFAS 123), the Company's 2003, 2002 and 2001 net income and earnings per
share would have been reduced to the pro forma amounts indicated below (amounts
in 000's, except per share data):

<TABLE>
<CAPTION>
                                        2003            2002             2001
                                      -----------------------------------------
<S>                                   <C>              <C>              <C>
Net Income as Reported                $23,276          $18,841          $27,222

Deduct: Total stock-based
employee compensation
determined under fair value
based method for all awards,
net of related tax effects                892              700              515
                                      -----------------------------------------
Proforma Net Income                   $22,384          $18,141          $26,707
                                      =========================================
Earnings Per Share
    Basic Shares                       17,417           17,323           17,282
    Diluted Shares                     17,937           17,789           17,991

Earnings per share
    Basic--as reported                $  1.34          $  1.09          $  1.58
    Basic--proforma                      1.29             1.05             1.55

    Diluted--as reported              $  1.30          $  1.06          $  1.51
    Diluted--proforma                    1.25             1.02             1.48
</TABLE>

         Compensation expense in the pro-forma disclosure is not indicative of
future amounts as options vest over several years and additional grants are
generally made each year.

         RECLASSIFICATION OF POLICY SERVICE FEES--American Modern charges a
service fee to those policyholders who elect to pay their insurance premium in
installments. Historically, American Modern treated these fees as a recovery of
processing costs and recorded the fees as an offset to the related operating
expense. American Modern has reclassified these fees in 2003 as revenues for
reporting purposes. This reclassification has no impact on net income, however,
the change adds approximately 1.3 and

                                                        THE MIDLAND COMPANY   29

<PAGE>

Notes to Consolidated Financial Statements (Continued)

THE MIDLAND COMPANY AND SUBSIDIARIES

1.1 percentage points to the combined ratio of the property and casualty
operations for 2002 and 2001, respectively. On a pre-tax basis, these fees
amounted to $7.9 million, $7.0 million and $5.7 million in 2003, 2002 and 2001,
respectively. All prior period data have been reclassified to conform to the
current method of presenting these policy service fees.

         NEW ACCOUNTING STANDARDS-- The Financial Accounting Standards Board
("FASB") issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", in April 2003 and SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity", in May 2003. The adoption of SFAS Nos. 149 and 150 did not have a
material impact on Midland's consolidated financial position or results of
operations.

         On July 1, 2003, Midland adopted the provisions of FASB Interpretation
No. 46 (FIN 46), "Consolidation of Variable Interest Entities." This
interpretation requires variable interest entities to be consolidated by the
primary beneficiary which represents the enterprise that will absorb the
majority of the variable interest entities' expected losses if they occur,
receive a majority of the variable interest entities' residual returns if they
occur, or both. Midland has consolidated a lease arrangement for certain
transportation equipment in which Midland was deemed to be the primary
beneficiary as the Company maintains the majority of the variable interests in
this leased asset (Note 4).

         In December 2003, the FASB issued SFAS No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits - an
amendment of FASB statements No. 87, 88 and 106". The revised statement (SFAS
No. 132(R)) requires additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. SFAS No. 132(R) also requires
interim-period disclosure of components of net pension and other postretirement
benefit cost. Midland adopted this standard and all of its required disclosures
are included in Note 12.

2. MARKETABLE SECURITIES

<TABLE>
<CAPTION>
                                                      THOUSANDS OF DOLLARS
                              --------------------------------------------------------------
                                                     GROSS UNREALIZED
                                                --------------------------           MARKET
       2003                     COST             GAINS             LOSSES            VALUE
--------------------------------------------------------------------------------------------
<S>                           <C>               <C>               <C>               <C>
DEBT SECURITIES:
    GOVERNMENTS               $169,952          $  3,894          $    229          $173,617
    MUNICIPALS                 177,973            10,845               230           188,588
    CORPORATES                 231,275            13,973               534           244,714
    CASH EQUIVALENTS            51,234                --                --            51,234
    OTHER--NOTES
      RECEIVABLE                 6,209                --                --             6,209
    ACCRUED INTEREST             7,092                --                --             7,092
                              --------------------------------------------------------------
          TOTAL                643,735            28,712               993           671,454
                              --------------------------------------------------------------
EQUITY SECURITIES               85,543            87,798               928           172,413
EMBEDDED
    DERIVATIVES                  1,687                --                --             1,687
ACCRUED DIVIDENDS                  768                --                --               768
                              --------------------------------------------------------------
    TOTAL                       87,998            87,798               928           174,868
                              --------------------------------------------------------------
TOTAL MARKETABLE
    SECURITIES                $731,733          $116,510          $  1,921          $846,322
                              ==============================================================
</TABLE>

<TABLE>
<CAPTION>
                                                  Thousands of Dollars
                              --------------------------------------------------------------
                                                      Gross Unrealized
                                                --------------------------           Market
       2002                     Cost             Gains             Losses            Value
--------------------------------------------------------------------------------------------
<S>                           <C>               <C>               <C>               <C>
Debt Securities:
    Governments               $105,208          $  6,146          $     38          $111,316
    Municipals                 162,923            11,214                10           174,127
    Corporates                 216,493            13,717             2,877           227,333
    Cash Equivalents            73,338                --                --            73,338
    Other--Notes
      Receivable                 7,639                --                --             7,639
    Accrued Interest             7,167                --                --             7,167
                              --------------------------------------------------------------
          Total                572,768            31,077             2,925           600,920
                              --------------------------------------------------------------
Equity Securities               89,616            58,182            10,583           137,215
Embedded Derivatives               888                --                --               888
Accrued Dividends                  735                --                --               735
                              --------------------------------------------------------------
    Total                       91,239            58,182            10,583           138,838
                              --------------------------------------------------------------
Total Marketable
    Securities                $664,007          $ 89,259          $ 13,508          $739,758
                              ==============================================================
</TABLE>

         At December 31, 2003 and 2002, the market value of the Company's
investment in the common stock of US Bancorp, which exceeded 10% of the
Company's shareholders' equity, was $73.3 million and $52.2 million,
respectively.

         The following is investment information summarized by investment
category (amounts in 000's):

<TABLE>
<CAPTION>
                                          2003               2002               2001
                                        ----------------------------------------------
<S>                                     <C>                <C>                <C>
Investment Income:
Insurance:
    Interest on Fixed
      Income Securities                 $ 28,515           $ 30,928           $ 30,782
    Dividends on
      Equity Securities                    5,987              5,982              4,564
    Investment Expense                    (1,530)            (1,455)            (1,544)
                                        ----------------------------------------------
Net Insurance
      Investment Income                   32,972             35,455             33,802
Other Investment Income                      138                134                193
                                        ----------------------------------------------
    Total Investment Income             $ 33,110           $ 35,589           $ 33,995
                                        ==============================================
Net Realized
    Investment Gains (Losses):
      Fixed Income:
         Gross Realized Gains           $  8,172           $  6,333           $  2,358
         Gross Realized Losses            (2,487)            (7,659)            (1,687)
                                        ----------------------------------------------
      Equity Securities:
         Gross Realized Gains              3,996              3,414             15,083
         Gross Realized Losses            (5,115)            (8,988)           (13,731)
                                        ----------------------------------------------
      Net Realized Investment
         Gains (Losses)                 $  4,566           $ (6,900)          $  2,023
                                        ==============================================
Change in Unrealized
    Investment Gains (Losses):
      Fixed Income                      $   (433)          $ 15,556           $  6,297
      Equity Securities                   39,271            (10,060)           (19,678)
                                        ----------------------------------------------
Change in Unrealized
    Investment Gains (Losses)           $ 38,838           $  5,496           $(13,381)
                                        ==============================================
</TABLE>

         Other Investment Income is included in Other on the Company's
Consolidated Statements of Income.

30 THE MIDLAND COMPANY

<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

         Included in Net Realized Investment Gains (Losses) for 2003, 2002 and
2001 is the change in the fair value of embedded derivative options of $799,
$(220) and $1,108, respectively. In addition, Net Realized Investment Gains
(Losses) for 2003 and 2002 include other-than-temporary impairment charges of
$(1,898) and of $(4,639), respectively. There were no material impairment
charges in 2001.

         The cost and approximate market value of debt securities held at
December 31, 2003, 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).

<TABLE>
<CAPTION>
                                                               MARKET
                                              COST             VALUE
                                            --------------------------
<S>                                         <C>               <C>
One year or less                            $ 66,890          $ 67,087
After one year through five years            168,872           176,755
After five years through ten years           196,109           209,857
After 10 years                               211,864           217,755
                                            --------------------------
      Total                                 $643,735          $671,454
                                            ==========================
</TABLE>

         The Company's fixed income portfolio primarily consists of high quality
investment grade securities and has an "AA" Standard & Poor's average quality
rating at December 31, 2003. The Company performs quarterly comprehensive
reviews of individual fixed income and equity portfolio holdings that have a
market value less than their respective carrying costs. The Company, with the
assistance of its external professional money managers, applies both
quantitative and qualitative criteria in its evaluation, including facts
specific to each individual investment, including, but not limited to, the
length of time the fair value has been below cost, the extent of the decline,
the Company's intent to hold or sell the security, the expectation for each
security's performance, the credit worthiness and related liquidity of the
issuer and the issuer's business sector.

         The following table shows the Company's investments' gross unrealized
losses and fair value, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2003.

<TABLE>
<CAPTION>
                                                 LESS THAN 12 MONTHS
                                   ---------------------------------------------
                                    FAIR          UNREALIZED            NUMBER
                                    VALUE           LOSSES            SECURITIES
                                   ---------------------------------------------
<S>                                <C>            <C>                 <C>
Governments                        $24,112          $   229               28
Municipals                          10,171              230               10
Corporates                          22,155              417               33
                                   ---------------------------------------------
    Total Debt Securities           56,438              876               71
                                   ---------------------------------------------
Equity Securities                    4,163              206               16
                                   ---------------------------------------------
    Total                          $60,601          $ 1,082               87
                                   =============================================
</TABLE>

<TABLE>
<CAPTION>
                                               12 MONTHS OR MORE
                                --------------------------------------------
                                   FAIR          UNREALIZED         NUMBER
                                  VALUE            LOSSES         SECURITIES
                                --------------------------------------------
<S>                             <C>              <C>              <C>
Governments                        $   --         $    --              --
Municipals                             --              --              --
Corporates                          1,159             117               3
                                   --------------------------------------
    Total Debt Securities           1,159             117               3
                                   --------------------------------------
Equity Securities                   5,670             722              17
                                   --------------------------------------
    Total                          $6,829          $  839              20
                                   ======================================
</TABLE>

<TABLE>
<CAPTION>
                                                     TOTAL
                                   --------------------------------------------
                                    FAIR          UNREALIZED           NUMBER
                                    VALUE           LOSSES           SECURITIES
                                   --------------------------------------------
<S>                                <C>              <C>              <C>
Governments                        $24,112          $   229               28
Municipals                          10,171              230               10
Corporates                          23,314              534               36
                                   --------------------------------------------
    Total Debt Securities           57,597              993               74
                                   --------------------------------------------
Equity Securities                    9,833              928               33
                                   --------------------------------------------
    Total                          $67,430          $ 1,921              107
                                   ============================================
</TABLE>

3. ACCOUNTS RECEIVABLE--NET

         Accounts receivable at December 31, 2003 and 2002 are generally due
within one year and consist of the following (amounts in 000's):

<TABLE>
<CAPTION>
                                          2003            2002
                                        ------------------------
<S>                                     <C>              <C>
Insurance                               $72,548          $79,666
Transportation                            4,104            3,218
Other                                     5,471            9,575
                                        ------------------------
      Total                              82,123           92,459
Less Allowance for Losses                   826              826
                                        ------------------------
      Accounts Receivable--Net          $81,297          $91,633
                                        ========================
</TABLE>

         At December 31, 2003 and 2002, the Company had outstanding receivables
from its largest customer, GreenTree Insurance Agency, Inc. (formerly Conseco
Agency, Inc.) of $4.8 million and $11.1 million, respectively. The amounts owed
from GreenTree were current.

         Other receivables include a federal income tax receivable of $0 and
$5.7 million at December 31, 2003 and 2002, respectively.

4. PROPERTY, PLANT AND EQUIPMENT--NET

         At December 31, 2003 and 2002, property, plant and equipment stated at
original cost consist of the following (amounts in 000's):

<TABLE>
<CAPTION>
                                         2003              2002
                                       --------------------------
<S>                                    <C>               <C>
Land                                   $  1,341          $  1,341
Buildings, Improvements,
    Fixtures, etc.                       66,487            72,737
Transportation Equipment                 45,625            39,992
Software Development                     12,909             9,879
                                       --------------------------
      Total                             126,362           123,949
Less Accumulated Depreciation
    and Amortization                     57,034            62,439
                                       --------------------------
      Property, Plant and
         Equipment--Net                $ 69,328          $ 61,510
                                       ==========================
</TABLE>

         Total rent expense related to the rental of equipment included in the
accompanying Consolidated Statements of Income is (amounts in 000's) $4,889 in
2003, $5,839 in 2002 and $6,589 in 2001. Future rentals under non-cancelable
operating leases are approximately (amounts in 000's): $833-2004; $788-2005;
$793-2006; $776-2007; $602 in 2008 and $3,581-thereafter.

         The Company acquired 30 new and 27 used barges in 2003 at a total cost
of $9.4 million and has committed to acquire 25 used barges in 2004 at a cost of
$0.8 million.

                                                        THE MIDLAND COMPANY   31

<PAGE>

Notes to Consolidated Financial Statements (Continued)

THE MIDLAND COMPANY AND SUBSIDIARIES

         In 2003, the Company adopted the provisions of FASB Interpretation No.
46 (FIN 46), "Consolidation of Variable Interest Entities", and capitalized a
lease related to a certain piece of transportation equipment. The amount
recorded at December 31, 2003 related to this equipment was approximately
$2.3 million. No gain or loss was recognized by the Company upon the adoption of
FIN 46.

5. DEFERRED INSURANCE POLICY ACQUISITION COSTS

         Acquisition costs incurred and capitalized during 2003, 2002 and 2001
amounted to $169.1 million, $165.1 million and $155.0 million, respectively.
Amortization of deferred acquisition costs was $177.6 million, $169.5 million
and $145.8 million for 2003, 2002 and 2001, respectively.

6. GOODWILL

         On January 1, 2002 Midland adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 changed the accounting for goodwill from an
amortization method to the impairment approach. Upon the adoption of the
statement, Midland ceased amortizing goodwill, including goodwill recorded from
past business combinations. As a result of the initial impairment test, Midland
recorded an impairment charge of $(1.5)million, net of tax of $787,000, or
$(0.08) per share (diluted), in its Other Insurance segment in the first quarter
of 2002. This charge is reported separately in the income statement as a
Cumulative Effect of Change in Accounting Principle. The fair value of that
reporting unit was estimated using the expected present value of future cash
flows. There were no additional impairment charges incurred in 2002 or 2003 as a
result of the Company's impairment review. As of December 31, 2003, the
remaining goodwill balance, all of which is attributable to the Other Insurance
segment, was $2.1 million and is included in Other Assets.

         Illustrated below is what reported net income would have been exclusive
of amortization expense related to goodwill had the standard been adopted
effective January 1, 2001 (amounts in 000's except per share data):

<TABLE>
<CAPTION>
                                         2003                 2002               2001
                                      --------------------------------------------------
<S>                                   <C>                 <C>                 <C>
Reported net income                   $   23,276          $   18,841          $   27,222
Add back goodwill
    amortization, net of tax                  --                  --                 383
                                      --------------------------------------------------
Adjusted net income                   $   23,276          $   18,841          $   27,605
                                      ==================================================
Basic earnings per share:
    Reported net income               $     1.34          $     1.09          $     1.58
    Goodwill amortization                     --                  --                0.02
                                      --------------------------------------------------
Adjusted earnings per share                 1.34          $     1.09          $     1.60
                                      ==================================================
Diluted earnings per share:
    Reported net income               $     1.30          $     1.06          $     1.51
    Goodwill amortization                     --                  --                0.02
                                      --------------------------------------------------
Adjusted earnings per share           $     1.30          $     1.06          $     1.53
                                      ==================================================
</TABLE>

         The Company has no other intangible assets subject to the provisions of
SFAS No. 142.

7. NOTES PAYABLE TO BANKS

         At December 31, 2003 and 2002, the Company had conventional lines of
credit with commercial banks of $75 million and $69 million, respectively. The
lines of credit in use under these agreements at December 31, 2003 and 2002
amounted to $30 million and $39 million, respectively. Borrowings under these
lines of credit constitute senior debt. Annual commitment fees of $71,000 are
currently paid to the lending institutions to maintain these credit agreements.

         The aforementioned notes payable, together with outstanding commercial
paper, had weighted average interest rates of 1.47% and 1.97% at December
31, 2003 and 2002, respectively.

8. LONG-TERM DEBT

         Long-term debt at December 31, 2003 and 2002 is summarized as follows
(amounts in 000's):

<TABLE>
<CAPTION>
                                                          2003           2002
                                                       -------------------------
<S>                                                    <C>           <C>
Equipment Obligations, Due Through--
     *9.19%           June 20, 2007                    $   1,914     $        --
      6.50%           October 31, 2003                        --             700
      5.12%           December 11, 2008                    1,300              --
      4.89%           August 13, 2008                      7,350              --
Mortgage Notes, Due Through--

      6.83%           December 20, 2005                   15,653          16,463
Unsecured Notes Under a
    $72 million Credit Facility--

    **5.57%           December 1, 2005                    30,000          30,000
      2.17%           December 1, 2005                     6,000              --
                                                       -------------------------
    Total Obligations                                     62,217          47,163
    Current Maturities                                     1,574           1,510
                                                       -------------------------
      Non Current Portion                              $  60,643     $    45,653
                                                       =========================
</TABLE>

*  This obligation relates to the Company's consolidation of a lease upon
   the adoption in 2003 of FASB Interpretation No. 46 (Note 4).

** In 2002, an interest rate swap agreement was entered into with a
   consortium of three banks. This agreement fixed the interest rate of
   this credit facility at 5.57% for the term of the agreement. The fair
   value of this agreement as of December 31, 2003 and 2002 was $(1.4) and
   $(1.9)million, respectively, and is included in Other Payables and
   accruals.

         Equipment and real estate obligations are collateralized by
transportation equipment and real estate with a net book value of $35,048 at
December 31, 2003.

         The aggregate amount of repayment requirements on long- term debt for
the five years subsequent to 2003 are (amounts in 000's): 2004 - $1,574;
2005 - $51,532; 2006 - $782; 2007 - $2,735 and 2008 - $5,594.

         At December 31, 2003 and 2002, the carrying value of the Company's
long-term debt, excluding the fair value of the interest rate swap agreement
disclosed separately above, approximated its fair value.

32    THE MIDLAND COMPANY
<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

9. FEDERAL INCOME TAX

         The provision for federal income tax is summarized as follows (amounts
in 000's):

<TABLE>
<CAPTION>
                                        2003             2002             2001
                                      ------------------------------------------
<S>                                   <C>               <C>              <C>
Current provision                     $ 9,118           $ 2,609          $ 5,956
Deferred provision (benefit)           (2,162)            2,828            3,526
                                      ------------------------------------------
      Total                           $ 6,956           $ 5,437          $ 9,482
                                      ==========================================
</TABLE>

         The federal income tax provision for the years ended December 31, 2003,
2002 and 2001 is different from amounts derived by applying the statutory tax
rates to income before federal income tax as follows (amounts in 000's):

<TABLE>
<CAPTION>
                                    2003               2002               2001
                                  ----------------------------------------------
<S>                               <C>                <C>                <C>
Federal income tax at
    statutory rate                $ 10,581           $  9,009           $ 12,846
Tax effect of:
    Tax exempt interest
      and excludable
      dividend income               (3,762)            (3,925)            (3,672)
    Other--net                         137                353                308
                                  ----------------------------------------------
    Provision for
      federal income tax          $  6,956           $  5,437           $  9,482
                                  ==============================================
</TABLE>

         Significant components of the Company's net deferred federal income tax
liability are summarized as follows (amounts in 000's):

<TABLE>
<CAPTION>
                                          2003             2002
                                         ------------------------
<S>                                      <C>              <C>
Deferred tax liabilities:
    Deferred insurance policy
      acquisition costs                  $27,592          $30,851
    Unrealized gain on
      marketable securities               39,538           25,590
    Accelerated depreciation               9,591            8,596
    Other                                  3,605            3,808
                                         ------------------------
      Sub-total                           80,326           68,845
                                         ------------------------

Deferred tax assets:
    Unearned insurance premiums           23,028           23,661
    Pension expense                          636              579
    Insurance loss reserves                4,377            3,915
    Other                                  4,856            5,048
                                         ------------------------
      Sub-total                           32,897           33,203
                                         ------------------------
Deferred federal income tax              $47,429          $35,642
                                         ========================
</TABLE>

         For 2003, 2002 and 2001, $182, $1,570 and $861, respectively, 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, is as follows (amount in 000's):

<TABLE>
<CAPTION>
                                  WRITTEN PREMIUM
                 -------------------------------------------------
2003                P&C            LIFE & OTHER           TOTAL
                 -------------------------------------------------
<S>              <C>               <C>                   <C>
DIRECT           $ 614,471           $  16,388           $ 630,859
ASSUMED             49,240                  (7)             49,233
CEDED              (47,002)             (4,443)            (51,445)
                 -------------------------------------------------
NET              $ 616,709           $  11,938           $ 628,647
                 =================================================
</TABLE>

<TABLE>
<CAPTION>
                                  EARNED PREMIUM
                 -------------------------------------------------
2003                P&C            LIFE & OTHER            TOTAL
                 -------------------------------------------------
<S>              <C>               <C>                   <C>
DIRECT           $ 607,160           $  37,371           $ 644,531
ASSUMED             56,166                  18              56,184
CEDED              (39,355)            (23,322)            (62,677)
                 -------------------------------------------------
NET              $ 623,971           $  14,067           $ 638,038
                 =================================================
</TABLE>

<TABLE>
<CAPTION>
                                  Written Premium
                 -------------------------------------------------
2002                P&C            Life & Other            Total
                 -------------------------------------------------
<S>              <C>               <C>                   <C>
Direct           $ 525,188           $  40,368           $ 565,556
Assumed             67,061               2,404              69,465
Ceded              (30,734)            (30,949)            (61,683)
                 -------------------------------------------------
Net              $ 561,515           $  11,823           $ 573,338
                 =================================================
</TABLE>

<TABLE>
<CAPTION>
                                  Earned Premium
                 -------------------------------------------------
2002                P&C             Life & Other           Total
                 -------------------------------------------------
<S>              <C>                <C>                  <C>
Direct           $ 516,532           $  31,245           $ 547,777
Assumed             82,362                 616              82,978
Ceded              (33,218)            (19,869)            (53,087)
                 -------------------------------------------------
Net              $ 565,676           $  11,992           $ 577,668
                 =================================================
</TABLE>

<TABLE>
<CAPTION>
                                  Written Premium
                 -------------------------------------------------
2001               P&C             Life & Other            Total
                 -------------------------------------------------
<S>              <C>               <C>                   <C>
Direct           $ 472,989           $  37,171           $ 510,160
Assumed             84,864               4,025              88,889
Ceded              (34,748)            (25,313)            (60,061)
                 -------------------------------------------------
Net              $ 523,105           $  15,883           $ 538,988
                 =================================================
</TABLE>

<TABLE>
<CAPTION>
                                   Earned Premium
                 -------------------------------------------------
2001                P&C            Life & Other            Total
                 -------------------------------------------------
<S>              <C>               <C>                   <C>
Direct           $ 455,253           $  23,968           $ 479,221
Assumed             70,428               1,150              71,578
Ceded              (28,462)            (14,104)            (42,566)
                 -------------------------------------------------
Net              $ 497,219           $  11,014           $ 508,233
                 =================================================
</TABLE>

         The amounts of recoveries pertaining to property and casualty
reinsurance contracts that were deducted from losses incurred during 2003, 2002
and 2001 were (amounts in 000's): $23,151, $10,317 and $16,146, respectively.

                                                        THE MIDLAND COMPANY   33

<PAGE>

Notes to Consolidated Financial Statements (Continued)

THE MIDLAND COMPANY AND SUBSIDIARIES

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):

<TABLE>
<CAPTION>
                                    2003              2002                2001
                                 ------------------------------------------------
<S>                              <C>                <C>                 <C>
Balance at January 1             $ 131,703          $ 122,167           $ 111,742
    Less reinsurance
      recoverables                  16,119             19,309              16,720
                                 ------------------------------------------------
Net balance
    at January 1                   115,584            102,858              95,022
                                 ------------------------------------------------

Incurred related to:
    Current year                   374,580            343,600             291,502
    Prior years                     12,031             (8,371)             (4,179)
                                 ------------------------------------------------
Total incurred                     386,611            335,229             287,323
                                 ------------------------------------------------
Paid related to:
    Current year                   281,731            268,343             226,853
    Prior years                     70,986             54,160              52,634
                                 ------------------------------------------------
Total paid                         352,717            322,503             279,487
                                 ------------------------------------------------
Net balance at
    December 31                    149,478            115,584             102,858
    Plus reinsurance
      recoverables                  20,453             16,119              19,309
                                 ------------------------------------------------
Balance at December 31           $ 169,931          $ 131,703           $ 122,167
                                 ================================================
</TABLE>

<TABLE>
<CAPTION>
                                   2003               2002                2001
                                 ------------------------------------------------
<S>                              <C>                <C>                 <C>
Property and Casualty
    Gross Loss Reserves          $ 169,931          $ 131,703           $ 122,167
Life and Other
    Gross Loss Reserves             12,147             11,214               7,658
Outstanding Checks
    and Drafts                      22,755             21,800              18,849
                                 ------------------------------------------------
Consolidated Gross
    Loss Reserves                $ 204,833          $ 164,717           $ 148,674
                                 ================================================
</TABLE>

         Loss reserves, net of reinsurance, for Life and Other totaled
$6.8 million, $6.3 million and $4.7 million at December 31, 2003, 2002 and 2001
respectively.

12. BENEFIT PLANS

         The Company has a qualified defined benefit pension plan which provides
for the payment of annual benefits to participants upon retirement. Such
benefits are based on years of service and the participant'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
requirements. 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. During 2000, the participants of the qualified pension plan were given a
one-time election to opt out of the qualified pension plan and enroll in a
qualified self-directed defined contribution retirement plan. All employees
hired subsequent to that election are automatically enrolled in the qualified
self-directed defined contribution retirement plan. The Company contributed
$2.0 million, $1.8 million and $1.6 million to the qualified self-directed
retirement plan for the years 2003, 2002 and 2001, respectively.

         The Company has a qualified 401(k) savings plan and a funded
non-qualified savings plan. The Company contributed (amounts in 000's) $960,
$908 and $876 to the qualified 401(k) savings plan and $211, $182 and $225 to
the non-qualified savings plan for the years 2003, 2002 and 2001, respectively.

         The Company also has an unfunded non-qualified defined benefit pension
plan.

         The Company uses a measurement date of December 31 for its pension
plans.

         The following tables include amounts related to both the qualified and
non-qualified pension plans (amounts in 000's except for percentages):
<TABLE>
<CAPTION>
                                                    2003               2002
                                                  ---------------------------
<S>                                               <C>                <C>
Change in benefit obligation:
Benefit obligation at beginning of year           $ 21,638           $ 17,889
Service cost                                           757                714
Interest cost                                        1,455              1,394
Actuarial loss                                         696              2,375
Benefits paid                                         (830)              (734)
                                                  ---------------------------
Benefit obligation at end of year
    (accumulated benefit obligation of
    $19,031 and $17,455, respectively)            $ 23,716           $ 21,638
                                                  ===========================
Change in plan assets:
Fair value of plan assets
    at beginning of year                          $ 16,504           $ 15,245
Actual return on plan assets                         2,455             (1,580)
Employer contributions                                 586              3,573
Benefits paid                                         (830)              (734)
                                                  ---------------------------
Fair value of plan assets at end of year          $ 18,715           $ 16,504
                                                  ===========================

Funded status:
Funded status at end of year                      $ (5,001)          $ (5,134)
Unrecognized net actuarial loss                      4,756              4,992
Unrecognized prior service cost                        364                395
Unrecognized net transition
    obligation (asset)                                 (72)              (167)
                                                  ---------------------------
Prepaid benefit cost                              $     47           $     86
                                                  ===========================

Amounts recognized in
  the Consolidated Balance Sheets
  consist of:
Prepaid benefit cost                              $    495           $    342
Accrued benefit cost                                  (448)              (256)
Additional minimum liability                          (168)            (1,037)
Intangible asset                                         7                395
Accumulated other
    comprehensive income                               161                642
                                                  ---------------------------
Net amount recognized at end of year              $     47           $     86
                                                  ===========================
</TABLE>

34    THE MIDLAND COMPANY

<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                    2003              2002              2001
                                   -------------------------------------------
<S>                                <C>               <C>               <C>
Components of net periodic
    benefit cost:
Service cost                       $   757           $   714           $   609
Interest cost                        1,455             1,395             1,229
Expected return on assets           (1,575)           (1,503)           (1,244)
Amortization of:
    Transition asset                   (96)              (96)              (95)
    Prior service cost                  31                31                32
    Actuarial (gain)/loss               53                30                --
                                   -------------------------------------------
Net periodic benefit cost              625               571               531
Settlement credit                       --                --              (813)
                                   -------------------------------------------
Total net periodic
    benefit cost (credit)          $   625           $   571           $  (282)
                                   ===========================================
</TABLE>

         The assumptions used relative to the plans are evaluated annually and
updated as necessary. The discount rate assumption is based on the Moody's AA
rate. The expected long-term rate of return assumption was based on actuarial
recommendations, economic conditions and the historical performance of the
plan's investment portfolio over the past ten years.

<TABLE>
<CAPTION>
                                        2003           2002           2001
                                        ----------------------------------
<S>                                     <C>            <C>            <C>
Assumptions:
Weighted average assumptions:
    For disclosure:
      Discount rate                     6.00%          6.75%          7.25%
      Rate of compensation
         increase                       4.00%          4.25%          4.25%

    For measuring net periodic
      pension cost:
         Discount rate                  6.75%          7.25%          7.75%
         Rate of compensation
            increase                    4.25%          4.25%          4.25%

         Expected return
            on plan assets              8.00%          9.40%          9.40%
</TABLE>

         Plan assets consist primarily of equity and fixed income securities
managed by non-affiliated professional investment managers. No plan assets are
invested in either real estate or the Company's stock. The following table
reflects the asset allocations at fair value related to plan assets in 2003 and
2002:

<TABLE>
<CAPTION>
                                       Weighted average
                                       asset allocation
                                      ------------------
                                      2003          2002
                                      ------------------
<S>                                   <C>           <C>
Total equity securities                 62%           39%
Total fixed income securities           37%           58%
Cash and cash equivalents                1%            3%
                                      ------------------
      Total                            100%          100%
                                      ==================
</TABLE>

         The primary objective for the investment of plan assets is the
preservation of capital with an emphasis on long-term growth without undue
exposure to risk. Targeted allocations are 50% to 80% for equities and 20% to
50% for fixed income securities.

      At December 31, 2003 and 2002, pension plans with a projected benefit
obligation in excess of plan assets and an accumulated benefit obligation in
excess of plan assets were as follows (in 000's):

<TABLE>
<CAPTION>
                                                    Projected
                                                Benefit Obligation
                                             Exceeds the Fair Value
                                                 of Plan Assets
                                            ------------------------
                                             2003             2002
                                            ------------------------
<S>                                         <C>              <C>
QUALIFIED AND NON-QUALIFIED
    PENSION PLANS:
      Projected benefit obligation          $23,716          $21,638
      Fair value of plan assets              18,715           16,504
</TABLE>

<TABLE>
<CAPTION>
                                                Accumulated
                                            Benefit Obligation
                                          Exceeds the Fair Value
                                              of Plan Assets
                                          ----------------------
                                            2003          2002
                                          ----------------------
<S>                                         <C>           <C>
NON-QUALIFIED PENSION PLAN:
    Accumulated benefit obligation          $616          $288
    Fair value of plan assets                 --            --
</TABLE>

         In 2003, the accumulated benefit obligation of the qualified defined
benefit pension plan did not exceed the fair value of plan assets. As of
December 31, 2002, the accumulated benefit obligation and fair value of plan
assets for the qualified defined benefit pension plan was (amounts in 000's):
$17,167 and $16,504, respectively.

         The Company prepaid its required cash contribution of $0.6 million for
the 2003 plan year in December 2003 and anticipates no further cash
contributions until 2005. The Company's expected pension benefit payments, which
reflect expected future service, for the next ten years are as follows (amounts
in 000's): 2004 -- $990; 2005 -- $1,010; 2006 -- $1,023; 2007 -- $1,164; 2008 --
$1,230; 2009 through 2013 -- $7,360.

         At December 31, 2003 and 2002, the Company's additional minimum pension
liabilities were $0.2 million and $1.0 million, respectively. Related to these
actuarily determined minimum pension liabilities, comprehensive income was
reduced by $0.1 million and $0.4 million, net of deferred federal income taxes,
at December 31, 2003 and 2002, respectively.

                                                        THE MIDLAND COMPANY   35

<PAGE>

Notes to Consolidated Financial Statements (Continued)

THE MIDLAND COMPANY AND SUBSIDIARIES

13. STOCK OPTIONS AND AWARD PLANS

         Midland's equity compensation plans include plans for restricted stock,
performance shares and non-qualified stock options.

         The Company implemented a restricted stock award program during 1993.
Under this program, restricted 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 other rights of
outstanding shares. In 2002, 325,000 shares were distributed under this program
relating to the 1997 grant. At December 31, 2003, 202,000 restricted stock
awards are outstanding which relate to the 1999 grant. The value of the awards
is being charged to compensation expense over a five-year vesting period.

         In 2000, the Company established a performance stock award program.
Under this program, shares vest after a three-year performance measurement
period and will only be awarded if pre-established performance levels have been
achieved. Shares are awarded at no cost and the recipient must have been
employed throughout the entire three-year performance period. In 2003, 28,000
shares were issued under this program, 26,000 shares have been earned and are
scheduled for distribution in 2004, and a maximum of 72,000 and 92,000 shares
could potentially be issued in 2005 and 2006, respectively, related to this
program. The expected value of these awards is charged to compensation expense
over the performance period.

         Under the Company's stock option plans, all of the outstanding stock
options at December 31, 2003 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. Of these stock options, 552,000 were exercisable at December 31,
2003, 215,000 options become exercisable in 2004, 154,000 options become
exercisable in 2005, 107,000 options become exercisable in 2006 and 63,000
options become exercisable in 2007. A summary of stock option transactions
follows:

<TABLE>
<CAPTION>
                                   2003                             2002                             2001
                         -----------------------------------------------------------------------------------------
                                           WTD.                             Wtd.                             Wtd.
                                           AVG.                             Avg.                             Avg.
                         (000's)          OPTION          (000's)          Option          (000's)          Option
                         SHARES            PRICE          Shares           Price           Shares            Price
                         -----------------------------------------------------------------------------------------
<S>                     <C>               <C>             <C>              <C>             <C>              <C>
Outstanding,
    beginning
    of year                 877           $14.85             747           $12.83             766           $ 8.78
Exercised                   (60)           10.26             (52)           10.24            (262)            4.72
Forfeited                   (17)           15.31             (46)           16.65             (23)           13.85
Granted                     291            17.23             228            20.78             266            16.60
                         ------                              ---                             ----
Outstanding,
    end of year           1,091           $15.73             877           $14.85             747           $12.83
                         =========================================================================================
Exercisable,
    end of year             552           $14.16             417           $12.76             312           $11.24
                         =========================================================================================
</TABLE>

         Information regarding such outstanding options at December 31, 2003
follows:

<TABLE>
<CAPTION>
                                 OUTSTANDING
        REMAINING                  OPTIONS
          LIFE                     (000's)         PRICE
---------------------------------------------------------
<S>                              <C>               <C>
One year                               18          $ 8.46
Three years                            18            6.32
Five years                             48           13.05
Six years                             286           11.38
Seven years                           226           16.60
Eight years                           207           20.78
Nine years                            288           17.23
                                    -----
    Total outstanding               1,091
                                    =====
    Weighted average price                         $15.73
                                                   ======
</TABLE>

         At December 31, 2003, options exercisable have exercise prices between
$6.32 and $20.78 and an average contractual life of approximately 6.4 years.

         At December 31, 2003, 1,963,000 common shares are authorized for future
option award or stock grants.

14. EARNINGS PER SHARE

         The following table is a reconciliation of the number of shares used to
compute Basic and Diluted earnings per share. Share information has been
adjusted for a 2 for 1 stock split effective July 17, 2002. No adjustments are
necessary to the income used in the Basic or Diluted calculations for the years
ended December 31, 2003, 2002 or 2001.

<TABLE>
<CAPTION>
                                                SHARES IN 000's
                                                ---------------
                                       2003            2002            2001
                                       ----            ----            ----
<S>                                   <C>             <C>             <C>
Shares used in basic
    EPS calculation (average
    shares outstanding)               17,417          17,323          17,282
Effect of dilutive
    stock options                        266             252             229
Effect of dilutive
    restricted stock grants              162             147             384
Effect of dilutive
    performance stock awards              92              67              96
                                      --------------------------------------
Shares used in diluted
    EPS calculation                   17,937          17,789          17,991
                                      ======================================
</TABLE>

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, results of
operations or cash flows. The Company also has credit exposure with customers,
generally in the form of premiums receivable. Management monitors these
exposures on a regular basis. However, as collectibility of such receivables is
dependent upon the financial stability of the customers, the Company cannot
assure collections in full. Where appropriate, the Company has provided a
reserve for such exposures.

36       THE MIDLAND COMPANY

<PAGE>

THE MIDLAND COMPANY AND SUBSIDIARIES

16. SHAREHOLDER'S EQUITY

         The Company has 40,000,000 shares of common stock authorized for
issuance without par value (stated value of $.042 a share). The Company also has
1,000,000 shares of preferred stock authorized, without par value, none of which
have been issued.

         In January 2001, the Company's Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's common stock and 414,000
of these shares had been repurchased as of December 31, 2003.

         The change in accumulated other comprehensive income was comprised of
changes related to the unrealized gains and losses on investments, the fair
value of interest rate swaps and additional minimum pension liability as follows
(amounts in 000's):

<TABLE>
<CAPTION>
                                             2003               2002              2001
                                           ----------------------------------------------
<S>                                        <C>                <C>                <C>
Unrealized holding
    gains (losses) on securities
    arising during the period              $ 28,205           $ (1,404)          $(11,358)
Reclassification adjustment:
    Impact of net
      realized loss (gain)                   (4,566)             6,900             (2,023)
Income taxes on above                         1,598             (2,117)             4,860
                                           ----------------------------------------------
Change in unrealized gains
    (losses) on securities, net              25,237              3,379             (8,521)
                                           ----------------------------------------------
Fair value of interest rate swaps               511             (1,945)                --
Income taxes on above                          (179)               681                 --
                                           ----------------------------------------------
Change in interest
    rate swaps, net                             332             (1,264)                --
                                           ----------------------------------------------
Additional Pension Liability                    481               (642)                --
Income Taxes                                   (168)               225                 --
                                           ----------------------------------------------
Change in additional
    pension liability, net                      313               (417)                --
                                           ----------------------------------------------
Net increase (decrease)
    in accumulated other
    comprehensive income                   $ 25,882           $  1,698           $ (8,521)
                                           ==============================================
</TABLE>

         The insurance subsidiaries are subject to state regulations which limit
by reference to statutory net 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 2004 without regulatory approval total
approximately (amounts in 000's): $32,426; such subsidiaries paid cash dividends
of $5,000 in 2003, $8,900 in 2002 and $15,000 in 2001.

         Net income as determined in accordance with statutory accounting
practices, which differ in certain respects from accounting principles generally
accepted in the United States of America, for the Company's insurance
subsidiaries was (amounts in 000's): $34,518, $20,809 and $18,231 for 2003, 2002
and 2001, respectively. Statutory surplus was (amounts in 000's): $289,915 and
$242,207 at December 31, 2003 and 2002, respectively.

17. RELATED PARTY TRANSACTIONS

         The Company has a commercial paper program under which qualified
purchasers may invest in the short-term unsecured notes of Midland. Many of the
investors in this program are executive officers and directors of the Company.
Total commercial paper debt outstanding at December 31, 2003 and 2002 was $3.6
million and $4.2 million, respectively, of which $3.0 million and $3.8 million
at those respective dates represented notes held either directly or indirectly
by the executive officers and directors of the Company. The effective annual
yield paid to all participants in this program was 1.0% as of December 31, 2003,
a rate that is considered to be competitive with the market rate for similar
instruments.

18. SUBSEQUENT EVENT

         On February 5, 2004, the Company sold 1,150,000 shares of its common
stock pursuant to an approved universal shelf registration statement previously
filed with the Securities and Exchange Commission on October 21, 2003. The net
proceeds derived from the sale of $25.1 million, will be used to increase the
capital and surplus of the Company's insurance subsidiaries to fund future
growth and for other general corporate purposes.

19. 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, motorcycle and watercraft insurance,
as well as physical damage 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.

                                                        THE MIDLAND COMPANY   37

<PAGE>

Notes to Consolidated Financial Statements (Continued)

THE MIDLAND COMPANY AND SUBSIDIARIES

         Listed below is financial information required to be reported for each
industry segment. Certain amounts are allocated and certain amounts are not
allocated (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, 2003, 2002 and 2001
(amounts in 000's):

<TABLE>
<CAPTION>
                                 MANUFACTURED                 UNALLOCATED                   CORPORATE
                                   HOUSING       OTHER         INSURANCE                      AND ALL    INTERSEGMENT
                                  INSURANCE     INSURANCE       AMOUNTS    TRANSPORTATION      OTHER      ELIMINATION      TOTAL
-----------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>           <C>            <C>          <C>             <C>           <C>            <C>
2003
REVENUES--EXTERNAL CUSTOMERS     $   329,144   $   322,984                   $    28,240   $        143                 $   680,511
NET INVESTMENT INCOME                 18,285        14,716    $       185              2            138   $      (216)       33,110
NET REALIZED INVESTMENT GAINS            N/A           N/A          4,566                                                     4,566
INTEREST EXPENSE                         N/A           N/A          2,124            423          1,952          (757)        3,742
DEPRECIATION AND AMORTIZATION          3,224         3,164                         2,224          1,130                       9,742
INCOME BEFORE TAXES                   38,926        (7,669)           626          1,270         (2,921)                     30,232
INCOME TAX EXPENSE                       N/A           N/A          7,835            455         (1,334)                      6,956
ACQUISITION OF FIXED ASSETS              N/A           N/A          5,355          9,644             20                      15,019
IDENTIFIABLE ASSETS                      N/A           N/A      1,106,541         30,990         66,069       (24,095)    1,179,505

2002
Revenues--External customers     $   329,402   $   261,958                   $    23,285    $       374                 $   615,019
Net investment income                 19,457        15,803    $       485             25            134  $       (315)       35,589
Net realized investment
 gains (losses)                          n/a           n/a         (6,900)                                                   (6,900)
Interest expense                         n/a           n/a          2,124            215          2,479          (969)        3,849
Depreciation and amortization          3,093         2,462                         1,627          1,125                       8,307
Income before taxes                   21,048        13,612         (7,541)           464         (1,842)                     25,741
Income tax expense                       n/a           n/a          5,939            168           (670)                      5,437
Change in accounting principle                      (1,463)                                                                  (1,463)
Acquisition of fixed assets              n/a           n/a         10,598                            69                      10,667
Identifiable assets                      n/a           n/a      1,021,572         22,469         63,425       (16,792)    1,090,674

2001
Revenues--External customers     $   321,887   $   199,229                      $ 34,826   $        291                 $   556,233
Net investment income                 20,562        14,042    $         7              5            193   $      (814)       33,995
Net realized investment gains            n/a           n/a          2,023                                                     2,023
Interest expense                         n/a           n/a          2,081            260          3,580        (1,553)        4,368
Depreciation and amortization          2,274         1,409            590          2,304          1,747                       8,324
Income before taxes                   29,758         8,010            910          1,673         (3,647)                     36,704
Income tax expense                       n/a           n/a         10,205            594         (1,317)                      9,482
Acquisition of fixed assets              n/a           n/a          9,515             12            208                       9,735
Identifiable assets                      n/a           n/a        987,149         24,952         56,670       (14,829)    1,053,942
</TABLE>

         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.
Intersegment revenues were not significant for 2003, 2002 or 2001.

         In September 2001, American Modern announced that it was exiting the
commercial liability line of coverages that have been provided to manufactured
home parks and dealerships. The commercial liability coverages are included as
part of the Other Insurance Segment. The net earned premium related to the
commercial liability was (amounts in 000's): $197, $11,290 and $17,587 for 2003,
2002 and 2001, respectively.

         No single customer contributed in excess of 10% of consolidated
revenues in 2003. In 2002 and 2001, revenues from one customer, GreenTree, which
exceeded 10% of consolidated revenues, amounted to (amounts in 000's): $78,643
and $80,674, respectively.

38   THE MIDLAND COMPANY
<PAGE>

Independent Auditor's Report

THE MIDLAND COMPANY AND SUBSIDIARIES

[DELOITTE LOGO]

Cincinnati, Ohio

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, 2003 and 2002, 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, 2003.
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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America.

         As discussed in Note 6, the Company adopted Statement of Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," effective January 1,
2002.

/s/ DELOITTE & TOUCHE LLP.
--------------------------

February 24, 2004

Management's Report

To the Shareholders of The Midland Company:

         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 accounting principles
generally accepted in the United States of America. They necessarily include
amounts that are based on management's best estimates and judgments. Other
financial information contained in this annual report is presented on a basis
consistent with the financial statements.

      In order to maintain the integrity, objectivity and fairness of data in
these financial statements, the Company has developed and maintains
comprehensive internal control which is supplemented by a program of internal
audits. Management believes that the Company's internal control 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,
Independent Auditors, in accordance with auditing standards generally accepted
in the United States of America, 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.

/s/ John W. Hayden                        /s/ John I. VonLehman
------------------                        ---------------------
John W. Hayden                            John I. VonLehman
President and                             Executive Vice President,
Chief Executive Officer                   Chief Financial Officer
                                          and Secretary

                                                        THE MIDLAND COMPANY   39

<PAGE>

Quarterly Data (unaudited)

THE MIDLAND COMPANY AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                            2003
-----------------------------------------------------------------------------------------------
(Amounts in thousands,           FIRST            SECOND            THIRD           FOURTH
except per share data)          QUARTER          QUARTER           QUARTER          QUARTER
-----------------------------------------------------------------------------------------------
<S>                          <C>              <C>               <C>              <C>
Revenues(a)                  $      169,288   $      178,642    $      184,222   $      186,035
                             ==================================================================
Net income (loss)            $       10,049   $       (1,017)   $        4,289   $        9,955
                             ==================================================================
Basic earnings (loss)
  per common share           $          .58   $         (.06)   $          .25   $          .57
                             ==================================================================
Diluted earnings (loss)
  per common share           $          .56   $         (.06)   $          .23   $          .56
                             ==================================================================
Dividends per common share   $        .0475   $        .0475    $        .0475   $        .0475
                             ==================================================================
Price range of
  common stock (Nasdaq):
    High                     $        20.30   $        23.70    $        24.30   $        23.62
                             ==================================================================
    Low                      $        16.20   $        17.17    $        20.57   $        20.30
                             ==================================================================

<CAPTION>
                                                             2002
--------------------------------------------------------------------------------------------------
(Amounts in thousands,              First           Second           Third             Fourth
except per share data)             Quarter          Quarter         Quarter           Quarter
-----------------------------   ------------------------------------------------------------------
<S>                             <C>              <C>               <C>              <C>
Revenues(a)                     $      154,055   $      157,460    $     160,476    $      171,717
                                ==================================================================
Net income (loss)               $        7,857   $        5,902    $      (2,615)   $        7,697
                                ==================================================================
Basic earnings (loss)
  per common share              $          .45   $          .35   $         (.15)   $          .44
                                ==================================================================
Diluted earnings (loss)
  per common share              $          .45   $          .33   $         (.15)   $          .43
                                ==================================================================
Dividends per common share      $       .04375   $       .04375   $       .04375    $       .04375
                                ==================================================================
Price range of
  common stock (Nasdaq):
    High                        $        22.05   $        25.38   $        25.17    $        20.00
                                ==================================================================
    Low                         $        19.55   $        20.63   $        15.65    $        15.40
                                ==================================================================
</TABLE>

(a)      Prior year amounts have been reclassified to conform with current year
         presentation.

Other Information

TRANSFER AGENT AND REGISTRAR                      INDEPENDENT AUDITORS
National City Bank                                Deloitte & Touche LLP
Shareholder Services                              250 East Fifth Street
P.O. Box 92301                                    Cincinnati, Ohio 45202
Cleveland, Ohio 44193-0900
1-800-622-6757
shareholder.inquiries@nationalcity.com
or
http://www.nationalcitystocktransfer.com

SHAREHOLDERS' MEETING

The next meeting of the shareholders will be held at 10:00 a.m. on Thursday,
April 8, 2004 at the Company's offices, 7000 Midland Boulevard, Amelia, Ohio
45102.

MARKET FOR REGISTRANT'S COMMON STOCK

The Midland Company Common Stock is traded on the NASDAQ National Market System.
The symbol is MLAN.

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 National City Bank
(1-800-622-6757).

FORM 10-K

A copy of the Company's 2003 Annual Report to the Securities and Exchange
Commission on Form 10-K may be obtained free of charge by writing to the Company
- Attention: Chief Financial Officer or from the Company's website
www.midlandcompany.com.

FINANCIAL INFORMATION

For financial information visit us on the internet at www.nasdaq.com or
www.midlandcompany.com

40       THE MIDLAND COMPANY

<PAGE>

Officers and Directors
THE MIDLAND COMPANY AND SUBSIDIARIES

<TABLE>
<CAPTION>
              BOARD OF DIRECTORS                                                                           OFFICERS
<S>                                                                                          <C>
JAMES E. BUSHMAN (a) (b) (c)                                                                 J. P. HAYDEN III
President and Chief Executive Officer                                                        Chairman and Chief Operating Officer
Cast-Fab Technologies, Inc.

JAMES H. CAREY (a) (b) (e)                                                                   JOHN W. HAYDEN
Corporate Director/Advisor                                                                   President and Chief Executive Officer

                                                                                             JOHN I. VON LEHMAN
MICHAEL J. CONATON (c)                                                                       Executive Vice President,
Formerly President and Vice Chairman of the Company                                          Chief Financial Officer and Secretary

JERRY A. GRUNDHOFER (d)                                                                      PAUL T. BRIZZOLARA
President and Chief Executive Officer                                                        Executive Vice President,
US Bancorp                                                                                   Chief Legal Officer and
                                                                                             Assistant Secretary

J. P. HAYDEN, JR. (c)
Chairman of the Executive Committee of the Board,                                            PAUL F. GELTER
Formerly Chairman and Chief Executive Officer                                                Vice President
of the Company
                                                                                             ELISABETH E. BALDOCK
                                                                                             Vice President
J. P. HAYDEN III (c)                                                                         W. TODD GRAY
Chairman and Chief Operating Officer                                                         Treasurer

JOHN W. HAYDEN (c)
President and Chief Executive Officer

                                                                                             MICHAEL L. FLOWERS
ROBERT W. HAYDEN                                                                             Vice President and Assistant Secretary
Formerly Vice President of the Company

                                                                                             MARK E. BURKE
WILLIAM T. HAYDEN (d)                                                                        Director of Taxation
Partner-Katz, Teller, Brant & Hild

                                                                                             ALISA E. POE
WILLIAM J. KEATING , JR. (b) (e)                                                             Assistant Vice President
Partner-Keating, Muething & Klekamp

                                                                                             RONALD L. GRAMKE
JOHN R. LABAR                                                                                Assistant Treasurer
Formerly Vice President and Secretary of the Company

                                                                                             EDWARD J. HESKAMP
RICHARD M. NORMAN   (a)                                                                      Assistant Treasurer
Vice President for Finance and Business Services,
Treasurer of Miami University, Ohio                                                          MARY ANN C. PETTIT
                                                                                             Assistant Secretary

DAVID B. O'MALEY (d)
Chairman, President and Chief Executive Officer
Ohio National Financial Services

JOHN M. O'MARA (b) (c) (e)
Corporate Director/Financial Consultant

GLENN E. SCHEMBECHLER (a)
Professor Emeritus University of Michigan

FRANCIS MARIE THRAILKILL, OSU ED.D. (d)
President-College of Mount St. Joseph

JOHN I. VON LEHMAN
Executive Vice President,
Chief Financial Officer and Secretary
</TABLE>

(a) Member of Audit Committee

(b) Member of Compensation Committee

(c) Member of Executive Committee

(d) Member of Governance Committee

(e) Member of Nominating Committee

<PAGE>

                                 [MIDLAND LOGO]

                               THE MIDLAND COMPANY
                             7000 Midland Boulevard
                                  P.O. Box 1256
                          Cincinnati, Ohio 45201-1256
                              Phone (513) 943-7100
                             www.midlandcompany.com