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, 2004 and 2003 (in millions):
M/G Transport, Midland’s transportation subsidiary, increased revenues to $45.4 million in 2004 compared to $28.2 million in 2003. Income before taxes also increased to $1.7 million in 2004 as compared to $1.3 million in 2003. The increase in revenues was due primarily to an increase in tonnage hauled related to petroleum coke, coal and barite. The increase in transportation expenses is commensurate with the increase in tonnage hauled plus additional costs due to changes in shipping patterns experienced during the year.
Premiums 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 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.
In order to limit its exposure to certain levels of risks, the Company cedes varying portions of its written premiums to other insurance companies. As such, the Company limits its loss exposure to that portion of the insurable risk it retains. In addition, the Company pays a percentage of earned premiums to reinsurers in return for coverage against catastrophic losses. However, if a 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.
In November 2005, FASB issued FASB Staff Position (“FSP”) FAS 115-1, which nullifies the guidance in paragraphs 10-18 of Emerging Issues Task Force Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” and references existing other than temporary impairment guidance. FSP FAS 115-1 clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell the security has not been made, and also provides guidance on the subsequent accounting for an impaired debt security. FSP FAS 115-1 is effective for reporting periods beginning after December 15, 2005. The adoption of FSP FAS 115-1 will not have a material impact on the Company’s Consolidated Financial Position or Results of Operations.
At December 31, 2005 and 2004, the fair value of the Company’s investment in the common stock of US Bancorp, which exceeded 10% of the Company’s shareholders’ equity, was $73.5 million and $77.1 million, respectively. Also, at December 31, 2005 and 2004, the market value of the Company’s investment portfolio includes approximately $35.1 million and $48.6 million, respectively, of convertible securities, some of which contain derivatives features.
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 2005 and 2004:
Under the Company’s stock option plans, all of the outstanding stock options at December 31, 2005 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, 916,000 were exercisable at December 31, 2005, and 201,000, 159,000, 101,000 and 49,000 options become exercisable in 2006, 2007, 2008 and 2009, respectively. A summary of stock option transactions follows:
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, 2005, 2004 and 2003 (amounts in 000’s):
(b) The Midland Company adopted SFAS 123 (Revised 2004), “Share-Based Payment” (“FAS 123(R)”) during the fourth quarter of 2005 which requires compensation cost relating to share-based payment transactions to be recognized in a company’s financial statements under the fair value method. Midland also chose to retrospectively apply FAS 123(R) to the first three quarters of 2005. Consequently, the first, second and third quarter data has been restated to reflect the impact of stock option expense on net income and earnings per share (basic and diluted).