##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the transition period from ___to ___ Commission file number 1-6026 The Midland Company 
  Ohio
    
    31-0742526(State or other jurisdiction of incorporation
or organization)
    
    (I.R.S. Employer Identification No.)
 7000 Midland Boulevard, Amelia, Ohio 45102-2607 
  (513) 943-7100 
  N/A   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes þ.      No o. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes þ.      No o. The number of common shares outstanding as of November 2, 2004 was
18,784,773.




---



TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONCONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS (Unaudited)CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)1. BASIS OF PRESENTATION2. EARNINGS PER SHARE3. INCOME TAXES4. SEGMENT DISCLOSURES5. STOCK OPTIONS6. DERIVATIVE FINANCIAL INSTRUMENTS7. DEFINED BENEFIT PENSION PLANS8. JUNIOR SUBORDINATED DEBENTURES9. RELATED PARTY TRANSACTIONS10. NEW ACCOUNTING STANDARDSITEM 2. THE MIDLAND COMPANY AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSALL INSURANCE (Manufactured Housing and All Other Insurance)LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITIONOTHER MATTERSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMPART II. OTHER INFORMATION THE MIDLAND COMPANY AND SUBSIDIARIES SEPTEMBER 30, 2004SIGNATUREExhibit 15Exhibit 31.1Exhibit 31.2Exhibit 32    Table of Contents  
 
 PART I. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
Amounts in 000s (Unaudited)September 30,
    
    Dec. 31,ASSETS
    
    2004
    
    2003MARKETABLE SECURITIES AVAILABLE FOR SALE:Fixed income (cost, $740,810 at September 30, 2004 and$643,735 at December 31, 2003)
    
    $
    765,827
    
    
    $
    671,454Equity (cost, $107,579 at September 30, 2004 and
$87,998 at December 31, 2003)
    
    
    189,643
    
    
    
    174,868Total
    
    
    955,470
    
    
    
    846,322CASH
    
    
    5,914
    
    
    
    2,386ACCOUNTS RECEIVABLE  NET
    
    
    104,573
    
    
    
    81,297REINSURANCE RECOVERABLES AND
PREPAID REINSURANCE PREMIUMS
    
    
    97,327
    
    
    
    70,990PROPERTY, PLANT AND EQUIPMENT  NET
    
    
    67,760
    
    
    
    69,328DEFERRED INSURANCE POLICY ACQUISITION COSTS
    
    
    91,934
    
    
    
    87,873OTHER ASSETS
    
    
    22,034
    
    
    
    21,309TOTAL ASSETS
    
    $
    1,345,012
    
    
    $
    1,179,505
 See notes to condensed consolidated financial statements.




---



##### Table of Contents



THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
Amounts in 000s (Unaudited)September 30,
    
    Dec. 31,LIABILITIES & SHAREHOLDERS EQUITY
    
    2004
    
    2003UNEARNED INSURANCE PREMIUMS
    
    $
    405,480
    
    
    $
    383,869INSURANCE LOSS RESERVES
    
    
    260,724
    
    
    
    204,833INSURANCE COMMISSIONS PAYABLE
    
    
    40,745
    
    
    
    30,522FUNDS HELD UNDER REINSURANCE AGREEMENTS
AND REINSURANCE PAYABLES
    
    
    13,506
    
    
    
    6,978LONG-TERM DEBT
    
    
    61,047
    
    
    
    62,217OTHER NOTES PAYABLE:Banks
    
    
    11,000
    
    
    
    30,000Commercial paper
    
    
    4,774
    
    
    
    3,625Total
    
    
    15,774
    
    
    
    33,625DEFERRED FEDERAL INCOME TAX
    
    
    45,047
    
    
    
    47,429OTHER PAYABLES AND ACCRUALS
    
    
    73,755
    
    
    
    53,974JUNIOR SUBORDINATED DEBENTURES
    
    
    24,000
    
    
    
    COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Common stock (issued and outstanding: 18,783 shares at
September 30, 2004 and 17,643 shares at December 31, 2003
after deducting treasury stock of 4,223
shares and
4,213 shares, respectively)
    
    
    959
    
    
    
    911Additional paid-in capital
    
    
    50,651
    
    
    
    23,406Retained earnings
    
    
    327,463
    
    
    
    299,752Accumulated other comprehensive income
    
    
    69,045
    
    
    
    73,455Treasury stock  at cost
    
    
    (43,184
    )
    
    
    (41,442
    )Unvested restricted stock awards
    
    
    
    
    
    
    (24
    )Total
    
    
    404,934
    
    
    
    356,058TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,345,012
    
    
    $
    1,179,505
 See notes to condensed consolidated financial statements.




---



##### Table of Contents



THE MIDLAND COMPANY
AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Amounts in 000s (except per share information) Nine-Mos. Ended Sept. 30,
    
    Three-Mos. Ended Sept. 30,2004
    
    2003
    
    2004
    
    2003REVENUES:Insurance:Premiums earned
    
    $
    503,350
    
    
    $
    474,770
    
    
    $
    169,296
    
    
    $
    164,290Net investment income
    
    
    27,062
    
    
    
    24,861
    
    
    
    9,318
    
    
    
    8,269Net realized investment gains
    
    
    5,726
    
    
    
    2,240
    
    
    
    318
    
    
    
    1,190Other insurance income
    
    
    10,246
    
    
    
    10,545
    
    
    
    1,943
    
    
    
    3,558Transportation
    
    
    32,701
    
    
    
    19,736
    
    
    
    12,006
    
    
    
    6,915Total
    
    
    579,085
    
    
    
    532,152
    
    
    
    192,881
    
    
    
    184,222COSTS AND EXPENSES:Insurance:Losses and loss adjustment expenses
    
    
    276,688
    
    
    
    297,222
    
    
    
    108,796
    
    
    
    105,139Commissions and other policy acquisition costs
    
    
    146,469
    
    
    
    133,676
    
    
    
    43,207
    
    
    
    44,953Operating and administrative expenses
    
    
    78,432
    
    
    
    63,335
    
    
    
    26,000
    
    
    
    21,612Transportation operating expenses
    
    
    31,090
    
    
    
    18,756
    
    
    
    11,336
    
    
    
    6,339Interest expense
    
    
    3,886
    
    
    
    2,782
    
    
    
    1,325
    
    
    
    961Total
    
    
    536,565
    
    
    
    515,771
    
    
    
    190,664
    
    
    
    179,004INCOME BEFORE FEDERAL INCOME TAX
    
    
    42,520
    
    
    
    16,381
    
    
    
    2,217
    
    
    
    5,218PROVISION (CREDIT) FOR FEDERAL INCOME TAX
    
    
    11,924
    
    
    
    3,060
    
    
    
    (207
    )
    
    
    929NET INCOME
    
    $
    30,596
    
    
    $
    13,321
    
    
    $
    2,424
    
    
    $
    4,289BASIC EARNINGS PER SHARE
OF COMMON STOCK:
    
    $
    1.65
    
    
    $
    0.77
    
    
    $
    0.13
    
    
    $
    0.25DILUTED EARNINGS PER SHARE
OF COMMON STOCK:
    
    $
    1.60
    
    
    $
    0.74
    
    
    $
    0.12
    
    
    $
    0.23CASH DIVIDENDS DECLARED PER SHARE
OF COMMON STOCK
    
    $
    0.15375
    
    
    $
    0.14250
    
    
    $
    0.05125
    
    
    $
    0.04750
 See notes to condensed consolidated financial statements.




---



##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Amounts in 000s Accumulated
    
    
    
    
    
    UnvestedAdditional
    
    
    
    
    
    Other Com-
    
    
    
    
    
    Restricted
    
    
    
    
    
    Compre-Common
    
    Paid-In
    
    Retained
    
    prehensive
    
    Treasury
    
    Stock
    
    
    
    
    
    hensiveStock
    
    Capital
    
    Earnings
    
    Income
    
    Stock
    
    Awards
    
    Total
    
    IncomeBALANCE, DECEMBER 31, 2002
    
    $
    911
    
    
    $
    22,516
    
    
    $
    279,826
    
    
    $
    47,573
    
    
    $
    (41,605
    )
    
    $
    (313
    )
    
    $
    308,908Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    13,321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,321
    
    
    $
    13,321Increase in unrealized gain on
marketable securities, net of federal
income tax of $7,070
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,108
    
    
    
    
    
    
    
    
    
    
    
    13,108
    
    
    
    13,108Other, net of federal income tax of $63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    117Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    26,546Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (944
    )
    
    
    
    
    
    
    (944
    )Issuance of treasury stock for options
exercised and employee savings plan
    
    
    
    
    
    
    563
    
    
    
    
    
    
    
    
    
    
    
    1,039
    
    
    
    
    
    
    
    1,602Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (2,511
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,511
    )Federal income tax benefit related to the
exercise or granting of stock awards
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123Amortization and cancellation of
unvested restricted stock awards
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    217
    
    
    
    213BALANCE, SEPTEMBER 30, 2003
    
    $
    911
    
    
    $
    23,200
    
    
    $
    290,636
    
    
    $
    60,798
    
    
    $
    (41,512
    )
    
    $
    (96
    )
    
    $
    333,937BALANCE, DECEMBER 31, 2003
    
    $
    911
    
    
    $
    23,406
    
    
    $
    299,752
    
    
    $
    73,455
    
    
    $
    (41,442
    )
    
    $
    (24
    )
    
    $
    356,058Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    30,596
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,596
    
    
    $
    30,596Decrease in unrealized gain on
marketable securities, net of federal
income tax of $2,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,880
    )
    
    
    
    
    
    
    
    
    
    
    (4,880
    )
    
    
    (4,880
    )Other, net of federal income tax of $253
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470
    
    
    
    
    
    
    
    
    
    
    
    470
    
    
    
    470Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    26,186Common stock issuance
    
    
    48
    
    
    
    25,022
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,070Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,770
    )
    
    
    
    
    
    
    (2,770
    )Issuance of treasury stock for options
exercised and employee savings plan
    
    
    
    
    
    
    1,138
    
    
    
    
    
    
    
    
    
    
    
    1,028
    
    
    
    
    
    
    
    2,166Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (2,885
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,885
    )Federal income tax benefit related to the
exercise or granting of stock awards
    
    
    
    
    
    
    1,085
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,085Amortization and cancellation of
unvested restricted stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    24BALANCE, SEPTEMBER 30, 2004
    
    $
    959
    
    
    $
    50,651
    
    
    $
    327,463
    
    
    $
    69,045
    
    
    $
    (43,184
    )
    
    $
    
    
    
    $
    404,934
 See notes to condensed consolidated financial statements.




---



##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Amount in 000s 2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    30,596
    
    
    $
    13,321Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    8,420
    
    
    
    6,739Net realized investment gains
    
    
    (6,540
    )
    
    
    (2,063
    )Increase (decrease) in unearned insurance premiums
    
    
    21,611
    
    
    
    (473
    )Decrease (increase) in deferred insurance policy acquisition costs
    
    
    (4,061
    )
    
    
    2,460Decrease (increase) in reinsurance recoverables and prepaid
reinsurance premiums
    
    
    (26,337
    )
    
    
    2,368Increase in net accounts receivable
    
    
    (23,276
    )
    
    
    (2,739
    )Increase in insurance loss reserves
    
    
    55,891
    
    
    
    33,442Increase in funds held under reinsurance
agreements and reinsurance payables
    
    
    6,528
    
    
    
    3,118Increase in other accounts payable and accruals
    
    
    21,456
    
    
    
    2,449Increase in other assets
    
    
    (725
    )
    
    
    (404
    )Increase in insurance commissions payable
    
    
    10,223
    
    
    
    944Other-net
    
    
    1,567
    
    
    
    2,776Net cash provided by operating activities
    
    
    95,353
    
    
    
    61,938CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of marketable securities
    
    
    (421,328
    )
    
    
    (382,606
    )Sale of marketable securities
    
    
    241,279
    
    
    
    232,632Decrease in cash equivalent marketable securities
    
    
    8,791
    
    
    
    39,662Maturity of marketable securities
    
    
    59,412
    
    
    
    76,860Acquisition of property, plant and equipment
    
    
    (7,144
    )
    
    
    (12,049
    )Proceeds from sale of property, plant and equipment
    
    
    480
    
    
    
    280Net cash used in investing activities
    
    
    (118,510
    )
    
    
    (45,221
    )CASH FLOWS FROM FINANCING ACTIVITIES:Decrease in net short-term borrowings
    
    
    (17,851
    )
    
    
    (20,971
    )Issuance of long-term debt
    
    
    
    
    
    
    7,497Repayment of long-term debt
    
    
    (1,170
    )
    
    
    (1,127
    )Issuance of junior subordinated debentures
    
    
    24,000
    
    
    
    Dividends paid
    
    
    (2,760
    )
    
    
    (2,441
    )Issuance of treasury stock
    
    
    2,166
    
    
    
    1,602Purchase of treasury stock
    
    
    (2,770
    )
    
    
    (944
    )Proceeds from common stock issuance
    
    
    25,070
    
    
    
    Net cash provided by (used in) financing activities
    
    
    26,685
    
    
    
    (16,384
    )NET INCREASE IN CASH
    
    
    3,528
    
    
    
    333CASH AT BEGINNING OF PERIOD
    
    
    2,386
    
    
    
    5,975CASH AT END OF PERIOD
    
    $
    5,914
    
    
    $
    6,308INTEREST PAID
    
    $
    3,156
    
    
    $
    2,542INCOME TAXES PAID
    
    $
    14,800
    
    
    $
    1,500
 See notes to the condensed consolidated financial statements.




---



##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued) 
 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of The
Midland Company and subsidiaries (Midland) have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete annual financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Financial information as of December 31, 2003 has been derived from the audited
consolidated financial statements of the Company. Revenue and operating
results for the nine and three-month periods ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. For further information, refer to the audited consolidated
financial statements and footnotes thereto for the year ended December 31, 2003
included in Midlands Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to current
period presentation. 
 2. EARNINGS PER SHARE Earnings per share (EPS) of common stock amounts are computed by dividing net
income by the weighted average number of shares outstanding during the period
for basic EPS, plus the dilutive share equivalents for stock options and
performance based stock awards for diluted EPS. Shares used for EPS
calculations were as follows (000s): For Basic EPS
    
    For Diluted EPSNine months ended September 30:2004
    
    
    18,561
    
    
    
    19,1002003
    
    
    17,411
    
    
    
    17,919Three months ended September 30:2004
    
    
    18,775
    
    
    
    19,3072003
    
    
    17,420
    
    
    
    17,913
 
 3. INCOME TAXES The federal income tax provisions for the nine and three-month periods ended
September 30, 2004 and 2003 are different from amounts derived by applying the
statutory tax rates to income before federal income tax as follows (000s): Nine-Mos. Ended Sept. 30,
    
    Three-Mos. Ended Sept. 30,2004
    
    2003
    
    2004
    
    2003Federal income tax at statutory rate
    
    $
    14,882
    
    
    $
    5,733
    
    
    $
    776
    
    
    $
    1,826Tax effect of:Tax exempt interest and
excludable dividend income
    
    
    (3,146
    )
    
    
    (2,773
    )
    
    
    (1,059
    )
    
    
    (939
    )Other  net
    
    
    188
    
    
    
    100
    
    
    
    76
    
    
    
    42Provision (credit) for federal income tax
    
    $
    11,924
    
    
    $
    3,060
    
    
    $
    (207
    )
    
    $
    929




---



##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued) 
 4. SEGMENT DISCLOSURES Since the Companys annual report for 2003, there have been no changes in
reportable segments or the manner in which Midland determines reportable
segments or measures segment profit or loss. Summarized segment information
for the interim periods for 2004 and 2003 is as follows (000s): Nine Months Ended
    
    Three Months EndedSept. 30, 2004
    
    Sept. 30, 2004Revenues-
    
    Pre-Tax
    
    Revenues-
    
    Pre-TaxTotal
    
    External
    
    Income
    
    External
    
    IncomeAssets
    
    Customers
    
    (Loss)
    
    Customers
    
    (Loss)Reportable Segments:Insurance:Manufactured housing
    
    
    n/a
    
    
    $
    240,626
    
    
    $
    24,664
    
    
    $
    79,024
    
    
    $
    2,937Other
    
    
    n/a
    
    
    
    272,970
    
    
    
    15,768
    
    
    
    92,215
    
    
    
    (720
    )Unallocated
    
    $
    1,248,655
    
    
    
    
    
    
    
    4,234
    
    
    
    
    
    
    
    6Transportation
    
    
    34,682
    
    
    
    32,701
    
    
    
    1,274
    
    
    
    12,006
    
    
    
    567Corporate and all other
    
    
    108,939
    
    
    
    
    
    
    
    (3,420
    )
    
    
    
    
    
    
    (573
    )Intersegment Eliminations
    
    
    (47,264
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,345,012
    
    
    $
    546,297
    
    
    $
    42,520
    
    
    $
    183,245
    
    
    $
    2,217Nine Months Ended
    
    Three Months EndedSept. 30, 2003
    
    Sept. 30, 2003Revenues-
    
    Pre-Tax
    
    Revenues-
    
    Pre-TaxTotal
    
    External
    
    Income
    
    External
    
    IncomeAssets
    
    Customers
    
    (Loss)
    
    Customers
    
    (Loss)Reportable Segments:Insurance:Manufactured housing
    
    
    n/a
    
    
    $
    248,187
    
    
    $
    21,156
    
    
    $
    82,359
    
    
    $
    6,535Other
    
    
    n/a
    
    
    
    237,128
    
    
    
    (6,418
    )
    
    
    85,489
    
    
    
    (2,418
    )Unallocated
    
    $
    1,088,276
    
    
    
    
    
    
    
    2,235
    
    
    
    
    
    
    
    833Transportation
    
    
    29,871
    
    
    
    19,736
    
    
    
    771
    
    
    
    6,915
    
    
    
    455Corporate and all other
    
    
    60,735
    
    
    
    
    
    
    
    (1,363
    )
    
    
    
    
    
    
    (187
    )Intersegment Eliminations
    
    
    (29,486
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,149,396
    
    
    $
    505,051
    
    
    $
    16,381
    
    
    $
    174,763
    
    
    $
    5,218
 Intersegment revenues are insignificant. Revenues reported above, by
definition, exclude investment income and realized gains. For pre-tax income
reported above, insurance investment income is allocated to Manufactured
Housing and Other while realized gains and losses are included in Unallocated.
The Company allocates insurance investment income to the segments based
primarily on written premium volume. The Company does not allocate realized
gains or losses to the segments as the Company evaluates the performance of the
segments exclusive of the impact of realized gains or losses due to potential
timing issues. Certain other amounts are also not allocated to segments (n/a
above) by the Company. The following chart provides additional detail related to the Companys
revenues for the nine and three-month periods ended September 30, 2004 and 2003
($000s):




---



##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued) Revenues Nine-Mos. Ended Sept. 30,
    
    Three-Mos. Ended Sept. 30,2004
    
    2003
    
    2004
    
    2003Insurance:Manufactured housing
    
    $
    240,626
    
    
    $
    248,187
    
    
    $
    79,024
    
    
    $
    82,359All other insuranceOther personal lines property
    
    
    65,166
    
    
    
    63,346
    
    
    
    22,043
    
    
    
    20,890Personal lines casualty
    
    
    92,924
    
    
    
    87,812
    
    
    
    29,884
    
    
    
    31,583Financial services
    
    
    59,555
    
    
    
    38,278
    
    
    
    22,556
    
    
    
    15,118Commercial lines
    
    
    37,707
    
    
    
    27,503
    
    
    
    13,703
    
    
    
    10,650Other insurance
    
    
    17,618
    
    
    
    20,189
    
    
    
    4,029
    
    
    
    7,248Total all other insurance
    
    
    272,970
    
    
    
    237,128
    
    
    
    92,215
    
    
    
    85,489Net investment income
    
    
    27,062
    
    
    
    24,861
    
    
    
    9,318
    
    
    
    8,269Net realized investment gains
    
    
    5,726
    
    
    
    2,240
    
    
    
    318
    
    
    
    1,190Transportation
    
    
    32,701
    
    
    
    19,736
    
    
    
    12,006
    
    
    
    6,915Total revenues
    
    $
    579,085
    
    
    $
    532,152
    
    
    $
    192,881
    
    
    $
    184,222
 
 5. STOCK OPTIONS Midland accounts for stock options under the recognition and measurement
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. As such, no compensation cost has been recognized
for the stock option plans. Had the Company accounted for stock-based employee
compensation under the fair value method (SFAS 123), the Companys net income
and earnings per share for the nine and three-months ended September 30, 2004
and 2003 would have been reduced to the pro forma amounts indicated below
(amounts in 000s, except per share data): Nine Months Ended Sept. 30,
    
    Three Months Ended Sept. 30,2004
    
    2003
    
    2004
    
    2003Net Income as Reported
    
    $
    30,596
    
    
    $
    13,321
    
    
    $
    2,424
    
    
    $
    4,289Deduct: Total stock-based employee
compensation determined under fair
value based method for all awards,
net of related tax effects
    
    
    822
    
    
    
    705
    
    
    
    232
    
    
    
    197Pro forma Net Income
    
    $
    29,774
    
    
    $
    12,616
    
    
    $
    2,192
    
    
    $
    4,092Basic Shares
    
    
    18,561
    
    
    
    17,411
    
    
    
    18,775
    
    
    
    17,420Diluted Shares
    
    
    19,100
    
    
    
    17,919
    
    
    
    19,307
    
    
    
    17,913Earnings per share:Basic  as reported
    
    $
    1.65
    
    
    $
    0.77
    
    
    $
    0.13
    
    
    $
    0.25Basic  pro forma
    
    
    1.61
    
    
    
    0.73
    
    
    
    0.12
    
    
    
    0.23Diluted  as reported
    
    $
    1.60
    
    
    $
    0.74
    
    
    $
    0.12
    
    
    $
    0.23Diluted  pro forma
    
    
    1.56
    
    
    
    0.70
    
    
    
    0.11
    
    
    
    0.23
 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.




---



##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued) 
 6. DERIVATIVE FINANCIAL INSTRUMENTS At September 30, 2004, Midlands investment portfolio included approximately
$51.1 million of convertible securities, some of which contain embedded
derivatives. The embedded conversion options are valued separately, and the
change in the market value on the embedded options is reported in net realized
investment gains (losses). For the three and nine month periods ending
September 30, 2004, Midland recorded pre-tax losses on these securities of
$(1,056,000) and $(814,000), respectively. For the three and nine month
periods ended September 30, 2003, Midland recorded pre-tax gains on these
securities of $467,000 and $177,000, respectively. Midland has a series of interest rate swap agreements converting $30 million of
its floating-rate debt to a fixed rate. The swaps qualify as cash flow hedges
and are deemed to be 100% effective. Therefore, the changes in the fair value
of the swap agreements are recorded as a separate component of shareholders
equity and have no income statement impact. At September 30, 2004 and 2003,
the derivative gain recorded in Other Comprehensive Income, net of deferred
taxes, amounted to $470,000 and $117,000, respectively. The swaps mature on
December 1, 2005. 
 7. DEFINED BENEFIT PENSION PLANS Midland has a funded qualified defined benefit pension plan and an unfunded
non-qualified defined benefit pension plan. The measurement date for Midlands
defined benefit retirement plans is December 31. The components of net
periodic pension cost related to both plans for the nine and three-month
periods ended September 30, 2004 and 2003 are (000s): Nine Months Ended Sept. 30,
    
    Three Months Ended Sept. 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    682
    
    
    $
    612
    
    
    $
    246
    
    
    $
    233Interest cost
    
    
    1,271
    
    
    
    1,175
    
    
    
    478
    
    
    
    448Expected return on assets
    
    
    (1,381
    )
    
    
    (1,272
    )
    
    
    (584
    )
    
    
    (485
    )Amortization of transition asset
    
    
    (61
    )
    
    
    (77
    )
    
    
    (25
    )
    
    
    (29
    )Amortization of prior service cost
    
    
    26
    
    
    
    25
    
    
    
    10
    
    
    
    9Amortization of net loss
    
    
    73
    
    
    
    42
    
    
    
    20
    
    
    
    16Net periodic cost
    
    $
    610
    
    
    $
    505
    
    
    $
    145
    
    
    $
    192
 The Company prepaid its required cash contribution of $0.6 million for the 2004
plan year in December 2003 and anticipates no further cash contributions until
2005. 
 8. JUNIOR SUBORDINATED DEBENTURES Wholly-owned subsidiary trusts of Midland have issued preferred trust
securities and, in turn, purchased a like amount of subordinated debt which
provides interest and principal payments to fund the trusts obligations. The
preferred trust securities are mandatorily redeemable upon maturity or
redemption of the subordinated debt and are an obligation of Midland. The
interest rate related to these securities is based on the 90 day LIBOR rate
plus 3.5%. The preferred securities consist of the following: Amount
    
    OptionDate of Issuance
    
    Maturity Date
    
    Outstanding
    
    Redemption DateApril 29, 2004
    
    Floating Rate Preferred (2034)
    
    $
    12,000,000
    
    
    On or after April 2009May 26, 2004
    
    Floating Rate Preferred (2034)
    
    
    12,000,000
    
    
    On or after May 2009
 
 9. 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 September 30, 2004




---



##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued) was $4.8 million, $4.0 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 1.61% as of September 30, 2004, a rate that
management considers to be competitive with the market rates offered for
similar instruments. 
 10. NEW ACCOUNTING STANDARDS In December 2003, the Financial Accounting Standards Board (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. In 2004,
SFAS No. 132(R); requires interim-period disclosure of components of net pension
and other postretirement benefit cost. Midland adopted this standard and all
of its required disclosures. In September 2004, the FASB deferred the effective date of paragraphs 10
through 20 of Emerging Issues Task Force Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
(EITF 03-1). Prior to the deferral, EITF 03-1 was to be effective for the
third quarter of 2004. Application of paragraphs 10 through 20 will be
deferred pending further guidance from the FASB. EITF 03-1 provides guidance
for determining when an investment is considered impaired, whether impairment
is other-than-temporary, and measurement of an impairment loss. If impairment
is determined to be other-than-temporary, then an impairment loss should be
recognized equal to the difference between the investments cost and its fair
value. Gross unrealized losses on available for sale securities were $4.1
million at September 30, 2004.




---



##### Table of Contents



ITEM 2. THE MIDLAND COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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 44% 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) operate 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. EXECUTIVE OVERVIEW OF RECENT TRENDS AND OTHER DEVELOPMENTS Third Quarter Hurricanes The catastrophe losses experienced from hurricanes Charley, Frances, Ivan and
Jeanne offset the excellent non-catastrophe underwriting results experienced
during the third quarter of 2004. American Moderns property and casualty
combined ratio (losses and expenses as a percent of earned premium)




---



##### Table of Contents



was 105.9% in the third quarter compared with 104.7% a year ago. However, excluding
catastrophe losses, American Moderns third quarter combined ratio improved to
88.6% compared with 99.8% in the third quarter of 2003. 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 shipments have been slower
than historical averages since 2001. 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. Also contributing to the general
decline was the shift away from chattel financing. Manufactured housing sales
have traditionally been financed as personal property through a financing
transaction referred to as chattel financing. Several large chattel lenders
over the past several years 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. Beginning
in 2003, American Modern benefited from rate increases and, coupled with the
conversion of certain books of manufactured housing business, experienced
growth in gross written premium in 2003. Continuing this trend in 2004,
American Moderns gross written premiums increased 4.4% to $257.7 million from
$246.8 million in the nine month period ended September 30, 2004 and increased
0.7% to $89.3 million from $88.6 in the three month period ended September 30,
2004. Site-Built Dwelling Premium Over the past several years, 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 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 dwelling fire programs. More
specifically, gross written premium from American Moderns ongoing site-built
programs increased 8.5% to $23.0 million in the third quarter of 2004 from
$21.2 million in the comparable quarter in 2003. On a year-to-date basis, the
ongoing site-built programs increased 16.2% to $66.9 million in the first nine
months of 2004 compared to $57.6 in the prior years first nine months.
American Modern has also experienced the intended decrease in de-emphasized
programs, which are primarily standard homeowners programs. Manufactured Housing and Site-Built Dwelling Profitability American Modern experienced higher than normal levels of losses caused by fire
in its manufactured housing and site-built lines during 2000, 2001 and 2002
which had an adverse impact on the underwriting results from these lines. 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. As a result of these rate increases combined with tightened
underwriting criteria, manufactured housing and site-built dwelling
non-catastrophe profitability has improved in 2004. Motorcycle Rate increases averaging 21%
and 19% were approved by various states
insurance departments in 2003 and 2004, respectively. We expect these rate increases to have approximately a 20%
impact on motorcycles net earned premium in 2004. We have also added
expertise to our staff and have refined our product offering to better match
the needs of our targeted market. On a year-to-date basis, the motorcycle combined ratio improved from 131.9% in
2003 to 106.7% in 2004. Motorcycle losses are typically lower in the first and
fourth quarters and higher in the second and




---



##### Table of Contents



third quarters in a given year due to increased use during the middle of the year. As expected, motorcycle gross
written premium decreased 25.5% from $14.9 million in the third quarter of 2003
to $11.1 million in the third quarter of 2004. On a year-to-date basis,
motorcycle premium decreased 18.7% from $52.1 million in 2003 to $42.4 million
in 2004. 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. During 2003, we experienced higher than expected
losses related to this line. Due to the adverse development, American Modern
strengthened reserves, in the latter part of 2003, to address the future
run-off claims. For the first nine months of 2004, American Modern has
experienced favorable development in the claims settled for the period and
believes that the loss exposure is adequately reserved for the remainder of the
run-off period. Diversification of Premium  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
significantly to American Moderns overall growth in recent years as well as in
2004. During the third quarter of 2004, gross written premium from American
Moderns other property and casualty insurance products (excluding manufactured
housing) collectively increased 4.9% to $100.3 million from $95.6 million in
the prior years third quarter. On a year-to-date basis, gross written premium
from American Moderns other property and casualty insurance products
(excluding manufactured housing) collectively increased 13.0 % to $298.0
million from $263.6 million in 2003. American Moderns gross written premiums
benefited from the assumption of a $17.6 million book of collateral protection
business that it obtained the rights to in the second quarter of 2004. The
mortgage fire and the excess and surplus lines products are also significant
contributors to the growth in 2004.




---



##### Table of Contents



RESULTS OF OPERATIONS The Midland Company reported net income of $2.4 million, or $0.12 per diluted
share, for the third quarter of 2004 compared with $4.3 million, or $0.23 per
diluted share, for the third quarter of 2003. Revenue for the quarter
increased 4.7% to $192.9 million, compared with $184.2 million in last
years third quarter. Net income was impacted by catastrophe losses of $0.98
per share in the third quarter of 2004, $0.93 of which was related to
hurricanes Charley, Frances, Ivan and Jeanne. This compares to catastrophe
losses of $0.29 cents per share for the third quarter of 2003. On a year to date basis, net income was a record $30.6 million, or $1.60 per
diluted share, compared with $13.3 million, or $0.74 per diluted share, for the
first nine months of 2003. Revenue increased 8.8% to a record $579.1 million
compared with $532.2 million in the same period last year. Financial Highlights (amounts in thousands except per share data) Nine Months Ended Sept. 30,
    
    Three Months Ended Sept. 30,2004
    
    2003
    
    %
    
    2004
    
    2003
    
    %Income Statement DataInsurance Revenue
    
    $
    546,384
    
    
    $
    512,416
    
    
    
    6.6
    %
    
    $
    180,875
    
    
    $
    177,307
    
    
    
    2.0
    %Transportation Revenue
    
    
    32,701
    
    
    
    19,736
    
    
    
    65.7
    %
    
    
    12,006
    
    
    
    6,915
    
    
    
    73.6
    %Total Revenue
    
    $
    579,085
    
    
    $
    532,152
    
    
    
    8.8
    %
    
    $
    192,881
    
    
    $
    184,222
    
    
    
    4.7
    %Net Income
    
    $
    30,596
    
    
    $
    13,321
    
    
    
    
    
    
    $
    2,424
    
    
    $
    4,289Balance Sheet DataCash & Invested Assets
    
    $
    961,384
    
    
    $
    798,975
    
    
    
    20.3
    %Total Assets
    
    $
    1,345,012
    
    
    $
    1,149,396
    
    
    
    17.0
    %Total Debt
    
    $
    100,821
    
    
    $
    77,714
    
    
    
    29.7
    %Shareholders Equity
    
    $
    404,934
    
    
    $
    333,937
    
    
    
    21.3
    %Common Shares Outstanding
    
    
    18,783
    
    
    
    17,626Per Share DataNet Income (Diluted)
    
    $
    1.60
    
    
    $
    0.74
    
    
    
    
    
    
    $
    0.12
    
    
    $
    0.23Dividends Declared
    
    $
    0.15375
    
    
    $
    0.14250
    
    
    
    7.9
    %
    
    $
    0.05125
    
    
    $
    0.04750
    
    
    
    7.9
    %Market Value
    
    $
    27.35
    
    
    $
    21.26
    
    
    
    28.6
    %Book Value
    
    $
    21.56
    
    
    $
    18.95
    
    
    
    13.8
    %AMIGs Property and Casualty OperationsDirect and Assumed Written Premiums
    
    $
    555,679
    
    
    $
    510,449
    
    
    
    8.9
    %
    
    $
    189,592
    
    
    $
    184,296
    
    
    
    2.9
    %Net Written Premium
    
    $
    515,768
    
    
    $
    476,298
    
    
    
    8.3
    %
    
    $
    177,288
    
    
    $
    168,503
    
    
    
    5.2
    %Combined Ratio Before Catastrophes
    
    
    90.8
    %
    
    
    97.3
    %
    
    
    
    
    
    
    88.6
    %
    
    
    99.8
    %Catastrophe Effects on Combined Ratio
    
    
    8.1
    %
    
    
    6.8
    %
    
    
    
    
    
    
    17.3
    %
    
    
    4.9
    %Combined Ratio
    
    
    98.9
    %
    
    
    104.1
    %
    
    
    
    
    
    
    105.9
    %
    
    
    104.7
    %




---



##### Table of Contents



Overview of Revenues The following chart provides detail related to the Companys revenues for the
nine and three-month periods ended September 30, 2004 and 2003 ($000s): Revenues Nine-Mos. Ended Sept. 30,
    
    Three-Mos. Ended Sept. 30,2004
    
    2003
    
    2004
    
    2003Insurance:Manufactured housing
    
    $
    240,626
    
    
    $
    248,187
    
    
    $
    79,024
    
    
    $
    82,359All other insuranceOther personal lines property
    
    
    65,166
    
    
    
    63,346
    
    
    
    22,043
    
    
    
    20,890Personal lines casualty
    
    
    92,924
    
    
    
    87,812
    
    
    
    29,884
    
    
    
    31,583Financial services
    
    
    59,555
    
    
    
    38,278
    
    
    
    22,556
    
    
    
    15,118Commercial lines
    
    
    37,707
    
    
    
    27,503
    
    
    
    13,703
    
    
    
    10,650Other insurance
    
    
    17,618
    
    
    
    20,189
    
    
    
    4,029
    
    
    
    7,248Total all other insurance
    
    
    272,970
    
    
    
    237,128
    
    
    
    92,215
    
    
    
    85,489Net investment income
    
    
    27,062
    
    
    
    24,861
    
    
    
    9,318
    
    
    
    8,269Net realized investment gains
    
    
    5,726
    
    
    
    2,240
    
    
    
    318
    
    
    
    1,190Transportation
    
    
    32,701
    
    
    
    19,736
    
    
    
    12,006
    
    
    
    6,915Total revenues
    
    $
    579,085
    
    
    $
    532,152
    
    
    $
    192,881
    
    
    $
    184,222
 Insurance Manufactured Housing The following chart is an overview of the results of operations of the
companys manufactured housing product. Nine Months Ended Sept. 30,
    
    Three Months Ended Sept. 30,2004
    
    2003
    
    
    
    
    
    2004
    
    2003Manufactured HousingDirect and Assumed Written Premiums
    
    $
    257,717
    
    
    $
    246,813
    
    
    
    4.4
    %
    
    $
    89,276
    
    
    $
    88,646
    
    
    
    0.7
    %Net Written Premiums
    
    $
    240,982
    
    
    $
    232,928
    
    
    
    3.5
    %
    
    $
    82,553
    
    
    $
    83,438
    
    
    
    (1.1
    )%Net Earned Premium
    
    $
    237,431
    
    
    $
    245,038
    
    
    
    (3.1
    )%
    
    $
    77,904
    
    
    $
    81,263
    
    
    
    (4.1
    )%Service Fees
    
    
    3,195
    
    
    
    3,149
    
    
    
    1.5
    %
    
    
    1,120
    
    
    
    1,096
    
    
    
    2.2
    %Total Revenues
    
    $
    240,626
    
    
    $
    248,187
    
    
    
    (3.0
    )%
    
    $
    79,024
    
    
    $
    82,359
    
    
    
    (4.0
    )%Pre-Tax Income
    
    $
    24,664
    
    
    $
    21,156
    
    
    
    
    
    
    $
    2,937
    
    
    $
    6,535Combined Ratio Before Catastrophes
    
    
    85.8
    %
    
    
    88.9
    %
    
    
    
    
    
    
    83.7
    %
    
    
    92.1
    %Catastrophe Effects on Combined Ratio
    
    
    11.0
    %
    
    
    8.6
    %
    
    
    
    
    
    
    23.0
    %
    
    
    6.1
    %Combined Ratio
    
    
    96.8
    %
    
    
    97.5
    %
    
    
    
    
    
    
    106.7
    %
    
    
    98.2
    %
 Premium Growth Although the manufactured housing industry continues to be depressed, American
Moderns gross written premium related to this product increased 0.7% in the
third quarter of 2004 and 4.4% on a year-to-date basis compared to the same
period of 2003. These increases were due primarily to rate increases approved
in 2002 and 2003 as well as the conversion of selected agents business from
our competitors.




---



##### Table of Contents



Profitability The manufactured housing product experienced a combined ratio of 106.7% in the
third quarter compared to 98.2% in last years third quarter. The increase in
combined ratio is due to the catastrophe losses related to hurricanes Charley,
Frances, Ivan and Jeanne. The manufactured housing combined ratio excluding
catastrophe losses was 83.7% for the third quarter compared with 92.1% for the
third quarter of 2003. As discussed above, this improvement in the
non-catastrophe underwriting results is driven primarily by the Companys
recent rate and underwriting actions. 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 The following chart is an
overview of the results of operations of the
companys other insurance products and services (excluding
manufactured
housing). Nine Months Ended Sept. 30,
    
    Three Months Ended Sept. 30,2004
    
    2003
    
    
    
    
    
    2004
    
    2003All Other InsuranceDirect and Assumed Written Premiums
    
    $
    323,242
    
    
    $
    274,836
    
    
    
    17.6
    %
    
    $
    109,318
    
    
    $
    101,030
    
    
    
    8.2
    %Net Written Premiums
    
    $
    284,623
    
    
    $
    252,251
    
    
    
    12.8
    %
    
    $
    98,011
    
    
    $
    90,898
    
    
    
    7.8
    %Net Earned Premium
    
    $
    265,922
    
    
    $
    229,735
    
    
    
    15.8
    %
    
    $
    91,393
    
    
    $
    83,027
    
    
    
    10.1
    %Fee Income
    
    
    7,048
    
    
    
    7,393
    
    
    
    (4.7
    )%
    
    
    822
    
    
    
    2,462
    
    
    
    (66.6
    )%Total Revenues
    
    $
    272,970
    
    
    $
    237,128
    
    
    
    15.1
    %
    
    $
    92,215
    
    
    $
    85,489
    
    
    
    7.9
    %Pre-Tax Income (Loss)
    
    $
    20,002
    
    
    $
    (4,183
    )
    
    
    
    
    
    $
    (714
    )
    
    $
    (1,585
    )
 Premium Growth Gross written premiums in American Moderns other specialty property and
casualty products (non-manufactured housing products) collectively increased
4.9% in the third quarter of 2004 and 13.0% year-to-date over the comparable
period in 2003. Driving this growth were the collateral protection, mortgage
fire, site built dwelling continued lines and the excess and surplus lines
products which collectively increased $51.6 million or 48.2% over 2003 levels.
American Moderns gross written premiums benefited from the assumption of a
$17.6 million book of collateral protection business that it obtained the
rights to in the second quarter of 2004. American Modern received rate
increases on several of these product lines in 2002, 2003 and 2004. American Modern has 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 dwelling fire programs. More specifically, gross
written premium from American Moderns ongoing site-built programs increased
8.5% to $23.0 million in the third quarter of 2004 from $21.2 million in the
comparable quarter in 2003. On a year-to-date basis, the ongoing site-built
programs increased 16.2% to $66.9 million in the first nine months of 2004
compared to $57.6 million in the first nine months of 2003. American Modern
has also experienced the intended decrease in de-emphasized programs, which are
primarily standard homeowners programs. Rate increases averaging 21%
and 19% for the motorcycle product were approved
by various states insurance departments in 2003 and 2004,
respectively. We expect these rate increases to have
approximately a 20% impact on motorcycles net earned premium in 2004.




---



##### Table of Contents



As expected, motorcycle gross written premium decreased 25.5% from $14.9 million
in the third quarter of 2003 to $11.1 million in the third quarter of 2004.
On a year-to-date basis, motorcycle premium decreased 18.7%
from $52.1 million in 2003 to $42.4 million in 2004. We have also added
expertise to our staff and have refined our product offering to better match
the needs of our targeted market. Although we believe that these actions have
significantly benefited the motorcycle operating performance in 2004, and will
continue to do so in future years, the product is projected to be unprofitable
for the full year of 2004. Credit Life gross written premium increased $4.2 million in the third quarter
of 2004 over the comparable period in 2003. On a year-to-date basis, gross
written premiums increased $13.2 million in 2004 compared to 2003. This
increase is primarily due to the significant decrease in premium cancellations
in the current quarter as compared to the year ago third quarter.
Cancellations were heavy in 2003 due to the high level of refinancing activity
which was taking place at that time. Profitability For the third quarter of 2004, and on a year-to-date basis, the improvement in
pre-tax income (loss) related to all other insurance products and services
(excluding manufactured housing) was due primarily to the improved underwriting
results related to our motorcycle and site-built dwelling products. The initiatives related to the motorcycle product referred to above are
beginning to produce results as the 2004 underwriting performance of the
motorcycle product improved on both a third quarter and year-to-date basis
compared to 2003. Specifically, the motorcycle combined ratio improved from
158.5% in the third quarter of 2003 to 115.1% in the third quarter of 2004. On
a year-to-date basis, the motorcycle combined ratio improved from 131.9% in
2003 to 106.7% in 2004. Motorcycle losses are typically lower in the first and
fourth quarters and higher in the second and third quarters in a given year due
to increased use during the middle of the year. Similar to the manufactured housing line of business, American Moderns
improvement in the site-built dwelling underwriting results is driven primarily
by the Companys recent rate and underwriting actions. The site-built dwelling
combined ratio improved from 95.1% in the third quarter of 2003 to 91.4% in the
third quarter of 2004. On a year-to-date basis, the combined ratio improved
from 106.2% in 2003 to 93.3% in 2004. 
 ALL INSURANCE (Manufactured Housing and All Other Insurance) Investment Income and Realized Capital Gains Net investment income increased to $9.3 million in the third quarter of 2004
from $8.3 million in the prior years third quarter. On a year-to-date basis,
net investment income increased to $27.1 million in 2004 from $24.9 million in
the prior year. This increase is due primarily to the increase in the size of
the portfolio. The increase in portfolio size was due primarily to the
investment of $24 million in proceeds related to the public stock offering, the
investment of $24 million related to the issuance of junior subordinated debt
securities and positive cash flow generated from operations. Reinvestment
rates continue to be depressed due to the current low interest rate
environment. The annualized pre-tax equivalent investment yield, on a cost
basis, of American Moderns fixed income portfolio was 5.2% in the first nine
months of 2004 compared to 5.5% in the comparable prior period. 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. The following chart shows the gain or loss from these
sources as well as their impact on diluted earnings per share (amounts in
$000s except per share amounts):




---



##### Table of Contents



Nine Months Ended Sept. 30, 2004
    
    Nine Months Ended Sept. 30, 2003Pre-Tax
    
    After-Tax
    
    Earnings
    
    Pre-Tax
    
    After-Tax
    
    EarningsGain (Loss)
    
    Gain (Loss)
    
    Per Share
    
    Gain (Loss)
    
    Gain (Loss)
    
    Per ShareCapital Gains
    
    $
    6,540
    
    
    $
    4,251
    
    
    $
    0.22
    
    
    $
    3,961
    
    
    $
    2,574
    
    
    $
    0.14Embedded derivatives
    
    
    (814
    )
    
    
    (529
    )
    
    
    (0.03
    )
    
    
    177
    
    
    
    115
    
    
    
    0.01Other-Than-Temporary
Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,898
    )
    
    
    (1,233
    )
    
    
    (0.07
    )Total Realized Investment
Gains
    
    $
    5,726
    
    
    $
    3,722
    
    
    $
    0.19
    
    
    $
    2,240
    
    
    $
    1,456
    
    
    $
    0.08Three Months Ended Sept. 30, 2004
    
    Three Months Ended Sept. 30, 2003Pre-Tax
    
    After-Tax
    
    Earnings
    
    Pre-Tax
    
    After-Tax
    
    EarningsGain (Loss)
    
    Gain (Loss)
    
    Per Share
    
    Gain (Loss)
    
    Gain (Loss)
    
    Per ShareCapital Gains
    
    $
    1,374
    
    
    $
    893
    
    
    $
    0.05
    
    
    $
    723
    
    
    $
    470
    
    
    $
    0.02Embedded derivatives
    
    
    (1,056
    )
    
    
    (686
    )
    
    
    (0.04
    )
    
    
    467
    
    
    
    304
    
    
    
    0.02Other-Than-Temporary
Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Realized Investment
Gains
    
    $
    318
    
    
    $
    207
    
    
    $
    0.01
    
    
    $
    1,190
    
    
    $
    774
    
    
    $
    0.04
 Embedded derivatives relate to the equity conversion features attributable to
the convertible preferred stocks and convertible debentures held in American
Moderns convertible security portfolio. The Companys investment portfolio
does not currently include any other types of derivative investments. Insurance Losses and Loss Adjustment Expenses (LAE) American Moderns losses and loss adjustment expenses in the third quarter of
2004 increased 3.5% to $108.8 million from $105.1 million in the prior years
third quarter. This increase in losses was due to the significant catastrophe
losses incurred from hurricanes Charley, Frances, Ivan and Jeanne mostly offset
by the improved non-catastrophe underwriting results experienced by the
manufactured housing, watercraft and motorcycle products combined with
favorable development in the claims settled related to the companys run-off
commercial liability books of business. The non-catastrophe manufactured
housing combined ratio improved from 92.1% in the third quarter of 2003 to
83.7% in the third quarter of 2004. On a year-to-date basis, losses and loss adjustment expenses decreased 6.9% to
$276.7 million in 2004 from $297.2 million in 2003. The decrease is due to the
improved non-catastrophe underwriting results related to the manufactured
housing, site-built dwelling, motorcycle and watercraft products partially
offset by the increase in catastrophe losses related to Charley, Frances, Ivan
and Jeanne. On a year-to-date basis, the manufactured housing non-catastrophe
combined ratio improved from 88.9% to 85.8%, the site-built dwelling
non-catastrophe combined ratio improved from 95.0% to 88.9%, the motorcycle
non-catastrophe combined ratio improved from 131.9% to 106.5%, and the
watercraft non-catastrophe combined ratio improved from 102.9% to 85.5%. Insurance Commissions and Other Policy Acquisition Costs American Moderns commissions and other policy acquisition costs decreased 3.9%
from $45.0 million in the third quarter of 2003 to $43.2 million in the third
quarter of 2004. The decrease is due to the reduction in performance-based
commission expense resulting from the hurricane catastrophe losses experienced
during the quarter. On a year-to-date basis, American Moderns commissions and
other policy acquisition costs increased 9.6% from $133.7 million in 2003 to
$146.5 million in 2004. These increases are due primarily to the continued
growth in net earned premium plus an increase in performance-based commission
expense as a result of the improved underwriting results achieved in the first
nine months of 2004 compared to the first nine months of 2003. The
fluctuations in performance-based commission expense are attributable, in part,
to American Moderns Pay-for-Performance commission policy which reduces the
up-front commission paid but rewards favorable underwriting performance with a
higher performance-based commission.




---



##### Table of Contents



Insurance Operating and Administrative Expenses American Moderns insurance operating and administrative expenses increased
20.3% from $21.6 million in the third quarter of 2003 to $26.0 million in the
third quarter of 2004. On a year-to-date basis, American Moderns insurance
operating and administrative expenses increased 23.8% from $63.3 million in
2003 to $78.4 million in 2004. These increases are commensurate with the
increase in revenues plus increases related to employee incentive plans,
depreciation expenses related to modernLINK®, our proprietary information
systems and web enablement initiative, and an increase in employee healthcare
expenses. M/G Transport M/G Transport, Midlands transportation subsidiary, reported revenues for the
third quarter of 2004 of $12.0 million compared to $6.9 million in the prior
years third quarter. Pre-tax operating profit was $0.6 million in the current
quarter as compared to $0.5 million in the prior years third quarter. The
increase in transportation revenues is primarily due to an increase in tonnage
hauled related to petroleum coke, coal and barite commodities. The increase in
transportation expenses is commensurate with the increase in revenues plus
additional costs due to a change in shipping patterns experienced during the
quarter. On a year-to-date basis, M/G Transports revenues increased to $32.7 million in
2004 compared to $19.7 million in 2003. Pre-tax income improved to $1.3
million in 2004 compared to $0.8 million in 2003. Outlook Given the results of the three and nine-month periods ended September 30, 2004
coupled with the strong underwriting results from our core product lines so far
in 2004, we anticipate a property and casualty combined ratio, assuming normal
weather, in the range of 97.0% to 98.0% for the full year 2004. Management
also projects investment income to increase moderately given the larger base of
invested assets. This level of underwriting profit and investment income
should translate to net income in the range of $2.41 to $2.61 per share
(diluted), which would include the after-tax impact of $0.19 per share
(diluted) from realized investment gains.




---



##### Table of Contents



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 September 30, 2004, the aggregate obligations on a
consolidated basis were as follows (amounts in $000s): Payments Due by PeriodLess than
    
    2-5
    
    After 5Total
    
    1 Year
    
    Years
    
    YearsLong-term debt
    
    $
    85,047
    
    
    $
    1,649
    
    
    $
    59,398
    
    
    $
    24,000Other notes payable
    
    
    15,774
    
    
    
    15,774
    
    
    
    
    
    
    
    Annual commitments under
non-cancelable leases
    
    
    7,125
    
    
    
    1,000
    
    
    
    2,952
    
    
    
    3,173Purchase obligations
    
    
    16,474
    
    
    
    12,289
    
    
    
    4,185
    
    
    
    Other obligations
    
    
    1,096
    
    
    
    1,034
    
    
    
    62
    
    
    
    Insurance policy loss reserves
    
    
    260,724
    
    
    
    143,920
    
    
    
    105,593
    
    
    
    11,211Total
    
    $
    386,240
    
    
    $
    175,666
    
    
    $
    172,190
    
    
    $
    38,384
 The table above excludes contracts and agreements that relate to maintenance
and service agreements which, individually and in the aggregate, are not
material to the Companys operations or financial condition, and are terminable
by the Company with minimal advance notice and at little or no cost to the
Company. The insurance policy loss reserve payment projections in the above table are
based on actuarial assumptions. The actual payments will vary, in both amount
and time periods, from the estimated amounts represented in this table. See
further discussion regarding insurance policy loss reserves under the Critical
Accounting Policies section below. Other Items No shares were repurchased in the open market under the Companys share
repurchase program during the first nine months of 2004 and a total of 586,000
shares remain authorized for repurchase under terms of this authority. On
April 29, 2004, the Companys 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 2006. The resolution does not require the
repurchase of shares, but rather gives management discretion to make purchases
based on market conditions and the Companys capital requirements. The share repurchase program pertains exclusively to shares to be purchased on
the open market. This program specifically excludes shares repurchased in
connection with stock incentive plans. The Company may periodically repurchase
stock awarded to associates in connection with stock incentive programs. Such
repurchase transactions essentially accommodate associates funding of the
exercise price and any tax liabilities arising from the exercise or receipt of
equity based incentive awards. During the nine-month period ended September
30, 2004, the Company repurchased approximately $2.8 million of treasury shares
in connection with associate stock incentive programs. The Company repurchased
no shares related to this program during the third quarter of 2004. We expect that our existing cash and other liquid investments, coupled with
future operating cash flows and our short-term borrowing capacity, will 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 the Companys, or American Moderns, liquidity or ability
to meet their respective long or short-term operating, financing or capital
obligations.




---



##### Table of Contents



Midland has a commercial paper program under which qualified purchasers may
invest in the short-term unsecured notes of Midland. As of September 30, 2004,
Midland had $4.8 million of commercial paper debt outstanding, $4.0 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 1.61% as of September 30, 2004, a rate that management
considers to be competitive with the market rates offered for similar
instruments. As of September 30, 2004, Midland also had $79.0 million of
conventional short-term credit lines available at costs not exceeding prime
borrowing rates, of which $11.0 million was outstanding. These short-term
borrowings decreased $19.0 million since December 31, 2003. Proceeds derived
from the sale or maturity of marketable securities were used to reduce these
short-term borrowings. These lines of credit contain minimally restrictive
covenants and are typically drawn and repaid over periods ranging from two
weeks to three months. Additional short-term lines are available at the
discretion of various lending institutions with comparable rates and terms. The Company also has a mortgage obligation related to the financing of our
corporate headquarters building. As of September 30, 2004, the outstanding
balance of this mortgage was $15.0 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 shelf registration statement with the
Securities and Exchange Commission. 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, Midland sold 1,150,000 shares of its common stock authorized by this
shelf registration. The net proceeds received of $25.1 million were used to
increase the capital base of its insurance subsidiaries to provide for future
growth and for other general corporate purposes. During the second quarter of 2004, Midland, through a wholly owned trust,
issued $24.0 million of junior subordinated debt securities ($12.0 million on
April 29 and $12.0 million on May 26). These transactions were part of the
Companys participation in pooled trust preferred offerings. The proceeds from
these transactions were used to increase the capital of the insurance
subsidiaries to fund future growth and for general corporate purposes. The
debt issues have 30-year terms and are callable after five years. The interest
related to the debt is variable in nature. The debt contains certain
provisions which are typical and customary for this type of security. Insurance American Modern generates cash inflows primarily from insurance premium,
investment income, proceeds from the sale of marketable securities and
maturities of fixed income 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 to us 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 12.9% from
$846.3 million at December 31, 2003, to $955.5 million at September 30, 2004.
This increase was primarily due to the investment of $24.0 million in net
proceeds derived from the public stock offering, the investment of $24 million
related to the issuance of junior subordinated debt securities and positive
cash flow generated from operations, offset by a decrease of $7.5 million in
unrealized appreciation in the market value of securities held. The decrease
in the unrealized appreciation was due to a $2.7 million decrease in unrealized
appreciation related to the fixed income portfolio combined with a $4.8 million
decrease in the unrealized appreciation related to the equity portfolio.
Midlands largest equity holding, 2.5 million shares of U.S. Bancorp, decreased
to $71.1 million in market value as of September 30, 2004 from $73.3 million as
of December 31, 2003. Securities with unrealized gains and losses by category (equity and fixed
income) and by time frame are summarized in the chart below:




---



##### Table of Contents



Unrealized Gain (Loss) as of September 30, 2004 (000s) Unrealized
    
    Fair
    
    # ofGain (Loss)
    
    Value
    
    PositionsFixed Income SecuritiesTotal Held In A Gain Position
    
    $
    26,756
    
    
    $
    634,519
    
    
    
    741Held In A Loss Position For Less Than 3 Months
    
    
    (225
    )
    
    
    21,260
    
    
    
    20Held In A Loss Position For More Than 3 Months
And Less Than 9 Months
    
    
    (1,264
    )
    
    
    90,547
    
    
    
    67Held In A Loss Position For More Than 9 Months
And Less Than 18 Months
    
    
    (248
    )
    
    
    11,181
    
    
    
    17Held In A Loss Position For More Than 18 Months
    
    
    (2
    )
    
    
    203
    
    
    
    1Fixed Income Total
    
    $
    25,017
    
    
    $
    757,710
    
    
    
    846
 Unrealized
    
    Fair
    
    # ofGain (Loss)
    
    Value
    
    PositionsEquity SecuritiesTotal Held In A Gain Position
    
    $
    84,425
    
    
    $
    164,113
    
    
    
    174Held In A Loss Position For Less Than 3 Months
    
    
    (1,141
    )
    
    
    12,842
    
    
    
    27Held In A Loss Position For More Than 3 Months
And Less Than 9 Months
    
    
    (835
    )
    
    
    8,622
    
    
    
    22Held In A Loss Position For More Than 9 Months
And Less Than 18 Months
    
    
    (53
    )
    
    
    329
    
    
    
    3Held In A Loss Position For More Than 18 Months
    
    
    (332
    )
    
    
    2,978
    
    
    
    6Equity Total
    
    $
    82,064
    
    
    $
    188,884
    
    
    
    232Total Per Above
    
    $
    107,081
    
    
    $
    946,594
    
    
    
    1,078Accrued Interest and Dividends
    
    
    
    
    
    
    8,876Total Per Balance Sheet
    
    $
    107,081
    
    
    $
    955,470
 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 September 30, 2004. However, the facts and circumstances related
to these securities may change in future periods, which could result in
other-than-temporary impairments in future periods. The average duration of American Moderns fixed income security investment
portfolio as of September 30, 2004 was 4.4 years which management believes
provides adequate asset/liability matching. The amounts expended for the development costs capitalized in connection with
the development of modernLINK®, our proprietary information systems and web
enablement initiative, amounted to $3.7 million for the first nine months of
2004 and a total of $16.6 million from inception in 2000. 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 two to
three years, with additional spending thereafter to expand system compatibility
and functionality. A portion




---



##### Table of Contents



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 September 30, 2004, there was $36.0
million outstanding under these facilities. American Modern has 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.
The fair value of this agreement as of September 30, 2004 was $(0.7) million
and 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 62% of American Moderns accounts
receivables relate to premium due directly from policyholders as of September
30, 2004. In the case of receivables due from agents, American Modern has
offered 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, 2003, American Moderns accounts receivable has increased $20.9
million to $93.4 million at September 30, 2004 due primarily to the increase in
written premium volume. The increase of $26.3 million in reinsurance recoverables and prepaid
reinsurance premiums is primarily due to the loss recoverables generated by
hurricanes Charley, Frances, Ivan and Jeanne. The $21.6 million increase in unearned insurance premiums was due to the growth
in gross written premium in 2004 compared to the levels in 2003. As a result,
gross written premium outpaced gross earned premium during the first nine
months of 2004. The $55.9 million increase in insurance loss reserves is due primarily to the
catastrophe losses incurred related to hurricanes Charley, Frances, Ivan and
Jeanne. The $10.2 million increase in insurance commissions payable is primarily due to
the net increase of $7.8 million in property and casualty performance-based
commissions payable as a result of the strong underwriting profitability of the
property and casualty operations in the first nine months of 2004 combined with
an increase in written premiums during the period. The $19.8 million increase in other payable and accruals is due primarily to
$15.6 million increase in investment securities payable. These payables are
generated when a security is purchased for the Companys investment portfolio
with a trade date prior to period end, but the trade is not settled until after
period end. 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. As of September 30, 2004, the
transportation subsidiaries had $10.0 million of collateralized equipment
obligations outstanding. Like the insurance operations, cash flow from the
transportation subsidiaries is expected to remain sufficiently positive to meet
future operating requirements.




---



##### Table of Contents



OTHER MATTERS Comprehensive Income The only differences between the Companys net income and comprehensive income
is the net after-tax change in unrealized gains on marketable securities and
the after-tax change in the fair value of the interest rate swap agreement.
For the nine and three-month periods ended September 30, 2004 and 2003, such
changes increased or (decreased), net of related income tax effects, by the
following (amounts in $000s): Nine Months Ended Sept. 30,
    
    Three Months Ended Sept. 30,2004
    
    2003
    
    2004
    
    2003Changes in net unrealized capital gains:Equity securities
    
    $
    (3,124
    )
    
    $
    11,887
    
    
    $
    1,358
    
    
    $
    (258
    )Fixed income securities
    
    
    (1,756
    )
    
    
    1,221
    
    
    
    8,840
    
    
    
    (3,254
    )Changes in fair value of interest
rate swap hedge
    
    
    470
    
    
    
    117
    
    
    
    62
    
    
    
    203Total
    
    $
    (4,410
    )
    
    $
    13,225
    
    
    $
    10,260
    
    
    $
    (3,309
    )
 Changes in net unrealized gains on marketable securities result from both
market conditions and realized gains recognized in a reporting period. Changes
in the fair value of the interest rate swap agreement are predicated on the
current interest rate environment relative to the fixed rate of the swap
agreement. Critical Accounting Policies The Companys discussion and analysis of its financial condition and results of
operations are based upon 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 the Company to make estimates, assumptions and judgments that affect
the reported amounts of assets, revenues and expenses and related disclosures
of contingent assets and liabilities. Management regularly evaluates the
Companys critical accounting policies, assumptions and estimates, including
those related to insurance revenue and expense recognition, loss reserves,
reinsurance levels and valuation and impairment of assets. Management bases
its estimates on historical experience and on various assumptions believed to
be reasonable under the 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. Management believes the following critical accounting policies require
significant judgments and estimates in the preparation of the Companys
consolidated financial statements. Insurance Revenue and Expense Recognition 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. Insurance Policy Loss Reserves 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




---



##### Table of Contents



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. The following table provides additional detail surrounding the Companys
insurance policy loss reserves at September 30, 2004 and December 31, 2003: September 30,
    
    December 31,2004
    
    2003Gross case base loss reserves:Manufactured housing
    
    $
    38,217
    
    
    $
    30,263Other insurance
    
    
    126,184
    
    
    
    96,448Gross loss reserves incurred but not reported
    
    
    68,775
    
    
    
    55,366Outstanding checks and drafts
    
    
    27,548
    
    
    
    22,756Total insurance loss reserves
    
    $
    260,724
    
    
    $
    204,833
 The recorded insurance loss reserves at the balance sheet date represent the
Companys best estimate, based on historical patterns, of its liabilities at
that date. Management, along with the Companys internal actuaries,
periodically reviews the level of loss reserves against actual loss
development. This retrospective review is the primary criteria used in
refining the levels of loss reserves recorded in the financial statements.
Additionally, management compares the Companys estimate of loss reserves to
ranges prepared by its external consulting actuaries to ensure that such
estimates are within the actuaries acceptable range. The external actuaries
perform an extensive review of loss reserves at year end along with a higher
level review throughout the year to ensure that the recorded loss reserves
appear reasonable. At December 31, 2003, loss reserves, net of reinsurance
recoverables, for our property and casualty companies totaled $149.5 million.
The Companys estimate was affirmed by the actuaries estimated range for net
loss reserves of $143.5 million to $155.5 million. At September 30, 2004, loss
reserves, net of reinsurance recoverables, for our property and casualty
companies totaled $186.7 million. While management believes the amounts are fairly stated, the ultimate
liability, once fully developed, may be more than or less than the recorded
amount. Management believes that the likelihood that actual loss development
patterns will differ significantly from past experience is remote given the
short-tail, property oriented nature of the Companys business. However, if
the ultimate pay outs would significantly exceed the expected amounts, the
company has several potential options to utilize in order to satisfy the
additional obligations. The Company could liquidate a portion of its
investment portfolio. In addition, American Modern and the Company have
conventional short-term credit lines available, at costs not exceeding prime
rates, which would be sufficient to meet any increases in required loss
payments. 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 and its independent reinsurance broker regularly conduct
market security evaluations of both its current and prospective reinsurers.
Such evaluations include a complete review of each reinsurers financial
condition along with an assessment of credit risk concentrations arising from
similar geographic regions, activities or economic characteristics of the
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. The specific evaluation procedures include, but are not limited
to, reviewing the periodic financial statements and ratings assigned to each
reinsurer from rating agencies such as S&P, Moodys and A.M. Best. In
addition, American Modern may, in some cases, require reinsurers to establish
trust funds and maintain letters of credit to further minimize possible
exposures. As of September 30, 2004, American Modern was owed $17.5 million
from reinsurers for claims that have been paid and for which a contractual
obligation to collect from a reinsurer exists. All such amounts owed to
American Modern are considered current and there is no allowance for
uncollectible accounts related to this recoverable. We do not believe there is
any significant concentration of credit risk arising from any single reinsurer.




---



##### Table of Contents



Other-Than-Temporary Impairment of Investment Securities 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 forecasted 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. 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 September 30,
2004, 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 principle 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
forecasted recovery
    
    time to conversion with respect to a mandatory convertible security For fixed income securities, we also consider the following factors:




---



##### Table of Contents




    
    whether the unrealized loss is credit-driven or is a result of changes in market interest rates
    
    the recoverability of principle 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 selling the security and reinvesting the proceeds, the managers
may do so, in which case the unrealized gain or loss will be recognized as a
realized gain or loss. Gross unrealized losses on securities were $4.1 million
at September 30, 2004. As part of our comprehensive quarterly review for
other-than-temporary impairment, the investment managers identify any
securities in which they have the 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 September 30, 2004, we had no securities with an unrealized loss
for which a decision was made to sell in the near term. 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 and
long-term bond yields. If other assumptions were used, the amount recorded as
pension expense would be different from our current estimate. Asset Impairment Midland regularly evaluates the carrying value of its assets for potential
impairment. These assets include property, plant and equipment, intangible
assets such as goodwill, deferred tax assets and deferred acquisition costs.
Generally, potential impairment is determined based on a comparison of fair
value to the carrying value. The determination of fair value can be highly
subjective, specifically for assets that are not actively traded or when market
based prices are not available. The initial valuation, subsequent impairment
tests and determining the impairment amount, if any, may require the use of
significant management estimates. New Accounting Standards In December 2003, the Financial Accounting Standards Board (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®) 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. In 2004,
SFAS No. 132® requires interim-period disclosure of components of net pension
and other postretirement benefit cost. Midland adopted this standard and all
of its required disclosures. In September 2004, the FASB deferred the effective date of paragraphs 10
through 20 of Emerging Issues Task Force Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
(EITF 03-1). Prior to the deferral, EITF 03-1 was to be effective for the
third quarter of 2004. Application of paragraphs 10 through 20 will be
deferred pending further guidance from the




---



##### Table of Contents



FASB. EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment
is other-than-temporary, and measurement of an impairment loss. If impairment
is determined to be other-than-temporary, then an impairment loss should be
recognized equal to the difference between the investments cost and its fair
value. Gross unrealized losses on available for sale securities were $4.1
million at September 30, 2004. 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. 
 ITEM 3. 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 4.4 year duration of American Moderns fixed
income portfolio as of September 30, 2004, management estimates that a 100
basis point increase in interest rates would decrease the market value of its
$770.5 million fixed income portfolio by 4.4%, or $33.9 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 September 30, 2004, American Modern had $171.6
million in equity holdings, including $53.2 million of U.S. Bancorp common
stock. As of September 30, 2004, the remainder of American Moderns portfolio
of equity securities (excluding U.S. Bancorp) had a beta coefficient (a measure
of stock price volatility) of 1.09. 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 10.9%. American Moderns and
Midlands combined equity holding of U.S. Bancorp common stock totaled $71.1
million at September 30, 2004. A 10% decrease in the market value of U.S.
Bancorps common stock would decrease the consolidated fair value of our equity
holdings by approximately $7.1 million. 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. 
 ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report (the Evaluation Date), we
carried out an evaluation, under the supervision and with the participation of
our management, including our President and Chief Executive Officer and our
Executive Vice President and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act). Based upon this evaluation, our President and Chief Executive
Officer and our Executive Vice President and Chief Financial Officer concluded
that, as of the Evaluation Date, our disclosure controls and procedures are
effective. The Company maintains a system of internal control over financial reporting.
There have been no changes in the Companys internal control over financial
reporting that occurred during the Companys third fiscal quarter that have
materially affected, or are reasonably likely to materially effect, the
Companys internal control over financial reporting.




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Midland Company
Cincinnati, Ohio We have reviewed the accompanying condensed consolidated balance sheet of The
Midland Company and subsidiaries (the Corporation) as of September 30, 2004,
and the related condensed consolidated statements of operations for the
three-month and nine-month periods ended September 30, 2004 and 2003, and of
cash flows and changes in shareholders equity for the nine-month periods ended
September 30, 2004 and 2003. These interim financial statements are the
responsibility of the Corporations management. We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America. We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
The Midland Company and subsidiaries as of December 31, 2003, and the related
consolidated statements of income, shareholders equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 24,
2004, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2003 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived. Deloitte & Touche LLP Cincinnati, Ohio November 3, 2004




---



##### Table of Contents



PART II. OTHER INFORMATION
THE MIDLAND COMPANY AND SUBSIDIARIES
SEPTEMBER 30, 2004 Item 1.
    
    Legal Proceedings
NoneItem 2.
    
    Unregistered Sales of Equity Securities and Use of Proceedsa)
    
    Noneb)
    
    Nonec)
    
    During the three and nine-month periods ended September
30, 2004, the Company did not purchase any of its equity
securities pursuant to a publicly announced plan or program.
However, during the three and nine-month periods ended September
30, 2004, the Company acquired zero shares and 97,553 shares,
respectively, in private transactions from employees in
connection with its stock incentive plans. Such transactions
essentially accommodate employees funding requirements of the
exercise price and tax liabilities arising from the exercise or
receipt of equity-based incentive awards. Additionally, pursuant
to the Companys Salaried Employees 401(k) Savings Plan, the
Company acquired 7,970 and 14,779 shares from the Plan during the
three and nine-month periods ended September 30, 2004,
respectively.Item 3.
    
    Defaults Upon Senior Securities
NoneItem 4.
    
    Submission of Matters to a Vote of Security Holders
NoneItem 5.
    
    Other Information
NoneItem 6.
    
    ExhibitsExhibit 15  Letter re: Unaudited Interim Financial InformationExhibit 31.1  Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934Exhibit 31.2  Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934Exhibit 32  Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. § 1350
 
 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.  THE MIDLAND COMPANYDate:  November 3, 2004
    /s/John I. Von LehmanJohn I. Von Lehman, Executive Vice President,Chief Financial Officer and Secretary