##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 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
   þ o
  þ o
    1




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TABLE OF CONTENTS  PART I.ITEM I. FINANCIAL INFORMATIONITEM 2. THE MIDLAND COMPANY AND SUBSIDIARIESITEM 3. QUANTITATIVE AND QUALITATIVEITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATUREExhibit 15Exhibit 31.1Exhibit 31.2Exhibit 32    Table of Contents  
 PART I.
 
 ITEM I. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
Amounts in 000s
 (Unaudited)June 30,
    
    December 31,ASSETS
    
    2005
    
    2004MARKETABLE SECURITIES AVAILABLE FOR SALE:Fixed income (cost, $765,534 at June 30, 2005 and
$745,514 at December 31, 2004)
    
    $
    787,202
    
    
    $
    770,639Equity (cost, $100,626 at June 30, 2005 and
$109,851 at December 31, 2004)
    
    
    183,742
    
    
    
    200,799Total
    
    
    970,944
    
    
    
    971,438CASH
    
    
    4,715
    
    
    
    6,858ACCOUNTS RECEIVABLE  NET
    
    
    147,783
    
    
    
    113,979REINSURANCE RECOVERABLES AND
PREPAID REINSURANCE PREMIUMS
    
    
    84,043
    
    
    
    87,726PROPERTY, PLANT AND EQUIPMENT  NET
    
    
    82,206
    
    
    
    68,312DEFERRED INSURANCE POLICY ACQUISITION COSTS
    
    
    90,817
    
    
    
    90,423OTHER ASSETS
    
    
    24,767
    
    
    
    25,948TOTAL ASSETS
    
    $
    1,405,275
    
    
    $
    1,364,684
  2




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##### Table of Contents



THE MIDLAND COMPANY
AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
Amounts in 000s
 (Unaudited)June 30,
    
    December 31,LIABILITIES & SHAREHOLDERS EQUITY
    
    2005
    
    2004UNEARNED INSURANCE PREMIUMS
    
    $
    393,312
    
    
    $
    390,447INSURANCE LOSS RESERVES
    
    
    215,859
    
    
    
    232,915INSURANCE COMMISSIONS PAYABLE
    
    
    48,269
    
    
    
    45,374FUNDS HELD UNDER REINSURANCE AGREEMENTS
AND REINSURANCE PAYABLES
    
    
    14,161
    
    
    
    11,465LONG-TERM DEBT
    
    
    68,843
    
    
    
    58,729OTHER NOTES PAYABLE
    
    
    12,992
    
    
    
    33,177DEFERRED FEDERAL INCOME TAX
    
    
    43,762
    
    
    
    47,604OTHER PAYABLES AND ACCRUALS
    
    
    116,048
    
    
    
    88,697JUNIOR SUBORDINATED DEBENTURES
    
    
    24,000
    
    
    
    24,000TOTAL LIABILITIES
    
    
    937,246
    
    
    
    932,408COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Common stock (issued and outstanding: 18,908 shares at
June 30, 2005 and 18,807 shares at December 31, 2004
after deducting treasury stock of 4,098 shares and
4,199 shares, respectively)
    
    
    959
    
    
    
    959Additional paid-in capital
    
    
    53,418
    
    
    
    51,184Retained earnings
    
    
    390,300
    
    
    
    350,141Accumulated other comprehensive income
    
    
    65,890
    
    
    
    73,027Treasury stock  at cost
    
    
    (42,538
    )
    
    
    (43,035
    )TOTAL SHAREHOLDERS EQUITY
    
    
    468,029
    
    
    
    432,276TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,405,275
    
    
    $
    1,364,684
  3




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##### Table of Contents



THE MIDLAND COMPANY
AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2005 AND 2004
Amounts in 000s (except per share information)
 Six-Mos. Ended June 30,
    
    Three-Mos. Ended June 30,2005
    
    2004
    
    2005
    
    2004REVENUES:Premiums earned
    
    $
    325,280
    
    
    $
    334,054
    
    
    $
    159,689
    
    
    $
    170,415Other insurance income
    
    
    6,394
    
    
    
    8,303
    
    
    
    3,152
    
    
    
    4,041Net investment income
    
    
    20,119
    
    
    
    17,744
    
    
    
    10,193
    
    
    
    9,030Net realized investment gains
    
    
    2,216
    
    
    
    5,408
    
    
    
    1,413
    
    
    
    702Transportation
    
    
    22,695
    
    
    
    20,695
    
    
    
    11,891
    
    
    
    11,395Total
    
    
    376,704
    
    
    
    386,204
    
    
    
    186,338
    
    
    
    195,583COSTS AND EXPENSES:Losses and loss adjustment expenses
    
    
    134,710
    
    
    
    167,892
    
    
    
    71,771
    
    
    
    88,567Commissions and other policy acquisition costs
    
    
    102,045
    
    
    
    103,262
    
    
    
    44,343
    
    
    
    51,569Operating and administrative expenses
    
    
    54,963
    
    
    
    52,432
    
    
    
    28,210
    
    
    
    27,353Transportation operating expenses
    
    
    20,544
    
    
    
    19,754
    
    
    
    10,414
    
    
    
    10,690Interest expense
    
    
    3,079
    
    
    
    2,561
    
    
    
    1,617
    
    
    
    1,542Total
    
    
    315,341
    
    
    
    345,901
    
    
    
    156,355
    
    
    
    179,721INCOME BEFORE FEDERAL INCOME TAX
    
    
    61,363
    
    
    
    40,303
    
    
    
    29,983
    
    
    
    15,862PROVISION FOR FEDERAL INCOME TAX
    
    
    19,079
    
    
    
    12,131
    
    
    
    9,249
    
    
    
    4,538NET INCOME
    
    $
    42,284
    
    
    $
    28,172
    
    
    $
    20,734
    
    
    $
    11,324BASIC EARNINGS PER SHARE
OF COMMON STOCK:
    
    $
    2.24
    
    
    $
    1.53
    
    
    $
    1.09
    
    
    $
    0.60DILUTED EARNINGS PER SHARE
OF COMMON STOCK:
    
    $
    2.16
    
    
    $
    1.48
    
    
    $
    1.06
    
    
    $
    0.58CASH DIVIDENDS DECLARED PER SHARE
OF COMMON STOCK
    
    $
    0.1125
    
    
    $
    0.1025
    
    
    $
    0.05625
    
    
    $
    0.05125
  4




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THE MIDLAND COMPANY AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (Unaudited)
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, 2003
    
    $
    911
    
    
    $
    23,406
    
    
    $
    299,752
    
    
    $
    73,455
    
    
    $
    (41,442
    )
    
    $
    (24
    )
    
    $
    356,058Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    28,172
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,172
    
    
    $
    28,172Decrease in unrealized gain on
marketable securities, net of related
income tax effect of $8,120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,078
    )
    
    
    
    
    
    
    
    
    
    
    (15,078
    )
    
    
    (15,078
    )Other, net of federal income tax of $220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    408
    
    
    
    
    
    
    
    
    
    
    
    408
    
    
    
    408Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,502Public stock offering
    
    
    48
    
    
    
    25,022
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,070Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,550
    )
    
    
    
    
    
    
    (2,550
    )Issuance of treasury stock for options
exercised and employee savings plan
    
    
    
    
    
    
    852
    
    
    
    
    
    
    
    
    
    
    
    773
    
    
    
    
    
    
    
    1,625Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (1,922
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,922
    )Federal income tax benefit related to the
exercise or granting of stock awards
    
    
    
    
    
    
    1,033
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,033Amortization and cancellation of
unvested restricted stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    24BALANCE, JUNE 30, 2004
    
    $
    959
    
    
    $
    50,313
    
    
    $
    326,002
    
    
    $
    58,785
    
    
    $
    (43,219
    )
    
    $
    
    
    
    $
    392,840BALANCE, DECEMBER 31, 2004
    
    $
    959
    
    
    $
    51,184
    
    
    $
    350,141
    
    
    $
    73,027
    
    
    $
    (43,035
    )
    
    $
    
    
    
    $
    432,276Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    42,284
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,284
    
    
    $
    42,284Decrease in unrealized gain on
marketable securities, net of related
income tax effect of $3,951
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,338
    )
    
    
    
    
    
    
    
    
    
    
    (7,338
    )
    
    
    (7,338
    )Other, net of federal income tax of $109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    201
    
    
    
    201Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,147Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (787
    )
    
    
    
    
    
    
    (787
    )Issuance of treasury stock for options
exercised and employee savings plan
    
    
    
    
    
    
    1,952
    
    
    
    
    
    
    
    
    
    
    
    1,284
    
    
    
    
    
    
    
    3,236Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (2,125
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,125
    )Federal income tax benefit related to the
exercise or granting of stock awards
    
    
    
    
    
    
    282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    282BALANCE, JUNE 30, 2005
    
    $
    959
    
    
    $
    53,418
    
    
    $
    390,300
    
    
    $
    65,890
    
    
    $
    (42,538
    )
    
    $
    
    
    
    $
    468,029
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##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX-MONTHS ENDED JUNE 30, 2005 AND 2004
Amounts in 000s
 2005
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    42,284
    
    
    $
    28,172Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,888
    
    
    
    5,912Net realized investment gains
    
    
    (2,691
    )
    
    
    (5,166
    )Increase in unearned insurance premiums
    
    
    2,865
    
    
    
    9,846Increase in deferred insurance policy acquisition costs
    
    
    (394
    )
    
    
    (2,158
    )Decrease (increase) in reinsurance recoverables and prepaid
reinsurance premiums
    
    
    3,683
    
    
    
    (4,237
    )Increase in accounts receivable  net
    
    
    (33,804
    )
    
    
    (6,448
    )Increase (decrease) in insurance loss reserves
    
    
    (17,056
    )
    
    
    12,958Increase in funds held under reinsurance
agreements and reinsurance payables
    
    
    2,696
    
    
    
    1,404Increase in other payables and accruals
    
    
    27,842
    
    
    
    8,836Decrease (increase) in other assets
    
    
    1,181
    
    
    
    (229
    )Increase in insurance commissions payable
    
    
    2,895
    
    
    
    13,856Other-net
    
    
    1,882
    
    
    
    796Net cash provided by operating activities
    
    
    36,271
    
    
    
    63,542CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of marketable securities
    
    
    (232,003
    )
    
    
    (272,536
    )Sale of marketable securities
    
    
    208,615
    
    
    
    134,039Decrease (increase) in cash equivalent marketable securities
    
    
    (25,022
    )
    
    
    21,065Maturity of marketable securities
    
    
    38,328
    
    
    
    39,140Acquisition of property, plant and equipment
    
    
    (18,830
    )
    
    
    (5,787
    )Proceeds from sale of property, plant and equipment
    
    
    145
    
    
    
    386Net cash used in investing activities
    
    
    (28,767
    )
    
    
    (83,693
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from common stock issuance
    
    
    
    
    
    
    25,070Decrease in net short-term borrowings
    
    
    (20,185
    )
    
    
    (21,847
    )Issuance of treasury stock
    
    
    3,236
    
    
    
    1,625Dividends paid
    
    
    (2,025
    )
    
    
    (2,747
    )Purchase of treasury stock
    
    
    (787
    )
    
    
    (2,550
    )Borrowing (repayment) of long-term debt
    
    
    10,114
    
    
    
    (775
    )Issuance of junior subordinated debentures
    
    
    
    
    
    
    24,000Net cash provided by (used in) financing activities
    
    
    (9,647
    )
    
    
    22,776NET INCREASE (DECREASE) IN CASH
    
    
    (2,143
    )
    
    
    2,625CASH AT BEGINNING OF PERIOD
    
    
    6,858
    
    
    
    2,386CASH AT END OF PERIOD
    
    $
    4,715
    
    
    $
    5,011INTEREST PAID
    
    $
    2,909
    
    
    $
    1,917INCOME TAXES PAID
    
    $
    16,600
    
    
    $
    11,800
  6




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##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2005
 1. BASIS OF PRESENTATION
  2. EARNINGS PER SHARE
  For Basic EPS
    
    For Diluted EPSSix months ended June 30:2005
    
    
    18,859
    
    
    
    19,5382004
    
    
    18,453
    
    
    
    18,977Three months ended June 30:2005
    
    
    18,886
    
    
    
    19,5652004
    
    
    18,752
    
    
    
    19,259
  3. INCOME TAXES
  7




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##### Table of Contents



Six-Mos. Ended June 30,
    
    Three-Mos. Ended June 30,2005
    
    2004
    
    2005
    
    2004Federal income tax at statutory rate
    
    $
    21,477
    
    
    $
    14,106
    
    
    $
    10,494
    
    
    $
    5,552Tax effect of:Tax exempt interest and
excludable dividend income
    
    
    (2,521
    )
    
    
    (2,087
    )
    
    
    (1,301
    )
    
    
    (1,064
    )Other  net
    
    
    123
    
    
    
    112
    
    
    
    56
    
    
    
    50Provision for federal income tax
    
    $
    19,079
    
    
    $
    12,131
    
    
    $
    9,249
    
    
    $
    4,538
 4. SEGMENT DISCLOSURES
  Six Months Ended June 30, 2005
    
    Six Months Ended June 30, 2004Revenues-
    
    Pre-Tax
    
    
    
    
    
    Revenues-
    
    Pre-TaxTotal
    
    External
    
    Income
    
    Total
    
    External
    
    IncomeAssets
    
    Customers
    
    (Loss)
    
    Assets
    
    Customers
    
    (Loss)Reportable Segments:Insurance:Residential property
    
    
    n/a
    
    
    $
    200,233
    
    
    $
    32,912
    
    
    
    n/a
    
    
    $
    204,725
    
    
    $
    27,473Recreational casualty
    
    
    n/a
    
    
    
    54,816
    
    
    
    10,245
    
    
    
    n/a
    
    
    
    63,040
    
    
    
    5,774Financial institutions
    
    
    n/a
    
    
    
    38,414
    
    
    
    4,559
    
    
    
    n/a
    
    
    
    36,999
    
    
    
    2,829All other insurance
    
    
    n/a
    
    
    
    38,211
    
    
    
    12,109
    
    
    
    n/a
    
    
    
    37,593
    
    
    
    2,141Unallocated insurance
    
    $
    1,292,620
    
    
    
    
    
    
    
    1,575
    
    
    $
    1,170,586
    
    
    
    
    
    
    
    13,959Transportation
    
    
    46,277
    
    
    
    22,695
    
    
    
    1,975
    
    
    
    33,874
    
    
    
    20,695
    
    
    
    707Corporate and all other
    
    
    95,590
    
    
    
    
    
    
    
    (2,012
    )
    
    
    108,583
    
    
    
    
    
    
    
    (2,847
    )Intersegment Eliminations
    
    
    (29,212
    )
    
    
    
    
    
    
    
    
    
    
    (58,865
    )
    
    
    
    
    
    
    (9,733
    )Total
    
    $
    1,405,275
    
    
    $
    354,369
    
    
    $
    61,363
    
    
    $
    1,254,178
    
    
    $
    363,052
    
    
    $
    40,303
 Three Months Ended June 30, 2005
    
    Three Months Ended June 30, 2004Revenues-
    
    Pre-Tax
    
    
    
    
    
    Revenues-
    
    Pre-TaxTotal
    
    External
    
    Income
    
    Total
    
    External
    
    IncomeAssets
    
    Customers
    
    (Loss)
    
    Assets
    
    Customers
    
    (Loss)Reportable Segments:Insurance:Residential property
    
    
    n/a
    
    
    $
    99,769
    
    
    $
    16,955
    
    
    
    n/a
    
    
    $
    102,729
    
    
    $
    13,280Recreational casualty
    
    
    n/a
    
    
    
    27,023
    
    
    
    2,318
    
    
    
    n/a
    
    
    
    31,357
    
    
    
    (70
    )Financial institutions
    
    
    n/a
    
    
    
    16,901
    
    
    
    2,366
    
    
    
    n/a
    
    
    
    21,312
    
    
    
    2,761All other insurance
    
    
    n/a
    
    
    
    19,148
    
    
    
    7,511
    
    
    
    n/a
    
    
    
    19,058
    
    
    
    1,339Unallocated insurance
    
    $
    1,292,620
    
    
    
    
    
    
    
    1,106
    
    
    $
    1,170,586
    
    
    
    
    
    

    
    3,926Transportation
    
    
    46,277
    
    
    
    11,891
    
    
    
    1,391
    
    
    
    33,874
    
    
    
    11,395
    
    
    
    588Corporate and all other
    
    
    95,590
    
    
    
    
    
    
    
    (1,664
    )
    
    
    108,583
    
    
    
    
    
    
    
    (2,492
    )Intersegment Eliminations
    
    
    (29,212
    )
    
    
    
    
    
    
    
    
    
    
    (58,865
    )
    
    
    
    
    
    
    (3,470
    )Total
    
    $
    1,405,275
    
    
    $
    174,732
    
    
    $
    29,983
    
    
    $
    1,254,178
    
    
    $
    185,851
    
    
    $
    15,862
  8




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##### Table of Contents



5. STOCK OPTIONS
  Six Months Ended June 30,
    
    Three Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Net Income as Reported
    
    $
    42,284
    
    
    $
    28,172
    
    
    $
    20,734
    
    
    $
    11,324Deduct: Total stock-based employee
compensation determined under fair
value based method for all awards,
net of related tax effects
    
    
    690
    
    
    
    590
    
    
    
    284
    
    
    
    230Pro forma Net Income
    
    $
    41,594
    
    
    $
    27,582
    
    
    $
    20,450
    
    
    $
    11,094Basic Shares
    
    
    18,859
    
    
    
    18,453
    
    
    
    18,886
    
    
    
    18,752Diluted Shares
    
    
    19,538
    
    
    
    18,977
    
    
    
    19,565
    
    
    
    19,259Earnings per share:Basic  as reported
    
    $
    2.24
    
    
    $
    1.53
    
    
    $
    1.09
    
    
    $
    0.60Basic  pro forma
    
    
    2.21
    
    
    
    1.50
    
    
    
    1.08
    
    
    
    0.59Diluted  as reported
    
    $
    2.16
    
    
    $
    1.48
    
    
    $
    1.06
    
    
    $
    0.58Diluted  pro forma
    
    
    2.13
    
    
    
    1.45
    
    
    
    1.05
    
    
    
    0.57
  6. DERIVATIVE FINANCIAL INSTRUMENTS
   9




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##### Table of Contents



7. DEFINED BENEFIT PENSION PLANS
  Six Months Ended June 30,
    
    Three Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Service cost
    
    $
    442
    
    
    $
    436
    
    
    $
    221
    
    
    $
    218Interest cost
    
    
    808
    
    
    
    793
    
    
    
    404
    
    
    
    396Expected return on assets
    
    
    (786
    )
    
    
    (797
    )
    
    
    (393
    )
    
    
    (398
    )Amortization of transition asset
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    (18
    )Amortization of prior service cost
    
    
    16
    
    
    
    16
    
    
    
    8
    
    
    
    8Amortization of net loss
    
    
    148
    
    
    
    53
    
    
    
    74
    
    
    
    27Net periodic cost
    
    $
    628
    
    
    $
    465
    
    
    $
    314
    
    
    $
    233
  8. RELATED PARTY TRANSACTIONS
  9. NEW ACCOUNTING STANDARDS
   10




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##### 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
  INTRODUCTION
     11




---



##### Table of Contents



EXECUTIVE OVERVIEW OF RECENT TRENDS AND OTHER DEVELOPMENTS
 Diversification of Insurance Products
   Motorcycle
  Manufactured Housing
   12




---



##### Table of Contents



RESULTS OF OPERATIONS
      Financial Highlights
  Six Months Ended June 30,
    
    Three Months Ended June 30,2005
    
    2004
    
    %
    
    2005
    
    2004
    
    %Income Statement DataInsurance Revenue
    
    $
    354,009
    
    
    $
    365,509
    
    
    
    (3.1
    )%
    
    $
    174,447
    
    
    $
    184,188
    
    
    
    (5.3
    )%Transportation Revenue
    
    
    22,695
    
    
    
    20,695
    
    
    
    9.7
    %
    
    
    11,891
    
    
    
    11,395
    
    
    
    4.4
    %Total Revenue
    
    $
    376,704
    
    
    $
    386,204
    
    
    
    (2.5
    )%
    
    $
    186,338
    
    
    $
    195,583
    
    
    
    (4.7
    )%Net Income
    
    $
    42,284
    
    
    $
    28,172
    
    
    
    
    
    
    $
    20,734
    
    
    $
    11,324Balance Sheet DataCash & Invested Assets
    
    $
    975,659
    
    
    $
    910,656
    
    
    
    7.1
    %Total Assets
    
    $
    1,405,275
    
    
    $
    1,254,178
    
    
    
    12.0
    %Total Debt
    
    $
    105,835
    
    
    $
    97,220
    
    
    
    8.9
    %Shareholders Equity
    
    $
    468,029
    
    
    $
    392,840
    
    
    
    19.1
    %Common Shares Outstanding
    
    
    18,908
    
    
    
    18,766Per Share DataNet Income (Diluted)
    
    $
    2.16
    
    
    $
    1.48
    
    
    
    
    
    
    $
    1.06
    
    
    $
    0.58Dividends Declared
    
    $
    0.1125
    
    
    $
    0.1025
    
    
    
    9.8
    %
    
    $
    0.05625
    
    
    $
    0.05125
    
    
    
    9.8
    %Market Value
    
    $
    35.19
    
    
    $
    29.65
    
    
    
    18.7
    %Book Value
    
    $
    24.75
    
    
    $
    20.93
    
    
    
    18.3
    %
 13




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##### Table of Contents



Six Months Ended June 30,
    
    Three Months Ended June 30,2005
    
    2004
    
    %
    
    2005
    
    2004
    
    %AMIGs Property and Casualty OperationsDirect and Assumed Written Premiums
    
    $
    347,516
    
    
    $
    366,087
    
    
    
    (5.1
    )%
    
    $
    183,446
    
    
    $
    205,666
    
    
    
    (10.8
    )%Net Written Premium
    
    $
    323,817
    
    
    $
    338,480
    
    
    
    (4.3
    )%
    
    $
    172,318
    
    
    $
    192,008
    
    
    
    (10.3
    )%Combined Ratio Before Catastrophes
    
    
    86.8
    %
    
    
    91.9
    %
    
    
    
    
    
    
    87.1
    %
    
    
    91.4
    %Catastrophe Effects on Combined Ratio
    
    
    2.5
    %
    
    
    3.5
    %
    
    
    
    
    
    
    2.8
    %
    
    
    5.1
    %Combined Ratio
    
    
    89.3
    %
    
    
    95.4
    %
    
    
    
    
    
    
    89.9
    %
    
    
    96.5
    %
 Overview of Revenues
  Revenues
 Six-Mos. Ended June 30,
    
    Three-Mos. Ended June 30,2005
    
    2004
    
    2005
    
    2004Insurance:Residential property
    
    
    200,233
    
    
    
    204,725
    
    
    
    99,769
    
    
    
    102,729Recreational casualty
    
    
    54,816
    
    
    
    63,040
    
    
    
    27,023
    
    
    
    31,357Financial institutions
    
    
    38,414
    
    
    
    36,999
    
    
    
    16,901
    
    
    
    21,312All other insurance
    
    
    38,211
    
    
    
    37,593
    
    
    
    19,148
    
    
    
    19,058Total insurance
    
    
    331,674
    
    
    
    342,357
    
    
    
    162,841
    
    
    
    174,456Net investment income
    
    
    20,119
    
    
    
    17,744
    
    
    
    10,193
    
    
    
    9,030Net realized investment gains
    
    
    2,216
    
    
    
    5,408
    
    
    
    1,413
    
    
    
    702Transportation
    
    
    22,695
    
    
    
    20,695
    
    
    
    11,891
    
    
    
    11,395Total revenues
    
    $
    376,704
    
    
    $
    386,204
    
    
    $
    186,338
    
    
    $
    195,583
  Insurance
 Overview of Premium Volume
  Six-Mos. Ended June 30, 2005
    
    Six-Mos. Ended June 30, 2004Gross
    
    Net
    
    Net
    
    Gross
    
    Net
    
    NetWritten
    
    Written
    
    Earned
    
    Written
    
    Written
    
    EarnedBusiness Segment
    
    Premium
    
    Premium
    
    Premium
    
    Premium
    
    Premium
    
    PremiumResidential Property
    
    $
    209.6
    
    
    $
    197.2
    
    
    $
    197.4
    
    
    $
    213.5
    
    
    $
    201.9
    
    
    $
    202.0Recreational Casualty
    
    
    58.1
    
    
    
    57.5
    
    
    
    53.6
    
    
    
    66.1
    
    
    
    65.5
    
    
    
    61.9Financial Institutions
    
    
    32.7
    
    
    
    29.9
    
    
    
    38.4
    
    
    
    49.2
    
    
    
    48.6
    
    
    
    37.0All Other Insurance
    
    
    64.6
    
    
    
    43.1
    
    
    
    35.9
    
    
    
    51.9
    
    
    
    29.0
    
    
    
    33.2Total
    
    $
    365.0
    
    
    $
    327.7
    
    
    $
    325.3
    
    
    $
    380.7
    
    
    $
    345.0
    
    
    $
    334.1
 14




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##### Table of Contents



Three Mos. Ended June 30, 2005
    
    Three Mos. Ended June 30, 2004Gross
    
    Net
    
    Net
    
    Gross
    
    Net
    
    NetWritten
    
    Written
    
    Earned
    
    Written
    
    Written
    
    EarnedBusiness Segment
    
    Premium
    
    Premium
    
    Premium
    
    Premium
    
    Premium
    
    PremiumResidential Property
    
    $
    110.1
    
    
    $
    103.9
    
    
    $
    98.4
    
    
    $
    111.2
    
    
    $
    105.3
    
    
    $
    101.3Recreational Casualty
    
    
    35.6
    
    
    
    35.2
    
    
    
    26.4
    
    
    
    41.0
    
    
    
    40.7
    
    
    
    30.8Financial Institutions
    
    
    14.9
    
    
    
    13.3
    
    
    
    16.9
    
    
    
    34.4
    
    
    
    34.2
    
    
    
    21.3All Other Insurance
    
    
    32.0
    
    
    
    22.2
    
    
    
    18.0
    
    
    
    28.1
    
    
    
    15.4
    
    
    
    17.1Total
    
    $
    192.6
    
    
    $
    174.6
    
    
    $
    159.7
    
    
    $
    214.7
    
    
    $
    195.6
    
    
    $
    170.5
 Residential Property
  Six-Mos. Ended June 30,
    
    Three-Mos Ended June 30,2005
    
    2004
    
    
    
    
    
    2005
    
    2004Residential PropertyDirect and Assumed Written Premiums
    
    $
    209,649
    
    
    $
    213,465
    
    
    
    (1.8
    )%
    
    $
    110,107
    
    
    $
    111,137
    
    
    
    (0.9
    )%Net Written Premiums
    
    $
    197,243
    
    
    $
    201,903
    
    
    
    (2.3
    )%
    
    $
    103,908
    
    
    $
    105,271
    
    
    
    (1.3
    )%Net Earned Premium
    
    $
    197,366
    
    
    $
    201,989
    
    
    
    (2.3
    )%
    
    
    98,333
    
    
    
    101,329
    
    
    
    (3.0
    )%Service Fees
    
    
    2,867
    
    
    
    2,736
    
    
    
    4.8
    %
    
    
    1,436
    
    
    
    1,400
    
    
    
    2.6
    %Total Revenues
    
    $
    200,233
    
    
    $
    204,725
    
    
    
    (2.2
    )%
    
    $
    99,769
    
    
    $
    102,729
    
    
    
    (2.9
    )%Pre-Tax Income
    
    $
    32,912
    
    
    $
    27,473
    
    
    
    
    
    
    $
    16,955
    
    
    $
    13,280
   Recreational Casualty
  Six-Mos. Ended June 30,
    
    Three-Mos Ended June 30,2005
    
    2004
    
    
    
    
    
    2005
    
    2004Recreational CasualtyDirect and Assumed Written Premiums
    
    $
    58,094
    
    
    $
    66,065
    
    
    
    (12.1
    )%
    
    $
    35,574
    
    
    $
    40,975
    
    
    
    (13.2
    )%Net Written Premiums
    
    $
    57,524
    
    
    $
    65,479
    
    
    
    (12.1
    )%
    
    $
    35,200
    
    
    $
    40,697
    
    
    
    (13.5
    )%Net Earned Premium
    
    $
    53,612
    
    
    $
    61,930
    
    
    
    (13.4
    )%
    
    $
    26,420
    
    
    $
    30,789
    
    
    
    (14.2
    )%Service Fees
    
    
    1,204
    
    
    
    1,110
    
    
    
    8.5
    %
    
    
    603
    
    
    
    568
    
    
    
    6.2
    %Total Revenues
    
    $
    54,816
    
    
    $
    63,040
    
    
    
    (13.0
    )%
    
    $
    27,023
    
    
    $
    31,357
    
    
    
    (13.8
    )%Pre-Tax Income
    
    $
    10,245
    
    
    $
    5,774
    
    
    
    
    
    
    $
    2,318
    
    
    $
    (70
    )
 15




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##### Table of Contents



Financial Institutions
  Six-Mos. Ended June 30,
    
    Three-Mos Ended June 30,2005
    
    2004
    
    
    
    
    
    2005
    
    2004Financial InstitutionsDirect and Assumed Written Premiums
    
    $
    32,659
    
    
    $
    49,223
    
    
    
    (33.7
    )%
    
    $
    14,854
    
    
    $
    34,414
    
    
    
    (56.8
    )%Net Written Premiums
    
    $
    29,924
    
    
    $
    48,633
    
    
    
    (38.5
    )%
    
    $
    13,329
    
    
    $
    34,214
    
    
    
    (61.0
    )%Net Earned Premium/Total Revenues
    
    $
    38,414
    
    
    $
    36,999
    
    
    
    3.8
    %
    

    $
    16,901
    
    
    $
    21,312
    
    
    
    (20.7
    )%Pre-Tax Income
    
    $
    4,559
    
    
    $
    2,829
    
    
    
    
    
    
    $
    2,366
    
    
    $
    2,761
  All Other Insurance
  Six-Mos. Ended June 30,
    
    Three-Mos Ended June 30,2005
    
    2004
    
    
    
    
    
    2005
    

2004All Other InsuranceDirect and Assumed Written Premiums
    
    $
    64,561
    
    
    $
    51,909
    
    
    
    24.4
    %
    
    $
    31,994
    
    
    $
    28,143
    
    
    
    13.7
    %Net Written Premiums
    
    $
    43,057
    
    
    $
    29,027
    
    
    
    48.3
    %
    
    $
    22,192
    
    
    $
    15,458
    
    
    
    43.6
    %Net Earned Premium
    
    $
    35,889
    
    
    $
    33,138
    
    
    
    8.3
    %
    
    $
    18,034
    
    
    $
    16,986
    
    
    
    6.2
    %Agency Revenues
    
    
    2,280
    
    
    
    4,387
    
    
    
    (48.0
    )%
    
    
    1,093
    
    
    
    2,040
    
    
    
    (46.4
    )%Service Fees
    
    
    42
    
    
    
    68
    
    
    
    (38.2
    )%
    
    
    21
    
    
    
    32
    
    
    
    (34.4
    )%Total Revenues
    
    $
    38,211
    
    
    $
    37,593
    
    
    
    1.6
    %
    
    $
    19,148
    
    
    $
    19,058
    
    
    
    0.5
    %Pre-Tax Income
    
    $
    12,109
    
    
    $
    2,141
    
    
    
    
    
    
    $
    7,511
    
    
    $
    1,339
   16




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##### Table of Contents



ALL INSURANCE
 Investment Income and Realized Capital Gains
   Six Months Ended June 30, 2005
    
    Six Months Ended June 30, 2004Pre-Tax
    
    After-Tax
    
    Earnings
    
    Pre-Tax
    
    After-Tax
    
    EarningsGain (Loss)
    
    Gain (Loss)
    
    Per Share
    
    Gain (Loss)
    
    Gain (Loss)
    
    Per ShareCapital Gains
    
    $
    2,691
    
    
    $
    1,749
    
    
    $
    0.09
    
    
    $
    5,166
    
    
    $
    3,358
    
    
    $
    0.17Derivatives
    
    
    (475
    )
    
    
    (309
    )
    
    
    (0.02
    )
    
    
    242
    
    
    
    157
    
    
    
    0.01Total Realized Investment
Gains
    
    $
    2,216
    
    
    $
    1,440
    
    
    $
    0.07
    
    
    $
    5,408
    
    
    $
    3,515
    
    
    $
    0.18
 Three Months Ended June 30, 2005
    
    Three Months Ended June 30, 2004Pre-Tax
    
    After-Tax
    
    Earnings
    
    Pre-Tax
    
    After-Tax
    
    EarningsGain (Loss)
    
    Gain (Loss)
    
    Per Share
    
    Gain (Loss)
    
    Gain (Loss)
    
    Per ShareCapital Gains
    
    $
    1,150
    
    
    $
    747
    
    
    $
    0.04
    
    
    $
    628
    
    
    $
    408
    
    
    $
    0.02Derivatives
    
    
    263
    
    
    
    171
    
    
    
    0.01
    
    
    
    74
    
    
    
    48
    
    
    
    0.00Total Realized Investment
Gains
    
    $
    1,413
    
    
    $
    918
    
    
    $
    0.05
    
    
    $
    702
    
    
    $
    456
    
    
    $
    0.02
   Insurance Losses and Loss Adjustment Expenses (LAE)
  17




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##### Table of Contents



Insurance Commissions and Other Policy Acquisition Costs
  M/G Transport
   Outlook
  LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
 Consolidated Operations
 Aggregate Contractual Obligations and Off Balance Sheet Arrangements
  Payments Due by PeriodLess than
    
    2-5
    
    After 5Total
    
    1 Year
    
    Years
    
    YearsLong-term debt
    
    $
    92,843
    
    
    $
    15,556
    
    
    $
    44,941
    
    
    $
    32,346Other notes payable
    
    
    12,992
    
    
    
    12,992
    
    
    
    
    
    
    
    Annual commitments under
non-cancelable leases
    
    
    6,853
    
    
    
    1,171
    
    
    
    2,985
    
    
    
    2,697Purchase obligations
    
    
    19,220
    
    
    
    2,357
    
    
    
    16,863
    
    
    
    Other obligations
    
    
    343
    
    
    
    343
    
    
    
    
    
    
    
    Insurance policy loss reserves
    
    
    215,859
    
    
    
    112,247
    
    
    
    88,502
    
    
    
    15,110Total
    
    $
    348,110
    
    
    $
    144,666
    
    
    $
    153,291
    
    
    $
    50,153
 18




---



##### Table of Contents



Other Items
    Holding Company Operations
     19




---



##### Table of Contents



Investment in Marketable Securities
   Unrealized Gain (Loss) as of June 30, 2005
 Unrealized
    
    Fair
    
    # ofGain (Loss)
    
    Value
    
    PositionsFixed Income SecuritiesTotal held in a gain position
    
    $
    23,470
    
    
    $
    608,240
    
    
    
    669Held in a loss position for less than 3 months
    
    
    (181
    )
    
    
    40,544
    
    
    
    43Held in a loss position for more than 3 months
and less than 9 months
    
    
    (960
    )
    
    
    87,234
    
    
    
    115Held in a loss position for more than 9 months
and less than 18 months
    
    
    (558
    )
    
    
    40,859
    
    
    
    45Held in a loss position for more than 18 months
    
    
    (103
    )
    
    
    2,425
    
    
    
    7Fixed income total
    
    $
    21,668
    
    
    $
    779,302
    
    
    
    879
 20




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##### Table of Contents



Unrealized
    
    Fair
    
    # ofGain (Loss)
    
    Value
    
    PositionsEquity SecuritiesTotal held in a gain position
    
    $
    84,077
    
    
    $
    169,579
    
    
    
    147Held in a loss position for less than 3 months
    
    
    (830
    )
    
    
    11,469
    
    
    
    26Held in a loss position for more than 3 months
and less than 9 months
    
    
    (43
    )
    
    
    442
    
    
    
    1Held in a loss position for more than 9 months
and less than 18 months
    
    
    (88
    )
    
    
    1,343
    
    
    
    1Held in a loss position for more than 18 months
    
    
    
    
    
    
    
    
    
    
    Equity total
    
    $
    83,116
    
    
    $
    182,833
    
    
    
    175Total fixed income and equity
    
    $
    104,784
    
    
    $
    962,135
    
    
    
    1,054Accrued interest and dividends
    
    
    
    
    
    
    8,809Total per balance sheet
    
    
    
    
    
    $
    970,944
   Insurance
    21




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##### Table of Contents



June 30,
    
    December 31,2005
    
    2004Prepaid reinsurance premiums
    
    $
    40,799
    
    
    $
    40,215Reinsurance
recoverable  unpaid losses
    
    
    33,765
    
    
    
    37,873Reinsurance
recoverable  paid losses
    
    
    9,479
    
    
    
    9,638Total
    
    $
    84,043
    
    
    $
    87,726
     Transportation
   22




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##### Table of Contents



OTHER MATTERS
 Comprehensive Income
  Six Months Ended June 30,
    
    Three Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Changes in net unrealized capital gains:Equity securities
    
    $
    (5,091
    )
    
    $
    (4,482
    )
    
    $
    598
    
    
    $
    (1,069
    )Fixed income securities
    
    
    (2,247
    )
    
    
    (10,596
    )
    
    
    6,861
    
    
    
    (12,955
    )Changes in fair value of interest
rate swap hedge
    
    
    201
    
    
    
    408
    
    
    
    62
    
    
    
    418Total
    
    $
    (7,137
    )
    
    $
    (14,670
    )
    
    $
    7,521
    
    
    $
    (13,606
    )
  Critical Accounting Policies
   Insurance Revenue and Expense Recognition
  Insurance Policy Loss Reserves
  23




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##### Table of Contents



June 30,
    
    December 31,2005
    
    2004Gross case base loss reserves:Residential property
    
    $
    44,719
    
    
    $
    47,052Recreational casualty
    
    
    29,379
    
    
    
    33,590Financial institutions
    
    
    8,699
    
    
    
    12,004All other insurance
    
    
    54,593
    
    
    
    53,669Gross loss reserves incurred but not reported
    
    
    57,995
    
    
    
    64,783Outstanding checks and drafts
    
    
    20,474
    
    
    
    21,817Total insurance loss reserves
    
    $
    215,859
    
    
    $
    232,915
   Reinsurance Risks
   24




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##### Table of Contents



Other-Than-Temporary Impairment of Investment Securities
         
    
    the extent and duration to which market value is less than carrying value
    
    historical operating performance of the security
    
    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
 25




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##### Table of Contents




    
    our ability and intent to hold the investment for a period of time sufficient to allow
for any anticipated recovery
    
    time to conversion with respect to a mandatory convertible security
  
    
    the recoverability of principle and interest
    
    the issuers ability to continue to make obligated payments to security holders
    
    the current interest rate environment
   Defined Benefit Pension Plans
  Asset Impairment
  New Accounting Standards
  26




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##### Table of Contents



Impact of Inflation
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE
 DISCLOSURES ABOUT MARKET RISK
     
 ITEM 4. CONTROLS AND PROCEDURES
   27




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##### Table of Contents



28




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##### Table of Contents



PART II. OTHER INFORMATION
 THE MIDLAND COMPANY AND SUBSIDIARIES
JUNE 30, 2005
 
 Item 1.
    
    Legal Proceedings
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 a)
    
    Noneb)
    
    Nonec)
    
    During the six and three month periods ended June 30, 2005, the Company
did not purchase any of its equity securities pursuant to a publicly announced plan
or program. However, during the six month period ended June 30, 2005, the Company
acquired 16,048 shares in private transactions from employees in connection with
its stock incentive plans. There were no such transactions during the three month
period ended June 30, 2005. These 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 4,574
shares and 1,249 shares from the Plan during the six and three month periods ended
June 30, 2005, respectively.
 
 Item 3.
    
    Defaults Upon Senior Securities
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
  a)
    
    The following persons were elected as members of the Board of Directors
to serve until the year of the 2008 Annual Meeting and until their successors are
chosen and qualified:
 Votes
    
    
    
    
    
    BrokerName
    

Votes
For
    

Withheld
    

Abstentions
    

Non-VotesJames E. Bushman
    
    
    17,750,742
    
    
    
    158,678
    
    
    
    0
    
    
    
    0James H. Carey
    
    
    17,459,586
    
    
    
    449,834
    
    
    
    0
    
    
    
    0John W. Hayden
    
    
    16,055,297
    
    
    
    1,854,123
    
    
    
    0
    
    
    
    0David B. OMaley
    
    
    17,057,382
    
    
    
    852,038
    
    
    
    0
    
    
    
    0
 b)
    
    A proposal by the Board of Directors to ratify the appointment of the firm
of Deloitte & Touche LLP, as Midlands independent auditors to conduct the annual
audit of the financial statements of Midland for the year ending December 31, 2005,
was approved by the Shareholders. The Shareholders cast 17,826,367 votes in favor
of this proposal and 75,837 votes against it. There were 7,216 abstentions and no
broker non-votes.
 
 Item 5.
    
    Other Information
  
 Item 6.
    
    Exhibits
  29




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##### Table of Contents



PART II. OTHER INFORMATION
 THE MIDLAND COMPANY AND SUBSIDIARIES
JUNE 30, 2005
    
 SIGNATURE
  THE MIDLAND COMPANYDate August 4, 2005
    
    /s/ John I. Von LehmanJohn I. Von Lehman, Executive Vice President,Chief Financial Officer and Secretary
 30