##### 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 June 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 August 5, 2004 was
18,769,685.    1




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 2. THE MIDLAND COMPANY AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS OF            FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATION THE MIDLAND COMPANY AND SUBSIDIARIES JUNE 30, 2004Item 1. Legal ProceedingsItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity SecuritiesItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATUREEX-15EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
Amounts in 000s (Unaudited)June 30,
    
    Dec. 31,ASSETS
    
    2004
    
    2003MARKETABLE SECURITIES AVAILABLE FOR SALE:Fixed income (cost, $706,423 at June 30, 2004 and
$643,735 at December 31, 2003)
    
    $
    717,839
    
    
    $
    671,454Equity (cost, $107,832 at June 30, 2004 and
$87,998 at December 31, 2003)
    
    
    187,806
    
    
    
    174,868Total
    
    
    905,645
    
    
    
    846,322CASH
    
    
    5,011
    
    
    
    2,386ACCOUNTS RECEIVABLE  NET
    
    
    87,745
    
    
    
    81,297REINSURANCE RECOVERABLES AND
PREPAID REINSURANCE PREMIUMS
    
    
    75,227
    
    
    
    70,990PROPERTY, PLANT AND EQUIPMENT  NET
    
    
    68,981
    
    
    
    69,328DEFERRED INSURANCE POLICY ACQUISITION COSTS
    
    
    90,031
    
    
    
    87,873OTHER ASSETS
    
    
    21,538
    
    
    
    21,309TOTAL ASSETS
    
    $
    1,254,178
    
    
    $
    1,179,505
 See notes to condensed consolidated financial statements. 2




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THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
Amounts in 000s (Unaudited)June 30,
    
    Dec. 31,LIABILITIES & SHAREHOLDERS' EQUITY
    
    2004
    
    2003UNEARNED INSURANCE PREMIUMS
    
    $
    393,715
    
    
    $
    383,869INSURANCE LOSS RESERVES
    
    
    217,791
    
    
    
    204,833INSURANCE COMMISSIONS PAYABLE
    
    
    44,378
    
    
    
    30,522FUNDS HELD UNDER REINSURANCE AGREEMENTS
AND REINSURANCE PAYABLES
    
    
    8,382
    
    
    
    6,978LONG-TERM DEBT
    
    
    61,442
    
    
    
    62,217OTHER NOTES PAYABLE:Banks
    
    
    7,000
    
    
    
    30,000Commercial paper
    
    
    4,778
    
    
    
    3,625Total
    
    
    11,778
    
    
    
    33,625DEFERRED FEDERAL INCOME TAX
    
    
    39,528
    
    
    
    47,429OTHER PAYABLES AND ACCRUALS
    
    
    60,324
    
    
    
    53,974JUNIOR SUBORDINATED DEBENTURES
    
    
    24,000
    
    
    
    COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Common stock (issued and outstanding: 18,766 shares at
June 30, 2004 and 17,643 shares at December 31, 2003
after deducting treasury stock of 4,240 shares and
4,213 shares, respectively)
    
    
    959
    
    
    
    911Additional paid-in capital
    
    
    50,313
    
    
    
    23,406Retained earnings
    
    
    326,002
    
    
    
    299,752Accumulated other comprehensive income
    
    
    58,785
    
    
    
    73,455Treasury stock  at cost
    
    
    (43,219
    )
    
    
    (41,442
    )Unvested restricted stock awards
    
    
    
    
    
    
    (24
    )Total
    
    
    392,840
    
    
    
    356,058TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,254,178
    
    
    $
    1,179,505
 See notes to condensed consolidated financial statements. 3




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##### Table of Contents



THE MIDLAND COMPANY
AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Amounts in 000s (except per share information) Six-Mos. Ended June 30,
    
    Three-Mos. Ended June 30,2004
    
    2003
    
    2004
    
    2003REVENUES:Insurance:Premiums earned
    
    $
    334,054
    
    
    $
    310,480
    
    
    $
    170,415
    
    
    $
    157,202Net investment income
    
    
    17,744
    
    
    
    16,592
    
    
    
    9,030
    
    
    
    8,123Net realized investment gains
    
    
    5,408
    
    
    
    1,050
    
    
    
    702
    
    
    
    2,813Other insurance income
    
    
    8,303
    
    
    
    6,987
    
    
    
    4,041
    
    
    
    3,528Transportation
    
    
    20,695
    
    
    
    12,821
    
    
    
    11,395
    
    
    
    6,976Total
    
    
    386,204
    
    
    
    347,930
    
    
    
    195,583
    
    
    
    178,642COSTS AND EXPENSES:Insurance:Losses and loss adjustment expenses
    
    
    167,892
    
    
    
    192,083
    
    
    
    88,567
    
    
    
    113,436Commissions and other policy acquisition costs
    
    
    103,262
    
    
    
    88,723
    
    
    
    51,569
    
    
    
    40,918Operating and administrative expenses
    
    
    52,432
    
    
    
    41,723
    
    
    
    27,353
    
    
    
    19,735Transportation operating expenses
    
    
    19,754
    
    
    
    12,417
    
    
    
    10,690
    
    
    
    6,612Interest expense
    
    
    2,561
    
    
    
    1,821
    
    
    
    1,542
    
    
    
    882Total
    
    
    345,901
    
    
    
    336,767
    
    
    
    179,721
    
    
    
    181,583INCOME (LOSS) BEFORE FEDERAL INCOME TAX
    
    
    40,303
    
    
    
    11,163
    
    
    
    15,862
    
    
    
    (2,941
    )PROVISION (CREDIT) FOR FEDERAL INCOME TAX
    
    
    12,131
    
    
    
    2,131
    
    
    
    4,538
    
    
    
    (1,924
    )NET INCOME (LOSS)
    
    $
    28,172
    
    
    $
    9,032
    
    
    $
    11,324
    
    
    $
    (1,017
    )BASIC EARNINGS (LOSSES) PER SHARE
OF COMMON STOCK:
    
    $
    1.53
    
    
    $
    0.52
    
    
    $
    0.60
    
    
    $
    (0.06
    )DILUTED EARNINGS (LOSSES) PER SHARE
OF COMMON STOCK:
    
    $
    1.48
    
    
    $
    0.51
    
    
    $
    0.58
    
    
    $
    (0.06
    )CASH DIVIDENDS DECLARED PER SHARE
OF COMMON STOCK
    
    $
    0.1025
    
    
    $
    0.0950
    
    
    $
    0.05125
    
    
    $
    0.04750
 See notes to condensed consolidated financial statements. 4




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THE MIDLAND COMPANY AND
SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (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, 2002
    
    $
    911
    
    
    $
    22,516
    
    
    $
    279,826
    
    
    $
    47,573
    
    
    $
    (41,605
    )
    
    $
    (313
    )
    
    $
    308,908Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    9,032
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,032
    
    
    $
    9,032Increase in unrealized gain on
marketable securities, net of federal
income tax of $8,961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,620
    
    
    
    
    
    
    
    
    
    
    
    16,620
    
    
    
    16,620Other, net of federal income tax of $47
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (86
    )
    
    
    
    
    
    
    
    
    
    
    (86
    )
    
    
    (86
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,566Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    (445
    )
    
    
    
    
    
    
    (445
    )Issuance of treasury stock for options
exercised and employee savings plan
    
    
    
    
    
    
    434
    
    
    
    
    
    
    
    
    
    
    
    932
    
    
    
    
    
    
    
    1,366Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (1,674
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,674
    )Federal income tax benefit related to the
exercise or granting of stock awards
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123Amortization and cancellation of
unvested restricted stock awards
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    144
    
    
    
    140BALANCE, JUNE 30, 2003
    
    $
    911
    
    
    $
    23,071
    
    
    $
    287,184
    
    
    $
    64,107
    
    
    $
    (41,120
    )
    
    $
    (169
    )
    
    $
    333,984BALANCE, 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 federal
income tax of $8,120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,078
    )
    
    
    
    
    
    
    
    
    
    
    (15,078
    )
    
    
    (15,078
    )Other, net of federal income tax of $220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    408
    
    
    
    
    
    
    
    
    
    
    
    408
    
    
    
    408Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,502Common stock issuance
    
    
    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
    )
    
    $
    
    
    
    $
    392,840
 See notes to condensed consolidated financial statements. 5




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THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX-MONTHS ENDED JUNE 30, 2004 AND 2003
Amount in 000s 2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    28,172
    
    
    $
    9,032Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    5,912
    
    
    
    4,351Net realized investment gains
    
    
    (5,166
    )
    
    
    (1,340
    )Increase (decrease) in unearned insurance premiums
    
    
    9,846
    
    
    
    (7,780
    )Decrease (increase) in deferred insurance policy acquisition costs
    
    
    (2,158
    )
    
    
    2,988Decrease (increase) in reinsurance recoverables and prepaid
reinsurance premiums
    
    
    (4,237
    )
    
    
    7,508Increase in net accounts receivable
    
    
    (6,448
    )
    
    
    (5,726
    )Increase in insurance loss reserves
    
    
    12,958
    
    
    
    16,616Increase in funds held under reinsurance
agreements and reinsurance payables
    
    
    1,404
    
    
    
    624Increase in other accounts payable and accruals
    
    
    8,836
    
    
    
    6,166Decrease (increase) in other assets
    
    
    (229
    )
    
    
    1,117Increase in insurance commissions payable
    
    
    13,856
    
    
    
    84Other-net
    
    
    796
    
    
    
    1,797Net cash provided by operating activities
    
    
    63,542
    
    
    
    35,437CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of marketable securities
    
    
    (272,536
    )
    
    
    (226,151
    )Sale of marketable securities
    
    
    134,039
    
    
    
    148,832Decrease in cash equivalent marketable securities
    
    
    21,065
    
    
    
    21,625Maturity of marketable securities
    
    
    39,140
    
    
    
    50,578Acquisition of property, plant and equipment
    
    
    (5,787
    )
    
    
    (6,911
    )Proceeds from sale of property, plant and equipment
    
    
    386
    
    
    
    166Net cash used in investing activities
    
    
    (83,693
    )
    
    
    (11,861
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from common stock issuance
    
    
    25,070
    
    
    
    Decrease in net short-term borrowings
    
    
    (21,847
    )
    
    
    (15,804
    )Issuance of treasury stock
    
    
    1,625
    
    
    
    1,366Dividends paid
    
    
    (2,747
    )
    
    
    (1,604
    )Purchase of treasury stock
    
    
    (2,550
    )
    
    
    (445
    )Repayment of long-term debt
    
    
    (775
    )
    
    
    (750
    )Issuance of junior subordinated debentures
    
    
    24,000
    
    
    
    Net cash provided by (used in) financing activities
    
    
    22,776
    
    
    
    (17,237
    )NET INCREASE IN CASH
    
    
    2,625
    
    
    
    6,339CASH AT BEGINNING OF PERIOD
    
    
    2,386
    
    
    
    5,975CASH AT END OF PERIOD
    
    $
    5,011
    
    
    $
    12,314INTEREST PAID
    
    $
    1,917
    
    
    $
    1,710INCOME TAXES PAID
    
    $
    11,800
    
    
    $
    1,500
 See notes to the condensed consolidated financial statements. 6




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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 six and three-month periods ended June 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 EPSSix months ended June 30:2004
    
    
    18,453
    
    
    
    18,9772003
    
    
    17,405
    
    
    
    17,883Three months ended June 30:2004
    
    
    18,752
    
    
    
    19,2592003
    
    
    17,424
    
    
    
    17,424
 3. INCOME TAXES The federal income tax provisions for the three and six-month periods ended
June 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): Six-Mos. Ended June
30,
    
    Three-Mos. Ended June 30,2004
    
    2003
    
    2004
    
    2003Federal income tax at statutory rate
    
    $
    14,106
    
    
    $
    3,907
    
    
    $
    5,552
    
    
    $
    (1,030
    )Tax effect of:Tax exempt interest and
excludable dividend income
    
    
    (2,087
    )
    
    
    (1,834
    )
    
    
    (1,064
    )
    
    
    (925
    )Other  net
    
    
    112
    
    
    
    58
    
    
    
    50
    
    
    
    31Provision (credit) for federal income tax
    
    $
    12,131
    
    
    $
    2,131
    
    
    $
    4,538
    
    
    $
    (1,924
    )
 7




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##### 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): Six Months Ended June 30, 2004
    
    Three Months Ended June 30, 2004Revenues-
    
    Pre-Tax
    
    Revenues-
    
    Pre-TaxTotal
    
    External
    
    Income
    
    External
    
    IncomeAssets
    
    Customers
    
    (Loss)
    
    Customers
    
    (Loss)Reportable Segments:Insurance:Manufactured housing
    
    
    n/a
    
    
    $
    161,602
    
    
    $
    21,727
    
    
    $
    80,680
    
    
    $
    9,391Other
    
    
    n/a
    
    
    
    180,755
    
    
    
    16,488
    
    
    
    93,776
    
    
    
    7,917Unallocated
    
    $
    1,170,586
    
    
    
    
    
    
    
    4,228
    
    
    
    
    
    
    
    458Transportation
    
    
    33,874
    
    
    
    20,695
    
    
    
    707
    
    
    
    11,395
    
    
    
    588Corporate and all other
    
    
    108,583
    
    
    
    
    
    
    
    (2,847
    )
    
    
    
    
    
    
    (2,492
    )Intersegment Eliminations
    
    
    (58,865
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,254,178
    
    
    $
    363,052
    
    
    $
    40,303
    
    
    $
    185,851
    
    
    $
    15,862
 Six Months Ended June 30, 2003
    
    Three Months Ended June 30, 2003Revenues-
    
    Pre-Tax
    
    Revenues-
    
    Pre-TaxTotal
    
    External
    
    Income
    
    External
    
    IncomeAssets
    
    Customers
    
    (Loss)
    
    Customers
    
    (Loss)Reportable Segments:Insurance:Manufactured housing
    
    
    n/a
    
    
    $
    165,828
    
    
    $
    14,621
    
    
    $
    82,452
    
    
    $
    (971
    )Other
    
    
    n/a
    
    
    
    151,639
    
    
    
    (4,000
    )
    
    
    78,278
    
    
    
    (5,266
    )Unallocated
    
    $
    1,066,140
    
    
    
    
    
    
    
    1,402
    
    
    
    
    
    
    
    3,479Transportation
    
    
    26,122
    
    
    
    12,821
    
    
    
    316
    
    
    
    6,976
    
    
    
    315Corporate and all other
    
    
    61,794
    
    
    
    
    
    
    
    (1,176
    )
    
    
    
    
    
    
    (498
    )Intersegment Eliminations
    
    
    (30,155
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,123,901
    
    
    $
    330,288
    
    
    $
    11,163
    
    
    $
    167,706
    
    
    $
    (2,941
    )
 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 three and six-month periods ended June 30, 2004 and 2003
($000s): 8




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##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued) Revenues from external customers Six-Mos. Ended June 30,
    
    Three-Mos. Ended June 30,2004
    
    2003
    
    2004
    
    2003Insurance:Manufactured housing
    
    $
    161,602
    
    
    $
    165,828
    
    
    $
    80,680
    
    
    $
    82,452All other insuranceOther personal lines property
    
    
    43,123
    
    
    
    42,456
    
    
    
    22,049
    
    
    
    21,320Personal lines casualty
    
    
    63,040
    
    
    
    56,229
    
    
    
    31,357
    
    
    
    29,395Financial services
    
    
    36,999
    
    
    
    23,160
    
    
    
    21,312
    
    
    
    12,217Commercial lines
    
    
    24,004
    
    
    
    16,853
    
    
    
    12,786
    
    
    
    8,753Other insurance
    
    
    13,589
    
    
    
    12,941
    
    
    
    6,272
    
    
    
    6,593Transportation
    
    
    20,695
    
    
    
    12,821
    
    
    
    11,395
    
    
    
    6,976Total revenues from external customers
    
    $
    363,052
    
    
    $
    330,288
    
    
    $
    185,851
    
    
    $
    167,706
 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 three and six-months ended June 30, 2004 and
2003 would have been reduced to the pro forma amounts indicated below (amounts
in 000s, except per share data): Six Months Ended June 30,
    
    Three Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net Income (Loss) as Reported
    
    $
    28,172
    
    
    $
    9,032
    
    
    $
    11,324
    
    
    $
    (1,017
    )Deduct: Total stock-based employee
compensation determined under fair
value based method for all awards,
net of related tax effects
    
    
    590
    
    
    
    507
    
    
    
    230
    
    
    
    199Pro forma Net Income (Loss)
    
    $
    27,582
    
    
    $
    8,525
    
    
    $
    11,094
    
    
    $
    (1,216
    )Basic Shares
    
    
    18,453
    
    
    
    17,405
    
    
    
    18,752
    
    
    
    17,424Diluted Shares
    
    
    18,977
    
    
    
    17,883
    
    
    
    19,259
    
    
    
    17,424Earnings per share:Basic  as reported
    
    $
    1.53
    
    
    $
    0.52
    
    
    $
    0.60
    
    
    $
    (0.06
    )Basic  pro forma
    
    
    1.50
    
    
    
    0.49
    
    
    
    0.59
    
    
    
    (0.07
    )Diluted  as reported
    
    $
    1.48
    
    
    $
    0.51
    
    
    $
    0.58
    
    
    $
    (0.06
    )Diluted  pro forma
    
    
    1.45
    
    
    
    0.48
    
    
    
    0.57
    
    
    
    (0.07
    )
 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. 6. DERIVATIVE FINANCIAL INSTRUMENTS Midland adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, on January 1,
2001, which established reporting standards for derivative instruments and
hedging activities and requires recognition of all derivatives as either assets
or liabilities in the consolidated balance sheet and measurement of those 9




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##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued) instruments at fair value. At June 30, 2004, Midlands investment portfolio
included approximately $51.3 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 six month periods ending June 30, 2004, Midland recorded pre-tax
gains on these securities of $74,000 and $242,000, respectively. For the three
and six month periods ended June 30, 2003, Midland recorded pre-tax gains
(losses) on these securities of $612,000 and $(290,000), respectively. During March 2002, Midland entered into a series of interest rate swap
agreements to convert $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 and
thus 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 June 30, 2004 and 2003, the derivative gain (loss) recorded in Other
Comprehensive Income, net of deferred taxes, amounted to $408,000 and
$(86,000), 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 three and six-month periods
ended June 30, 2004 and 2003 are (000s): Six Months Ended June 30,
    
    Three Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    436
    
    
    $
    379
    
    
    $
    218
    
    
    $
    189Interest cost
    
    
    793
    
    
    
    727
    
    
    
    396
    
    
    
    364Expected return on assets
    
    
    (797
    )
    
    
    (787
    )
    
    
    (398
    )
    
    
    (394
    )Amortization of transition asset
    
    
    (36
    )
    
    
    (48
    )
    
    
    (18
    )
    
    
    (24
    )Amortization of prior service cost
    
    
    16
    
    
    
    16
    
    
    
    8
    
    
    
    8Amortization of net loss
    
    
    53
    
    
    
    26
    
    
    
    27
    
    
    
    13Net periodic cost
    
    $
    465
    
    
    $
    313
    
    
    $
    233
    
    
    $
    156
 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 The Midland
Company. 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 June 30, 2004 was $4.8 million, $4.0
million of which represented notes held either directly or indirectly by our
executive 10




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##### Table of Contents



THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued) officers and directors. The effective annual yield paid to all
participants in this program was 1.05% as of June 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 March 2004, the Financial Accounting Standards Board ratified the consensus
reached by the Emerging Issues Task Force in Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
(EITF 03-1). 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. An investment is considered impaired if the
fair value of the investment is less than its cost. Generally, an impairment
is considered other-than-temporary unless: (a) the investor has the ability and
intent to hold an investment for a reasonable period of time sufficient for a
forecasted recovery of fair value up to (or beyond) the cost of the investment;
and (b) evidence indicating that the cost of the investment is recoverable
within a reasonable period of time outweighs evidence to the contrary. 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. EITF 03-1 is effective for the Company in the third quarter of
2004. Gross unrealized losses on available for sale securities were $7.0
million at June 30, 2004. Any other-than-temporary impairments that may need
to be recognized upon adoption will be dependent on market conditions and
managements intent and ability to hold any such impaired securities. 11




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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 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 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 12




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##### Table of Contents



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 6.5% to $168.4 million from $158.2 million in the six month
period ended June 30, 2004 and increased 3.1% to $87.8 million from $85.2 in
the three month period ended June 30, 2004. Site-Built Dwelling Premium During 2002, American Modern de-emphasized its standard homeowner programs in
favor of its dwelling fire programs which have more restrictive coverages.
American Modern undertook a careful review of all of its site-built dwelling
programs with the intent of targeting those properties that fell outside the
parameters of the standard homeowners insurance market. As a result of these
actions, American Modern has achieved positive growth from its ongoing
site-built programs, which are primarily dwelling fire programs. More
specifically, gross written premium from American Moderns ongoing site-built
programs increased 17.6% to $22.7 million in the second quarter of 2004 from
$19.3 million in the comparable quarter in 2003. On a year-to-date basis, the
ongoing site-built programs increased 20.6% to $43.9 million in the first six
months of 2004 compared to $36.4 in the prior years first half. 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.
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. Primarily as a result of these rate increases, manufactured housing
and site-built dwelling profitability has increased to more acceptable levels
in 2004. For the second quarter of 2004, American Modern experienced a fire
loss ratio decrease in its manufactured housing and site-built programs of 3.6
percentage points and 10.6 percentage points, respectively, compared to the
comparable quarter in 2003. On a year-to-date basis, the fire loss ratio
decreased 6.2 percentage points for the site-built business and increased 0.9
percentage points for manufactured housing. The increase in the year-to-date
fire loss ratio resulted from American Modern experiencing a 5.4 percentage
point increase in its manufactured housing fire loss ratio in the first quarter
of 2004 compared to the 2003 first quarter. Motorcycle In 2003, the motorcycle product line accounted for approximately 9% of American
Moderns property and casualty gross written premiums. The underwriting
results of the motorcycle product have been below acceptable levels, due partly
to product positioning, inadequate rate levels and higher than expected losses.
American Modern has committed to improving the performance of the motorcycle
product even if gross written premium volume declines. In 2003, rate increases
averaging 21% were approved by various states insurance departments and
additional double-digit rate increases are being sought in 2004. 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.
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 remainder of 2004. 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 second quarter and year-to-date basis
compared to 2003. Specifically, the motorcycle combined ratio improved from
130.7% in the second quarter of 2003 to 121.0% in the second quarter of 2004.
On a year-to-date basis, the motorcycle combined ratio improved from 119.7% in
2003 to 102.7% in 2004. Generally, 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. As expected,
motorcycle gross written premium decreased 9.0% from $22.3 million in the
second quarter of 2003 to $20.3 million in the second 13




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##### Table of Contents



quarter of 2004. On a year-to-date basis, motorcycle premium decreased 16.1%
from $37.3 million in 2003 to $31.3 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 their reserves to address the future run-off claims. During the
second quarter of 2004, the run-off of this line of business increased our
profitability by approximately 5 cents per share (diluted) versus a charge of
15 cents a year ago as American Modern experienced favorable development in the
claims settled during the quarter. American Modern also experienced a
significant decrease in the number of new claims reported during the quarter.
The number of new reported claims was approximately 50% less than the level of
claims reported in the second quarter of 2003. 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 second quarter of 2004, gross written premium from American
Moderns other property and casualty insurance products (excluding manufactured
housing) collectively increased 23.1% to $117.8 million from $95.7 million in
the prior years second 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 17.7% to $197.7 million
from $168.0 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. RESULTS OF OPERATIONS Insurance Overview of Premium Volume The following chart provides detail related to the Companys revenues for the
three and six-month periods ended June 30, 2004 and 2003 ($000s): Revenues from external customers Six-Mos. Ended June 30,
    
    Three-Mos. Ended June 30,2004
    
    2003
    
    2004
    
    2003Insurance:Manufactured housing
    
    $
    161,602
    
    
    $
    165,828
    
    
    $
    80,680
    
    
    $
    82,452All other insuranceOther personal lines property
    
    
    43,123
    
    
    
    42,456
    
    
    
    22,049
    
    
    
    21,320Personal lines casualty
    
    
    63,040
    
    
    
    56,229
    
    
    
    31,357
    
    
    
    29,395Financial services
    
    
    36,999
    
    
    
    23,160
    
    
    
    21,312
    
    
    
    12,217Commercial lines
    
    
    24,004
    
    
    
    16,853
    
    
    
    12,786
    
    
    
    8,753Other insurance
    
    
    13,589
    
    
    
    12,941
    
    
    
    6,272
    
    
    
    6,593Transportation
    
    
    20,695
    
    
    
    12,821
    
    
    
    11,395
    
    
    
    6,976Total revenues from external customers
    
    $
    363,052
    
    
    $
    330,288
    
    
    $
    185,851
    
    
    $
    167,706
 Manufactured Housing Although the manufactured housing industry continues to be depressed, American
Moderns gross written premium related to this product increased 3.1% in the
second quarter of 2004 and 6.5% 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. The manufactured housing product achieved a combined ratio of
93.6% in the second quarter compared to 105.9% in last years second quarter.
The primary reason for this improvement was a 9.1 percentage 14




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##### Table of Contents



point decrease in catastrophe losses in the quarter. However, excluding the
effects of catastrophes, the second quarter manufactured housing combined ratio
still improved to 87.2% in 2004 compared to 91.2% in 2003. This improvement 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 Gross written premiums in American Moderns other specialty property and
casualty products (non-manufactured housing products) collectively increased
23.1% in the second quarter of 2004 and 17.7% year-to-date over the comparable
period in 2003. Driving this growth were the collateral protection, mortgage
fire and the excess and surplus lines products which collectively increased
$32.8 million or 129.6% 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 and 2003 and is continuing to seek rate increases in 2004. Gross
written premium related to the motorcycle product decreased 9.0% in the current
quarter compared to the prior years second quarter. On a year-to-date basis,
motorcycle premium decreased 16.1% from $37.3 million in 2003 to $31.3 million
in 2004. A decrease in motorcycle gross written premium was anticipated as
American Modern took aggressive rate actions and tightened its underwriting
criteria. Credit Life gross written premium increased $6.2 million in the second quarter
of 2004 over the comparable period in 2003. On a year-to-date basis, gross
written premiums increased $10.5 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 second quarter.
Cancellations were heavy in 2003 due to the high level of refinancing activity
which was taking place at that time. Investment Income and Realized Capital Gains Net investment income increased to $9.0 million in the second quarter of 2004
from $8.1 million in the prior years second quarter. On a year-to-date basis,
net investment income increased to $17.7 million in 2004 from $16.6 million in
the prior year. This increase is due primarily to the increase in the size of
the portfolio. 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 5.3% in
the first six months of 2004 compared to 5.7% 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): Six Months Ended June 30, 2004
    
    Six Months Ended June 30, 2003Pre-Tax
    
    After-Tax
    
    Earnings
    
    Pre-Tax
    
    After-Tax
    
    EarningsGain (Loss)
    
    Gain (Loss)
    
    Per Share
    
    Gain (Loss)
    
    Gain (Loss)
    
    Per ShareEmbedded derivatives
    
    $
    242
    
    
    $
    157
    
    
    $
    0.01
    
    
    $
    (290
    )
    
    $
    (189
    )
    
    $
    (0.01
    )Other-Than-Temporary
Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,898
    )
    
    
    (1,233
    )
    
    
    (0.07
    )Capital Gains
    
    
    5,166
    
    
    
    3,358
    
    
    
    0.17
    
    
    
    3,238
    
    
    
    2,105
    
    
    
    0.12Total Realized Investment
Gains (Losses)
    
    $
    5,408
    
    
    $
    3,515
    
    
    $
    0.18
    
    
    $
    1,050
    
    
    $
    683
    
    
    $
    0.04
 Three Months Ended June 30, 2004
    
    Three Months Ended June 30, 2003Pre-Tax
    
    After-Tax
    
    Earnings
    
    Pre-Tax
    
    After-Tax
    
    EarningsGain (Loss)
    
    Gain (Loss)
    
    Per Share
    
    Gain (Loss)
    
    Gain (Loss)
    
    Per ShareEmbedded derivatives
    
    $
    74
    
    
    $
    48
    
    
    $
    0.00
    
    
    $
    611
    
    
    $
    398
    
    
    $
    0.02Other-Than-Temporary
Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital Gains
    
    
    628
    
    
    
    408
    
    
    
    0.02
    
    
    
    2,202
    
    
    
    1,431
    
    
    
    0.08Total Realized Investment
Gains (Losses)
    
    $
    702
    
    
    $
    456
    
    
    $
    0.02
    
    
    $
    2,813
    
    
    $
    1,829
    
    
    $
    0.10
 15




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##### Table of Contents



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 second quarter of
2004 decreased 21.9% to $88.6 million from $113.4 million in the prior years
second quarter. This significant decrease in losses was due primarily to
decreased catastrophe and fire losses related to American Moderns manufactured
housing and site-built products combined with significant improvements in the
motorcycle loss ratio and the loss ratios in the companys run-off commercial
liability books of business. The manufactured housing and site-built dwelling
products experienced 9.1 percentage point and 15.2 percentage point decreases,
respectively, in catastrophe losses in the current quarter compared to prior
year. In addition, the loss ratios in the manufactured housing and site-built
dwelling products also experienced 3.6 percentage point and 10.6 percentage
point decreases, respectively, in fire losses in the current quarter compared
to prior year. The motorcycle combined ratio improved from 130.7% in the
second quarter of 2003 to 121.0% in the second quarter of 2004. American
Moderns discontinued commercial liability book of business increased
profitability for the second quarter of 2004 by approximately 5 cents per share
(diluted) compared to a loss of 15 cents per share (diluted) in last years
second quarter as American Modern experienced favorable development in the
claims settled during the second quarter of 2004. American Modern also
experienced a significant decrease in the number of new claims reported during
the quarter. The number of new reported claims was approximately 50% less than
the level of claims reported in the second quarter of 2003. On a year-to-date basis, losses and loss adjustment expenses decreased 12.6% to
$167.9 million in 2004 from $192.1 million in 2003. The loss ratios in the
manufactured housing and site-built dwelling products experienced 4.5
percentage point and 8.2 percentage point decreases, respectively, in
catastrophe losses for the six month period ended June 30, 2004 compared to the
prior years comparable period. In addition, the fire loss ratio decreased 6.2
percentage points for site-built business which was slightly offset by a 0.9
percentage points increase for manufactured housing. The increase in the
year-to-date manufactured housing fire loss ratio resulted from American Modern
experiencing a 5.4 percentage point increase in its fire loss ratio in the
first quarter of 2004 compared to the 2003 first quarter. On a year-to-date
basis, the motorcycle combined ratio improved from 119.7% in 2003 to 102.7% in
2004. Insurance Commissions and Other Policy Acquisition Costs American Moderns commissions and other policy acquisition costs increased
26.2% from $40.9 million in the second quarter of 2003 to $51.6 million in the
second quarter of 2004. On a year-to-date basis, American Moderns commissions
and other policy acquisition costs increased 16.5% from $88.7 million in 2003
to $103.3 million in 2004. These increases are primarily due to the continued
growth in net earned premium plus a significant increase in contingent
commission expense as a result of the improved underwriting results achieved in
the current years first quarter compared to the prior years first quarter.
The increase in contingent commission expense is attributable, in part, to
American Moderns Pay-for-Performance commission policy which reduces the
up-front commission paid but rewards underwriting performance with a higher
contingent commission. Insurance Operating and Administrative Expenses American Moderns insurance operating and administrative expenses increased
39.1% from $19.7 million in the second quarter of 2003 to $27.4 million in the
second quarter of 2004. On a year-to-date basis, American Moderns insurance
operating and administrative expenses increased 25.7% from $41.7 million in
2003 to $52.4 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. Overview of Property and Casualty Underwriting Results During the second quarter of 2004, American Moderns property and casualty
combined ratio (losses and expenses as a percent of earned premium) was 96.5%,
down from 111.2% in the prior years second quarter. This improvement was
primarily due to improved underwriting results related to our manufactured
housing, site built, motorcycle, snowmobile, watercraft and mortgage fire
products, a decrease in 16




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##### Table of Contents



catastrophe losses, and favorable run-off of our discontinued commercial
liability business. Excluding catastrophe losses, American Moderns property
and casualty combined ratio was 91.4% in the current quarter as compared to
98.5% in the year ago second quarter. On a year-to-date basis, American Moderns property and casualty combined ratio
decreased to 95.4% compared to 103.8% in the same period last year. This
improvement once again was primarily due to improved underwriting results
related to our manufactured housing, site built, motorcycle, snowmobile,
watercraft and mortgage fire products, a decrease in catastrophe losses, and
decreased losses related our discontinued commercial liability business.
Excluding catastrophe losses, American Moderns property and casualty combined
ratio was 91.9% for the six month period as compared to 96.0% for the same
period in 2003. M/G Transport M/G Transport, Midlands transportation subsidiary, reported revenues for the
second quarter of 2004 of $11.4 million compared to $7.0 million in the prior
years second quarter. Pre-tax operating profit was $0.6 million in the
current quarter as compared to $0.3 million in the prior years second 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 $20.7 million in
2004 compared to $12.8 million in 2003. Pre-tax income improved to $0.7
million in 2004 compared to $0.3 million in 2003. Outlook Given the results of the three and six-month periods ended June 30, 2004
coupled with our current outlook, we anticipate a property and casualty
combined ratio, assuming normal weather, in the range of 96.5% to 98.0% for the
full year 2004, noting that weather patterns and seasonal products such as
motorcycle and watercraft tend to increase the combined ratio during the third
quarter. 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 $2.40 to
$2.60 per share (diluted), which would include the after-tax impact of $0.18
per share (diluted) from realized investment gains. Finally, management also
projects near double-digit top-line growth. 17




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##### 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 June 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
    
    $
    85,442
    
    
    $
    1,625
    
    
    $
    59,817
    
    
    $
    24,000Other notes payable
    
    
    11,778
    
    
    
    11,778
    
    
    
    
    
    
    
    Annual commitments under
non-cancelable leases
    
    
    7,098
    
    
    
    951
    
    
    
    2,838
    
    
    
    3,309Purchase obligations
    
    
    8,615
    
    
    
    2,702
    
    
    
    5,913
    
    
    
    Other obligations
    
    
    1,668
    
    
    
    1,543
    
    
    
    125
    
    
    
    Insurance policy loss reserves
    
    
    217,791
    
    
    
    120,221
    
    
    
    88,205
    
    
    
    9,365Total
    
    $
    332,392
    
    
    $
    138,820
    
    
    $
    156,898
    
    
    $
    36,674
 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. The following table provides additional detail surrounding the Companys
insurance policy loss reserves at June 30, 2004 and December 31, 2003: June 30,
    
    December 31,2004
    
    2003Gross case base loss reserves:Manufactured housing
    
    $
    31,739
    
    
    $
    30,263Other insurance
    
    
    106,382
    
    
    
    96,448Gross loss reserves incurred but not reported
    
    
    59,194
    
    
    
    55,366Outstanding checks and drafts
    
    
    20,476
    
    
    
    22,756Total insurance loss reserves
    
    $
    217,791
    
    
    $
    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 its 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 June 30, 2004, loss reserves, net of reinsurance
recoverables, for our property and casualty companies totaled $159.7 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 18




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##### Table of Contents



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. Other Items No shares were repurchased in the open market under the Companys share
repurchase program during the first six 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 six-month period ended June 30,
2004, the Company repurchased approximately $2.6 million of treasury shares in
connection with associate stock incentive programs. The Company repurchased no
shares related to this program during the second quarter of 2004. Due to the timing related to the dividend payment date, the dividend for the
fourth quarter of 2003, as well as the dividends for the first and second
quarter of 2004, was paid during the first half of 2004. As a result, three
quarterly dividend payments were paid during the six month period ending June
30, 2004. Therefore, dividends paid to our shareholders amounted to $2.7
million in the first six months of 2004 compared to $1.6 million during the
prior years six-month period which represented only two quarters of dividends. 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. Midland has a commercial paper program under which qualified purchasers may
invest in the short-term unsecured notes of Midland. As of June 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 1.05% as of June 30, 2004, a rate that management considers to
be competitive with the market rates offered for similar instruments. As of
June 30, 2004, Midland also had $75.0 million of conventional short-term credit
lines available at costs not exceeding prime borrowing rates, of which $7.0
million was outstanding. These short-term borrowings decreased $23.0 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 June 30, 2004, the outstanding balance
of this mortgage was $15.2 million. This mortgage obligation includes normal
and customary debt covenants for instruments of this type. Monthly principal
and interest payments are required until maturity in December 2005. The
effective interest rate on this obligation is 6.8%. On October 21, 2003 Midland filed a universal shelf registration statement
with the Securities and Exchange Commission. A shelf registration, or delayed
offering, of securities allows companies to register securities under the
Securities Act of 1933 for future sale, thereby avoiding potential
time-consuming delays inherent in the registration process. Under this
process, companies are permitted to register securities in 19




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##### Table of Contents



advance of their expected sale date and put them on the shelf for future use.
This registration statement will allow the Company to offer from time to time
up to $150 million in various types of securities, including debt, preferred
stock and common stock. On February 5, 2004, 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 a pooled trust preferred offering. The proceeds
from these transactions will be 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 7.0% from
$846.3 million at December 31, 2003, to $905.6 million at June 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 $23.2 million in unrealized
appreciation in the market value of securities held. The decrease in the
unrealized appreciation was due to a $16.3 million decrease in unrealized
appreciation related to the fixed income portfolio combined with a $6.9 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 $67.8 million in market value as of June 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: Unrealized Gain (Loss) as of June 30, 2004 Unrealized
    
    Fair
    
    # ofGain (Loss)
    
    Value
    
    PositionsFixed Income SecuritiesTotal Held In A Gain Position
    
    $
    17,198
    
    
    $
    461,321
    
    
    
    622Held In A Loss Position For Less Than 3 Months
    
    
    (2,986
    )
    
    
    184,424
    
    
    
    210Held In A Loss Position For More Than 3 Months
And Less Than 9 Months
    
    
    (2,106
    )
    
    
    50,353
    
    
    
    43Held In A Loss Position For More Than 9 Months
And Less Than 18 Months
    
    
    (509
    )
    
    
    12,930
    
    
    
    18Held In A Loss Position For More Than 18 Months
    
    
    (181
    )
    
    
    846
    
    
    
    2Fixed Income Total
    
    $
    11,416
    
    
    $
    709,874
    
    
    
    895
 20




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##### Table of Contents



Unrealized
    
    Fair
    
    # ofGain (Loss)
    
    Value
    
    PositionsEquity SecuritiesTotal Held In A Gain Position
    
    $
    81,196
    
    
    $
    169,331
    
    
    
    192Held In A Loss Position For Less Than 3 Months
    
    
    (158
    )
    
    
    5,839
    
    
    
    13Held In A Loss Position For More Than 3 Months
And Less Than 9 Months
    
    
    (523
    )
    
    
    7,168
    
    
    
    20Held In A Loss Position For More Than 9 Months
And Less Than 18 Months
    
    
    (52
    )
    
    
    925
    
    
    
    3Held In A Loss Position For More Than 18 Months
    
    
    (489
    )
    
    
    3,743
    
    
    
    8Equity Total
    
    $
    79,974
    
    
    $
    187,006
    
    
    
    236Total Per Above
    
    $
    91,390
    
    
    $
    896,880
    
    
    
    1,131Accrued Interest and Dividends
    
    
    
    
    
    
    8,765Total Per Balance Sheet
    
    $
    91,390
    
    
    $
    905,645
 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 June 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 June 30, 2004 was 4.6 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 $2.7 million for the first six months of
2004 and a total of $15.6 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 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 June 30, 2004, there was $36.0 million
outstanding under these facilities. During the first quarter of 2002, American Modern entered into an interest rate
swap agreement with a consortium of three banks. Under the terms of this
agreement, the floating interest rate related to $30.0 million outstanding
under American Moderns long-term credit facility has been effectively fixed at
5.6% until December 1, 2005, the maturity date. The fair value of this
agreement as of June 30, 2004 was $(0.8) 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 72% of American Moderns accounts
receivables relate to premium due directly from policyholders as of June 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 21




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has increased $6.9 million to $79.5 million at June 30, 2004 due primarily to
the increase in written premium volume. The increase of $2.2 million in deferred policy acquisition costs is primarily
due to net written premium outpacing net earned premium during the first six
months of 2004 partially offset by the impact of the Pay for Performance
program. This program reduces the front-end commission and shifts the bulk of
the agents compensation to a back-end loaded profit sharing arrangement. The $9.8 million increase in unearned insurance premiums was also due to the
net written premium outpacing net earned premium during the first six months of
2004. The $13.9 million increase in insurance commissions payable is primarily due to
the net increase of $10.3 million in property and casualty contingent
commissions payable as a result of the strong underwriting profitability of the
property and casualty operations in the first half of 2004 combined with an
increase in written premiums during the period. 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 June 30, 2004, the transportation
subsidiaries had $10.2 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. 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 three and six-month periods ended June 30, 2004 and 2003, such changes
increased or (decreased), net of related income tax effects, by the following
(amounts in $000s): Six Months Ended June 30,
    
    Three Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Changes in net unrealized capital gains:Equity securities
    
    $
    (4,482
    )
    
    $
    12,145
    
    
    $
    (1,069)
    
    
    $
    14,800Fixed income securities
    
    
    (10,596
    )
    
    
    4,475
    
    
    
    (12,955)
    
    
    
    4,163Changes in fair value of interest
rate swap hedge
    
    
    408
    
    
    
    (86
    )
    
    
    418
    
    
    
    (67
    )Total
    
    $
    (14,670
    )
    
    $
    16,534
    
    
    $
    (13,606
    )
    
    $
    18,896
 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, 22




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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 premium written are expensed as incurred. Reserves for Insurance Losses American Moderns reserve for insurance losses is based on past experience of
settling known claims as well as estimating those not yet reported. While
management believes the amounts are fairly stated, the ultimate liability, once
fully developed, may be more than or less than that provided. Management and
its actuaries, both internal and external, regularly review these liabilities
and adjustments are made as necessary in the current period. Management does
not foresee any significant change in the manner in which it records its
reserve for insurance losses. Reinsurance Risks By reinsuring certain levels and types of insurable risk with other insurance
companies, American Modern limits its exposure to losses to that portion of the
insurable risk it retains. However, if the reinsurer fails to honor its
obligations, American Modern could suffer additional losses as the reinsurance
contracts do not relieve American Modern of its obligations to policyholders.
American Modern 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. Currently,
all of American Moderns catastrophe reinsurers are financially sound with 90%
carrying an A.M. Best or S&P rating of A or better. 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 June
30, 2004, American Modern was owed $4.6 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. 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 23




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individual portfolio holdings with an unrealized loss. For securities where
the market value is less than 80% of cost, we more closely monitor for signs of
other-than-temporary impairment. We, with the assistance of our external
professional money managers, apply both quantitative and qualitative criteria
in our evaluation, including facts specific to each individual investment such
as, but not limited to, the length of time the fair value has been below the
cost, the extent of the decline, our intent to sell or hold the security, the
expectation for each individual securitys performance, the credit worthiness
and related liquidity of the issuer and the issuers business sector. The evaluation for other-than-temporary impairment requires a significant
amount of judgement. As such, there are a number of risks and uncertainties
inherent in the process of monitoring impairments and determining if a decline
is other-than-temporary. These risks and uncertainties include the risks that: 1. The economic outlook is worse than anticipated and has a greater adverse
impact on a particular issuer than anticipated. 2. Our assessment of a particular issuers ability to meet all of its
contractual obligations changes based on changes in the facts and circumstances
related to the issuer. 3. New information is obtained or facts and circumstances change that cause a
change in our ability or intent to hold a security to maturity or until it
recovers in value. 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 June 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
anticipated recovery
    
    time to conversion with respect to a mandatory convertible security For fixed income securities, we also consider the following factors:  
    
    whether the unrealized loss is credit-driven or is a result of changes in market interest rates
    
    the recoverability of 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 24




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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. 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 June 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 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 March 2004, the Financial Accounting Standards Board ratified the consensus
reached by the Emerging Issues Task Force in Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
(EITF 03-1). 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. An investment is considered impaired if the
fair value of the investment is less than its cost. Generally, an impairment
is considered other-than-temporary unless: (a) the investor has the ability and
intent to hold an investment for a reasonable period of time sufficient for a
forecasted recovery of fair value up to (or beyond) the cost of the investment;
and (b) evidence indicating that the cost of the investment is recoverable
within a reasonable period of time outweighs evidence to the contrary. 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. EITF 03-1 is effective for the Company in the third quarter of
2004. Gross unrealized losses on available for sale securities were $7.0
million at June 30, 2004. Any other-than-temporary impairments that may need
to be recognized upon adoption will be dependent on market conditions and
managements intent and ability to hold any such impaired securities. 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. 25




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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 4.6 year duration of American Moderns fixed
income portfolio as of June 30, 2004, management estimates that a 100 basis
point increase in interest rates would decrease the market value of its $731.8
million fixed income portfolio by 4.6%, or $33.7 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 June 30, 2004, American Modern had $170.5 million in
equity holdings, including $50.8 million of U.S. Bancorp common stock. As of
June 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 $67.8 million at
June 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 $6.8 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 second fiscal quarter that has
materially affected, or is reasonably likely to materially effect, the
Companys internal control over financial reporting. 26




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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 June 30, 2004, and
the related condensed consolidated statements of operations for the three-month
and six-month periods ended June 30, 2004 and 2003, and of cash flows and
changes in shareholders equity for the six-month periods ended June 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 August 5, 2004 27




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PART II. OTHER INFORMATION
THE MIDLAND COMPANY AND SUBSIDIARIES
JUNE 30, 2004 
 Item 1. Legal Proceedings None 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities  a)
    
    During the quarter ended June 30, 2004, Midland entered
into two private placement transactions of trust preferred
securities.On April 29, 2004, the Company completed a private placement of
trust preferred securities through the formation of American
Modern Capital Trust I (Trust I), a statutory trust organized
under the Delaware Statutory Trust Act and wholly-owned subsidiary
of the Company. Trust I issued and sold 12,000 trust preferred
securities (liquidation amount of $1,000 per security) of Trust I
to Dekania CDO II, Ltd. for $12,000,000. Trust I used the proceeds
of the sale of such trust preferred securities to purchase from
the Company $12,000,000 aggregate principal amount of Floating
Rate Junior Subordinated Debentures due 2034.On May 26, 2004, the Company completed another private placement
of trust preferred securities through the formation of American
Modern Capital Trust II (Trust II), also a statutory trust
organized under the Delaware Statutory Trust Act and wholly-owned
subsidiary of the Company. Trust II also issued and sold 12,000
trust preferred securities (liquidation amount of $1,000 per
security) of Trust II to ICONS, Ltd. for $12,000,000. Trust II
also used the proceeds of the sale of such trust preferred
securities to purchase from the Company $12,000,000 aggregate
principal amount of Floating Rate Junior Subordinated Debentures
due 2034.Payment and performance of the obligations of Trust I and Trust II
under the securities described above is considered an obligation
of the Company to the extent provided in guarantee agreements.
The offering and sale of securities by trusts and the offering and
sale of debt securities and guarantees by Midland are exempt from
the registration requirements of the Securities Act of 1933 by
reason of Section 4(2) of that Act because the transactions do not
involve any public offering. Morgan Stanley & Co. Incorporated
and Cochran Caronia Securities LLC served as placement agents in
each of the above-described transactions and they received
$240,000 in commissions in connection with the placement of the
above-referenced securities. The sale of the trust preferred
securities were part of larger transactions arranged by the
placement agents pursuant to which the trust preferred securities
were deposited into special purpose vehicles along with similar
securities issued by a number of other issuers and the special
purpose vehicles then issued their securities to the public.
Midland expects to use the proceeds of each transaction to fund
future growth and for other general corporate purposes.b)
    
    During the three and six-month periods ended June 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 six-month periods ended
June 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 3,733 and 6,809 shares from the Plan during the three and
six-month periods ended June 30, 2004, respectively. 28




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PART II. OTHER INFORMATION
THE MIDLAND COMPANY AND SUBSIDIARIES
JUNE 30, 2004 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders  At the Companys 2003 Annual Meeting of Shareholders held on April
8, 2004, the following actions were taken:a)
    
    The following persons were elected as members of the
Board of Directors to serve until the year of the 2007 Annual
Meeting and until their successors are chosen and qualified: Votes
    
    
    
    
    
    BrokerName
    
    Votes For
    
    Withheld
    
    Abstentions
    
    Non-VotesJ. P. Hayden, Jr.
    
    
    14,762,355
    
    
    
    3,028,033
    
    
    
    0
    
    
    
    0William T. Hayden
    
    
    14,770,538
    
    
    
    3,019,850
    
    
    
    0
    
    
    
    0John M. OMara
    
    
    16,997,399
    
    
    
    792,989
    
    
    
    0
    
    
    
    0Glenn E. Schembechler
    
    
    17,141,138
    
    
    
    649,250
    
    
    
    0
    
    
    
    0Francis Marie Thrailkill
    
    
    17,180,688
    
    
    
    609,700
    
    
    
    0
    
    
    
    0John I. Von Lehman
    
    
    14,797,558
    
    
    
    2,992,830
    
    
    
    0
    
    
    
    0
  b)
    
    A proposal by the Board of Directors to adopt The
Midland Company Executive Annual Incentive Plan and approval of
performance conditions applicable to certain awards under the
incentive plan. The shareholders cast 14,741,347 votes in favor
of this proposal and 148,188 votes against it. There were 60,058
abstentions and no broker non-votes.c)
    
    A proposal by the Board of Directors for the adoption
of an amendment to The Midland Company 2002 Employee Incentive
Stock Plan and approval of performance conditions applicable to
certain awards under the 2002 plan as well as performance
conditions under the 1992 Associate Stock Incentive Plan. The
shareholders cast 13,791,584 votes in favor of this proposal and
1,105,272 votes against it. There were 52,738 abstentions and no
broker non-votes.d)
    
    A proposal by the Board of Directors to approve The
Midland Company Agent Stock Acquisition Program. The
shareholders cast 14,503,549 votes in favor of the proposal and
388,238 votes against it. There were 57,807 abstentions and no
broker non-votes.e)
    
    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, 2004, was
approved by the Shareholders. The Shareholders
cast 17,656,527 votes in favor of this proposal and 83,980 votes
against it. There were 49,880 abstentions and no broker
non-votes. 
 Item 5. Other Information None 
 Item 6. Exhibits and Reports on Form 8-K  a)
    
    Exhibit 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 1934 29




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PART II. OTHER INFORMATION
THE MIDLAND COMPANY AND SUBSIDIARIES
JUNE 30, 2004  Exhibit 31.2  Certification of Principal Financial Officer
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934Exhibit 32.1  Certification of Chief Executive Officer Pursuant
to 18 U.S.C. § 1350Exhibit 32.2  Certification of Chief Financial Officer Pursuant
to 18 U.S.C. § 1350b)
    
    Reports on Form 8-KThe Company filed a Current Report under item 10 of Form 8-K on
April 29, 2004 as the Companys Board of Directors approved
amendments to the Code of Financial Conduct for Senior Financial
Officers of the Company.The Company filed a Current Report under item 9 of Form 8-K on May
12, 2004 in connection with slides presented to several
institutional investment portfolio managers in accordance with
Regulation FD. 
 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 August 5, 2004
    /s/John I. Von LehmanJohn I. Von Lehman, Executive Vice President,Chief Financial Officer and Secretary 30