##### 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 1934For the quarterly period ended March 31, 2005ORo
    
    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(Exact name of registrant as specified in its charter)
 Ohio
    
    31-0742526(State or other jurisdiction of incorporation
or organization)
    
    (I.R.S. Employer Identification No.)
 7000 Midland Boulevard, Amelia, Ohio 45102-2607(Address of principal executive offices)
(Zip Code)
 (513) 943-7100(Registrants telephone number, including area code)
 N/A(Former name, former address and former fiscal year, if changed since last report)
 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 May 2, 2005 was 18,869,097.   1




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TABLE OF CONTENTS  PART IITEM 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 PROCEDURESREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATUREExhibit 15Exhibit 31.1Exhibit 31.2Exhibit 32    Table of Contents  
 PART I. 
 ITEM I. FINANCIAL INFORMATION
 THE MIDLAND COMPANY
 AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 MARCH 31, 2005 AND DECEMBER 31, 2004
 Amounts in 000s
 (Unaudited)March 31,
    
    
    December 31,2005
    
    
    2004ASSETSMARKETABLE SECURITIES AVAILABLE FOR SALE:Fixed income (cost, $739,577 at March 31, 2005 and
$745,514 at December 31, 2004)
    
    $
    750,692
    
    
    $
    770,639Equity (cost, $107,633 at March 31, 2005 and
$109,851 at December 31, 2004)
    
    
    189,830
    
    
    
    200,799Total
    
    
    940,522
    
    
    
    971,438CASH
    
    
    6,462
    
    
    
    6,858ACCOUNTS RECEIVABLE  NET
    
    
    114,848
    
    
    
    113,979REINSURANCE RECOVERABLES AND
PREPAID REINSURANCE PREMIUMS
    
    
    89,522
    
    
    
    87,726PROPERTY, PLANT AND EQUIPMENT  NET
    
    
    68,051
    
    
    
    68,312DEFERRED INSURANCE POLICY ACQUISITION COSTS
    
    
    87,296
    
    
    
    90,423OTHER ASSETS
    
    
    26,496
    
    
    
    25,948TOTAL ASSETS
    
    $
    1,333,197
    
    
    $
    1,364,684
 See notes to condensed consolidated financial statements. 2




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THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
Amounts in 000s (Unaudited)March 31,
    
    
    December 31,2005
    
    
    2004LIABILITIES & SHAREHOLDERS EQUITYUNEARNED INSURANCE PREMIUMS
    
    $
    378,852
    
    
    $
    390,447INSURANCE LOSS RESERVES
    
    
    220,635
    
    
    
    232,915INSURANCE COMMISSIONS PAYABLE
    
    
    49,470
    
    
    
    45,374FUNDS HELD UNDER REINSURANCE AGREEMENTS
AND REINSURANCE PAYABLES
    
    
    14,633
    
    
    
    11,465LONG-TERM DEBT
    
    
    58,316
    
    
    
    58,729OTHER NOTES PAYABLE
    
    
    20,771
    
    
    
    33,177DEFERRED FEDERAL INCOME TAX
    
    
    39,714
    
    
    
    47,604OTHER PAYABLES AND ACCRUALS
    
    
    87,130
    
    
    
    88,697JUNIOR SUBORDINATED DEBENTURES
    
    
    24,000
    
    
    
    24,000TOTAL LIABILITIES
    
    
    893,521
    
    
    
    932,408COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Common stock (issued and outstanding: 18,862 shares at
March 31, 2005 and 18,807 shares at December 31, 2004
after deducting treasury stock of 4,139 shares and
4,199 shares, respectively)
    
    
    959
    
    
    
    959Additional paid-in capital
    
    
    52,649
    
    
    
    51,184Retained earnings
    
    
    370,630
    
    
    
    350,141Accumulated other comprehensive income
    
    
    58,369
    
    
    
    73,027Treasury stock  at cost
    
    
    (42,931
    )
    
    
    (43,035
    )TOTAL SHAREHOLDERS EQUITY
    
    
    439,676
    
    
    
    432,276TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,333,197
    
    
    $
    1,364,684
 See notes to condensed consolidated financial statements. 3




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THE MIDLAND COMPANY
AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED INCOME (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Amounts in 000s except per share data 2005
    
    
    2004REVENUES:Premiums earned
    
    $
    165,591
    
    
    $
    163,639Other insurance income
    
    
    3,242
    
    
    
    4,262Net investment income
    
    
    9,926
    
    
    
    8,714Net realized investment gains
    
    
    803
    
    
    
    4,706Transportation
    
    
    10,804
    
    
    
    9,300Total
    
    
    190,366
    
    
    
    190,621COSTS AND EXPENSES:Losses and loss adjustment expenses
    
    
    62,939
    
    
    
    79,325Commissions and other policy acquisition costs
    
    
    57,702
    
    
    
    51,693Operating and administrative expenses
    
    
    26,753
    
    
    
    25,079Transportation operating expenses
    
    
    10,130
    
    
    
    9,064Interest expense
    
    
    1,462
    
    
    
    1,019Total
    
    
    158,986
    
    
    
    166,180INCOME BEFORE FEDERAL INCOME TAX
    
    
    31,380
    
    
    
    24,441PROVISION FOR FEDERAL INCOME TAX
    
    
    9,830
    
    
    
    7,593NET INCOME
    
    $
    21,550
    
    
    $
    16,848BASIC EARNINGS PER SHARE OF COMMON STOCK
    
    $
    1.15
    
    
    $
    0.93DILUTED EARNINGS PER SHARE OF COMMON STOCK
    
    $
    1.10
    
    
    $
    0.90CASH DIVIDENDS PER SHARE OF COMMON STOCK  DECLARED
    
    $
    .05625
    
    
    $
    .05125
 See notes to condensed consolidated financial statements. 4




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THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (Unaudited)
Amounts in 000s Accumulated
    
    
    
    
    
    
    UnvestedAdditional
    
    
    
    
    
    
    Other Com-
    
    
    
    
    
    
    Restricted
    
    
    
    
    
    
    Compre-Common
    
    
    Paid-In
    
    
    Retained
    
    
    prehensive
    
    
    Treasury
    
    
    Stock
    
    
    
    
    
    
    hensiveStock
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Stock
    
    
    Awards
    
    
    Total
    
    
    IncomeBALANCE, DECEMBER 31, 2003
    
    $
    911
    
    
    $
    23,406
    
    
    $
    299,752
    
    
    $
    73,455
    
    
    $
    (41,442
    )
    
    $
    (24
    )
    
    $
    356,058Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    16,848
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,848
    
    
    $
    16,848Decrease in unrealized gain on
marketable securities, net of related
income tax effect of $567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,054
    )
    
    
    
    
    
    
    
    
    
    
    (1,054
    )
    
    
    (1,054
    )Other, net of federal income tax of $5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (10
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15,784Public stock offering
    
    
    48
    
    
    
    25,022
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,070Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,452
    )
    
    
    
    
    
    
    (2,452
    )Issuance of treasury stock for options
exercised and employee savings plan
    
    
    
    
    
    
    512
    
    
    
    
    
    
    
    
    
    
    
    441
    
    
    
    
    
    
    
    953Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (960
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (960
    )Federal income tax benefit related to the
exercise or granting of stock awards
    
    
    
    
    
    
    972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    972Amortization and cancellation of
unvested restricted stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    24BALANCE, MARCH 31, 2004
    
    $
    959
    
    
    $
    49,912
    
    
    $
    315,640
    
    
    $
    72,391
    
    
    $
    (43,453
    )
    
    $
    
    
    
    $
    395,449BALANCE, DECEMBER 31, 2004
    
    $
    959
    
    
    $
    51,184
    
    
    $
    350,141
    
    
    $
    73,027
    
    
    $
    (43,035
    )
    
    $
    
    
    
    $
    432,276Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    21,550
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,550
    
    
    $
    21,550Decrease in unrealized gain on
marketable securities, net of related
income tax effect of $7,964
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,797
    )
    
    
    
    
    
    
    
    
    
    
    (14,797
    )
    
    
    (14,797
    )Other, net of federal income tax of $79
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    139Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,892Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (746
    )
    
    
    
    
    
    
    (746
    )Issuance of treasury stock for options
exercised and employee savings plan
    
    
    
    
    
    
    1,315
    
    
    
    
    
    
    
    
    
    
    
    850
    
    
    
    
    
    
    
    2,165Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (1,061
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,061
    )Federal income tax benefit related to the
exercise or granting of stock awards
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150BALANCE, MARCH 31, 2005
    
    $
    959
    
    
    $
    52,649
    
    
    $
    370,630
    
    
    $
    58,369
    
    
    $
    (42,931
    )
    
    $
    
    
    
    $
    439,676
 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 THREE-MONTHS ENDED MARCH 31, 2005 AND 2004
Amount in 000s 2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    21,550
    
    
    $
    16,848Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,448
    
    
    
    2,803Net realized investment gains
    
    
    (1,541
    )
    
    
    (4,538
    )Decrease in unearned insurance premiums
    
    
    (11,595
    )
    
    
    (15,327
    )Decrease in deferred insurance policy acquisition costs
    
    
    3,127
    
    
    
    3,634Increase in reinsurance recoverables and prepaid
reinsurance premiums
    
    
    (1,796
    )
    
    
    (4,408
    )Increase in net accounts receivable
    
    
    (869
    )
    
    
    (713
    )Increase (decrease) in insurance loss reserves
    
    
    (12,280
    )
    
    
    4,817Increase in funds held under reinsurance
agreements and reinsurance payables
    
    
    3,168
    
    
    
    1,906Increase (decrease) in other accounts payable and accruals
    
    
    (1,300
    )
    
    
    5,870Decrease (increase) in other assets
    
    
    (548
    )
    
    
    148Increase in insurance commissions payable
    
    
    4,096
    
    
    
    4,183Other-net
    
    
    1,241
    
    
    
    542Net cash provided by operating activities
    
    
    5,701
    
    
    
    15,765CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of marketable securities
    
    
    (79,974
    )
    
    
    (144,984
    )Sale of marketable securities
    
    
    68,509
    
    
    
    89,616Decrease (increase) in cash equivalent marketable securities
    
    
    (585
    )
    
    
    14,308Maturity of marketable securities
    
    
    20,451
    
    
    
    15,895Acquisition of property, plant and equipment
    
    
    (2,226
    )
    
    
    (4,390
    )Proceeds from sale of property, plant and equipment
    
    
    92
    
    
    
    239Net cash provided by (used in) investing activities
    
    
    6,267
    
    
    
    (29,316
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from common stock issuance
    
    
    
    
    
    
    25,070Decrease in net short-term borrowings
    
    
    (12,406
    )
    
    
    (5,572
    )Issuance of treasury stock
    
    
    2,165
    
    
    
    953Dividends paid
    
    
    (964
    )
    
    
    (1,785
    )Purchase of treasury stock
    
    
    (746
    )
    
    
    (2,452
    )Repayment of long-term debt
    
    
    (413
    )
    
    
    (386
    )Net cash provided by (used in) financing activities
    
    
    (12,364
    )
    
    
    15,828NET INCREASE (DECREASE) IN CASH
    
    
    (396
    )
    
    
    2,277CASH AT BEGINNING OF PERIOD
    
    
    6,858
    
    
    
    2,386CASH AT END OF PERIOD
    
    $
    6,462
    
    
    $
    4,663INTEREST PAID
    
    $
    1,421
    
    
    $
    878INCOME TAXES PAID
    
    $
    
    
    
    $
    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)
MARCH 31, 2005 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, 2004 has been derived from the
audited consolidated financial statements of the Company. Revenue and operating results for the
three-month period ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. For further information, refer to the audited
consolidated financial statements and footnotes thereto for the year ended December 31, 2004
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 EPSThree months ended March 31:2005
    
    
    18,829
    
    
    
    19,5082004
    
    
    18,154
    
    
    
    18,644
 At March 31, 2005, 197,000 stock options with an exercise price of $33.21 were outstanding and not
included in the calculation of diluted earnings per share as the exercise price was greater than
the average market value of Midlands common stock. All outstanding stock options at March 31,
2004 had exercise prices that were less than the average market price of Midlands common stock
and, therefore, were included in the computation of diluted earnings per share. 3. INCOME TAXES The federal income tax provisions for the three-month periods ended March 31, 2005 and 2004 are
different from amounts derived by applying the statutory tax rates to income before federal income
tax as follows (000s): 2005
    
    
    2004Federal income tax at statutory rate
    
    $
    10,983
    
    
    $
    8,554Tax effect of:Tax exempt interest and
excludable dividend income
    
    
    (1,220
    )
    
    
    (1,022
    )Other  net
    
    
    67
    
    
    
    61Provision for federal income tax
    
    $
    9,830
    
    
    $
    7,593
 7




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4. SEGMENT DISCLOSURES Since the Companys annual report for 2004, 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 2005 and 2004 is as follows (000s): Three Months Ended March 31, 2005
    
    
    Three Months Ended March 31, 2004Revenues-
    
    
    Pre-Tax
    
    
    
    
    
    
    Revenues-
    
    
    Pre-TaxTotal
    
    
    External
    
    
    Income
    
    
    Total
    
    
    External
    
    
    IncomeAssets
    
    
    Customers
    
    
    (Loss)
    
    
    Assets
    
    
    Customers
    
    
    (Loss)Reportable Segments:Insurance:Personal lines property
    
    
    n/a
    
    
    $
    100,464
    
    
    $
    15,957
    
    
    
    n/a
    
    
    $
    101,996
    
    
    $
    14,193Personal lines casualty
    
    
    n/a
    
    
    
    27,793
    
    
    
    7,927
    
    
    
    n/a
    
    
    
    31,683
    
    
    
    5,844Financial services
    
    
    n/a
    
    
    
    21,513
    
    
    
    2,193
    
    
    
    n/a
    
    
    
    15,687
    
    
    
    68All other insurance
    
    
    n/a
    
    
    
    19,063
    
    
    
    4,598
    
    
    
    n/a
    
    
    
    18,535
    
    
    
    802Unallocated insurance
    
    $
    1,229,918
    
    
    
    
    
    
    
    469
    
    
    $
    1,158,948
    
    
    
    
    
    
    
    10,033Transportation
    
    
    36,556
    
    
    
    10,804
    
    
    
    584
    
    
    
    31,931
    
    
    
    9,300
    
    
    
    119Corporate and all other
    
    
    102,206
    
    
    
    
    
    
    
    (348
    )
    
    
    85,692
    
    
    
    
    
    
    
    (355
    )Intersegment Eliminations
    
    
    (35,483
    )
    
    
    
    
    
    
    
    
    
    
    (47,827
    )
    
    
    
    
    
    
    (6,263
    )Total
    
    $
    1,333,197
    
    
    $
    179,637
    
    
    $
    31,380
    
    
    $
    1,228,744
    
    
    $
    177,201
    
    
    $
    24,441
 The amounts shown for personal lines property, personal lines casualty, financial services,
all other insurance and unallocated insurance comprise the consolidated amounts for Midlands
insurance operations subsidiary, American Modern Insurance Group, Inc. Intersegment revenues were
insignificant for the first quarters of 2005 and 2004. During the first quarter of 2004, the
Midland parent company purchased 314,951 shares of U.S. Bancorp common stock from American Modern
Insurance Group, Inc. The effects of this transaction were eliminated from total pre-tax income. Revenues reported above, by definition, exclude investment income and realized gains. For pre-tax
income reported above, insurance investment income is allocated to the insurance segments while
realized gains and losses are included in unallocated insurance. 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. Certain prior year amounts have been reclassified to conform with current year presentation. 8




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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 months ended March 31, 2005 and 2004 would have been reduced
to the pro forma amounts indicated below (amounts in 000s, except per share data): For the Three Months Ended March 312005
    
    
    2004Net Income as Reported
    
    $
    21,550
    
    
    $
    16,848Deduct: Total stock-based employee
compensation determined under fair
value based method for all awards,
net of related tax effects
    
    
    406
    
    
    
    360Pro forma Net Income
    
    $
    21,144
    
    
    $
    16,488Basic Shares
    
    
    18,829
    
    
    
    18,154Diluted Shares
    
    
    19,508
    
    
    
    18,644Earnings per share:Basic  as reported
    
    $
    1.15
    
    
    $
    0.93Basic  pro forma
    
    
    1.12
    
    
    
    0.91Diluted  as reported
    
    $
    1.10
    
    
    $
    0.90Diluted  pro forma
    
    
    1.08
    
    
    
    0.88
 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 At March 31, 2005 and 2004, Midlands investment portfolio included approximately $45.0 million and
$51.0 million, respectively, 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-month
periods ended March 31, 2005 and 2004, Midland recorded pre-tax realized gains (losses) on these
securities of $(738,000) and $168,000, 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
March 31, 2005 and 2004, the derivative losses recorded in Other Comprehensive Income, net of
deferred taxes, amounted to $139,000 and $942,000, respectively. The swaps mature on December 1,
2005. 9




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##### Table of Contents



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-month
periods ended March 31, 2005 and 2004 are (000s): For the Three Months Ended March 312005
    
    
    2004Service cost
    
    $
    221
    
    
    $
    218Interest cost
    
    
    404
    
    
    
    396Expected return on assets
    
    
    (393
    )
    
    
    (398
    )Amortization of transition asset
    
    
    
    
    
    
    (18
    )Amortization of prior service cost
    
    
    8
    
    
    
    8Amortization of net loss
    
    
    74
    
    
    
    27Net periodic benefit cost
    
    $
    314
    
    
    $
    233
 The Company intends to pay its required cash contribution of approximately $0.6 million for the
2005 plan year during 2005. The Company prepaid its required cash contribution of $0.6 million for
the 2004 plan year in December of 2003. 8. 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 March 31, 2005
was $4.8 million, $3.9 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 2.7% as of March 31, 2005, a rate that is considered to be competitive with the market
rates offered for similar instruments. 9. NEW ACCOUNTING STANDARDS In April 2005, the Financial Accounting Standards Board (FASB) delayed the effective date for
SFAS 123 (Revised 2004), Share-Based Payment, which makes it effective January 1, 2006 for the
Company. The revised statement (SFAS No. 123(R)) requires compensation cost relating to
share-based payment transactions to be recognized in a companys financial statements under the
fair value method. SFAS No. 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based
Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Midland is currently assessing the transition to SFAS 123(R) and does not expect its impact in 2006
to differ significantly from previously reported pro forma amounts. 10




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##### Table of Contents



ITEM 2. THE MIDLAND COMPANY AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS 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 2005 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 Prior to the 2004 annual report, the Company discussed its operations through three reportable
segments: manufactured housing insurance, all other insurance products and services and
transportation. However, as the Company has continued to grow its non-manufactured housing
insurance products, managements analysis of its insurance business has evolved in order to
facilitate a more focused examination of its varying insurance products. As a result, the Company
has divided its insurance products into four distinct groups: personal lines property, personal
lines casualty, financial services, and all other insurance products. The discussions of Results
of Operations and Liquidity, Capital Resources and Changes in Financial Condition address these
four reportable insurance segments and our transportation business. A summary description of the
operations of each of these segments is included below. Our personal lines property segment includes primarily manufactured housing and site-built dwelling
insurance products. Approximately 45% of American Moderns property and casualty and credit life
direct and assumed 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. Our personal lines casualty segment includes specialty insurance
products such as motorcycle, watercraft, recreational vehicle, collector car and snowmobile. Our
financial services segment includes specialty insurance products such as mortgage fire, collateral
protection and debt cancellation. The all other insurance segment includes products such as credit
life, long-haul truck physical damage, commercial, excess and surplus lines and also includes the
results of our fee producing subsidiaries. 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. M/G Transport operates a fleet of dry cargo barges for the movement of dry bulk commodities such as
petroleum coke, ores, barite, sugar and other dry cargoes primarily on the lower Mississippi River
and its tributaries. 11




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##### Table of Contents



EXECUTIVE OVERVIEW OF RECENT TRENDS AND OTHER DEVELOPMENTS Motorcycle The combined ratio for the motorcycle product improved to 69.2% in the first quarter of 2005
compared to 84.6% in the first quarter of 2004. Motorcycle losses are typically lower in the first
and fourth quarters and higher in the second and third quarters in a given year due to increased
use during the middle of the year. The effects of rate increases and other corrective underwriting
actions continue to have a positive impact on the motorcycle products profitability. Rate
increases averaging 19% and 21% were approved by various states insurance departments in 2004 and
2003, respectively, and we expect to experience a 14% increase in net earned premium related to
rate increases during 2005. In addition, we have added expertise to our staff and have refined our
product offering to better match the needs of our targeted market. Although we intend to increase
our motorcycle written premiums in the future, the aforementioned rate increases and other
corrective underwriting actions have resulted recently in decreased written premiums. The
motorcycle product direct and assumed written premiums decreased in the first quarter of 2005 to
$8.2 million from $11.0 million in the first quarter of 2004. Manufactured Housing Manufactured housing direct and assumed written premiums decreased by 3.4% in the first quarter of
2005 to $77.9 million compared to $80.6 million in the first quarter of 2004. American Modern
experienced mid single digit direct and assumed written premium growth in its point of sale channel
in 2005 compared to the first quarter of 2004, but continued to experience declines in lender
business as several institutional partners are no longer making new manufactured housing loans.
Over the last few years, American Modern has expanded its manufactured housing direct and assumed
written premiums, despite the depressed manufactured housing market, primarily through conversions
of selected agents business from our competitors. We continue to believe that our strong
relationships and our market leadership have us well positioned to capture future growth
opportunities as this market eventually recovers. The manufactured housing combined ratio improved to 87.3% in the first quarter of 2005 compared to
90.3% in the first quarter of 2004. This improvement was due primarily to rate increases combined
with improved underwriting. Commercial Liability Run-Off In September 2001, American Modern exited the manufactured housing park and dealer commercial
liability business. We have no outstanding unearned premium related to this business. During
2003, we experienced higher than expected losses related to this line. Due to the adverse
development, American Modern strengthened reserves in the latter part of 2003 to address the future
run-off claims. In 2004, American Modern experienced favorable development in the claims settled
for the year. This favorable trend has continued as the reserve development increased earnings per
share by 5 cents for the first quarter of 2005. Management believes that the loss exposure is
adequately reserved for the remainder of the run-off period. 12




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##### Table of Contents



RESULTS OF OPERATIONS The Midland Company reported net income of $21.5 million, or $1.10 per diluted share, for the first
quarter of 2005 compared with $16.8 million, or $0.90 per diluted share, for the first quarter of
2004. Revenue for the first quarter of 2005 was $190.4 million compared to $190.6 million in the
first quarter of 2004. Financial Highlights (amounts in thousands except per share data) Three Months Ended March 31,2005
    
    
    2004
    
    
    %Income Statement DataInsurance Revenue
    
    $
    179,562
    
    
    $
    181,321
    
    
    
    (1.0
    )%Transportation Revenue
    
    
    10,804
    
    
    
    9,300
    
    
    
    16.2
    %Total Revenue
    
    $
    190,366
    
    
    $
    190,621
    
    
    
    (0.1
    )%Net Income
    
    $
    21,550
    
    
    $
    16,848Balance Sheet DataCash & Invested Assets
    
    $
    946,984
    
    
    $
    878,386
    
    
    
    7.8
    %Total Assets
    
    $
    1,333,197
    
    
    $
    1,228,744
    
    
    
    8.5
    %Total Debt
    
    $
    103,087
    
    
    $
    89,884
    
    
    
    14.7
    %Shareholders Equity
    
    $
    439,676
    
    
    $
    395,449
    
    
    
    11.2
    %Common Shares Outstanding
    
    
    18,862
    
    
    
    18,737Per Share DataNet Income (Diluted)
    
    $
    1.10
    
    
    $
    0.90Dividends Declared
    
    $
    0.05625
    
    
    $
    0.05125
    
    
    
    9.8
    %Market Value
    
    $
    31.51
    
    
    $
    24.95
    
    
    
    26.3
    %Book Value
    
    $
    23.31
    
    
    $
    21.10
    
    
    
    10.5
    %AMIGs Property and Casualty OperationsDirect and Assumed Written Premiums
    
    $
    164,070
    
    
    $
    160,421
    
    
    
    2.3
    %Net Written Premium
    
    $
    151,499
    
    
    $
    146,472
    
    
    
    3.4
    %Combined Ratio Before Catastrophes
    
    
    86.6
    %
    
    
    92.4
    %Catastrophe Effects on Combined Ratio
    
    
    2.0
    %
    
    
    1.9
    %Combined Ratio
    
    
    88.6
    %
    
    
    94.3
    %
 13




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##### Table of Contents



Overview of Revenues The following chart provides detail related to the Companys revenues for the three-month periods
ended March 31, 2005 and 2004 ($000s): Revenues from external customers Three-Mos. Ended March 31,2005
    
    
    2004Insurance:Personal lines property
    
    $
    100,464
    
    
    $
    101,996Personal lines casualty
    
    
    27,793
    
    
    
    31,683Financial services
    
    
    21,513
    
    
    
    15,687All other insurance
    
    
    19,063
    
    
    
    18,535Total insurance
    
    
    168,833
    
    
    
    167,901Net investment income
    
    
    9,926
    
    
    
    8,714Net realized investment gains
    
    
    803
    
    
    
    4,706Transportation
    
    
    10,804
    
    
    
    9,300Total revenues
    
    $
    190,366
    
    
    $
    190,621
 Insurance Overview of Premium Volume The following chart shows American Moderns gross written premium, net written premium and net
earned premium by business segment for the periods ended March 31, 2005 and 2004 (millions): March 31, 2005
    
    
    March 31, 2004Gross
    
    
    Net
    
    
    Net
    
    
    Gross
    
    
    Net
    
    
    NetWritten
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Written
    
    
    EarnedBusiness Segment
    
    Premium
    
    
    Premium
    
    
    Premium
    
    
    Premium
    
    
    Premium
    
    
    PremiumPersonal Lines Property
    
    $
    99.5
    
    
    $
    93.3
    
    
    $
    99.0
    
    
    $
    102.3
    
    
    $
    96.6
    
    
    $
    100.7Personal Lines Casualty
    
    
    22.5
    
    
    
    22.3
    
    
    
    27.2
    
    
    
    25.1
    
    
    
    24.8
    
    
    
    31.1Financial Services
    
    
    17.8
    
    
    
    16.6
    
    
    
    21.5
    
    
    
    14.8
    
    
    
    14.4
    
    
    
    15.7All Other Insurance
    
    
    32.6
    
    
    
    20.9
    
    
    
    17.9
    
    
    
    23.8
    
    
    
    13.6
    
    
    
    16.1Total
    
    $
    172.4
    
    
    $
    153.1
    
    
    $
    165.6
    
    
    $
    166.0
    
    
    $
    149.4
    
    
    $
    163.6
 Personal Lines Property The following chart is an overview of the results of operations of the companys personal
lines property products (in 000s). March 31,2005
    
    
    2004Personal Lines PropertyDirect and Assumed Written Premiums
    
    $
    99,542
    
    
    $
    102,328
    
    
    
    (2.7
    )%Net Written Premiums
    
    $
    93,335
    
    
    $
    96,632
    
    
    
    (3.4
    )%Net Earned Premium
    
    $
    99,033
    
    
    $
    100,660
    
    
    
    (1.6
    )%Service Fees
    
    
    1,431
    
    
    
    1,336
    
    
    
    7.1
    %Total Revenues
    
    $
    100,464
    
    
    $
    101,996
    
    
    
    (1.5
    )%Pre-Tax Income
    
    $
    15,957
    
    
    $
    14,193
 14




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##### Table of Contents



Manufactured housing direct and assumed written premiums decreased 3.4% to $77.9 million in the
first quarter of 2005 from $80.6 million in last years first quarter. The manufactured housing
industry continues to be depressed and American Modern continues to experience declines in lender
business as several institutional partners are no longer making new manufactured housing loans.
The manufactured housing combined ratio improved to 87.3% in the first quarter of 2005 compared to
90.3% in the first quarter of 2004. Personal Lines Casualty The following chart is an overview of the results of operations of the companys personal
lines casualty products (in 000s). March 31,2005
    
    
    2004Personal Lines CasualtyDirect and Assumed Written Premiums
    
    $
    22,520
    
    
    $
    25,090
    
    
    
    (10.2
    )%Net Written Premiums
    
    $
    22,324
    
    
    $
    24,782
    
    
    
    (9.9
    )%Net Earned Premium
    
    $
    27,192
    
    
    $
    31,141
    
    
    
    (12.7
    )%Service Fees
    
    
    601
    
    
    
    542
    
    
    
    10.9
    %Total Revenues
    
    $
    27,793
    
    
    $
    31,683
    
    
    
    (12.3
    )%Pre-Tax Income
    
    $
    7,927
    
    
    $
    5,844
 Direct and assumed written premiums for our casualty products decreased due primarily to motorcycle
premiums decreasing to $8.2 million in the first quarter of 2005 compared to $11.0 million in the
first quarter of 2004. The decrease in motorcycle premiums is the result of American Modern taking
corrective underwriting actions to position the motorcycle product for profitability. As a result
of these actions, the combined ratio for the motorcycle product improved to 69.2% in the first
quarter of 2005 compared to 84.6% in the first quarter of 2004. Financial Services The following chart is an overview of the results of operations of the companys financial
services insurance products (in 000s). March 31,2005
    
    
    2004Financial ServicesDirect and Assumed Written Premiums
    
    $
    17,805
    
    
    $
    14,809
    
    
    
    20.2
    %Net Written Premiums
    
    $
    16,595
    
    
    $
    14,419
    
    
    
    15.1
    %Net Earned Premium/Total Revenues
    
    $
    21,513
    
    
    $
    15,687
    
    
    
    37.1
    %Pre-Tax Income
    
    $
    2,193
    
    
    $
    68
 The increase in gross written premiums for our financial services insurance products was driven by
the collateral protection products which increased $3.8 million compared to the first quarter of
2004. Profitability improved due primarily to the mortgage fire product combined ratio which
decreased to 82.6% compared to 92.3% in the comparable 2004 quarter. 15




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##### Table of Contents



All Other Insurance The following chart is an overview of the results of operations of the companys other insurance
products (in 000s). March 31,2005
    
    
    2004All Other InsuranceDirect and Assumed Written Premiums
    
    $
    32,567
    
    
    $
    23,766
    
    
    
    37.0
    %Net Written Premiums
    
    $
    20,865
    
    
    $
    13,569
    
    
    
    53.8
    %Net Earned Premium
    
    $
    17,855
    
    
    $
    16,152
    
    
    
    10.5
    %Agency Revenues
    
    
    1,187
    
    
    
    2,347
    
    
    
    (49.4
    )%Service Fees
    
    
    21
    
    
    
    36
    
    
    
    (41.7
    )%Total Revenues
    
    $
    19,063
    
    
    $
    18,535
    
    
    
    2.8
    %Pre-Tax Income
    
    $
    4,598
    
    
    $
    802
 American Moderns excess and surplus lines and credit life products were the primary drivers of the
increase in gross written premiums in the first quarter of 2005 compared to the first quarter of
2004. Excess and surplus lines direct and assumed written premiums increased $5.6 million to $15.5
million in the first quarter of 2005 from $9.9 million in the first quarter of 2004. Credit life
direct and assumed written premiums increased $2.8 million to $8.4 million in 2005 from $5.6
million in 2004. The improvement in profitability in 2005 compared to 2004 is due primarily to the increased
profitability related to the excess and surplus lines product combined with the favorable loss
development related to the run-off of our previously exited manufactured housing park and dealer
commercial liability business. The excess and surplus lines combined ratio was 62.7% in the first
quarter of 2005 compared to 98.5% for the comparable 2004 quarter. During the first quarter of
2005, development of the discontinued commercial liability business increased earnings per share by
approximately 5 cents compared to a decrease of 4 cents per share in the first quarter of 2004. ALL INSURANCE Investment Income and Realized Capital Gains Net investment income increased to $9.9 million in the first quarter of 2005 from $8.7 million in
the prior years first quarter. This increase is due primarily to the increase in the size of the
investment portfolio. The increase in portfolio size was due primarily to the investment of $24
million related to the issuance of junior subordinated debt securities in the second quarter of
2004 and positive cash flow generated from operations. Reinvestment rates continue to be depressed
due to the current low interest rate environment. The annualized pre-tax equivalent investment
yield, on a cost basis, of American Moderns fixed income portfolio was 5.2% in the first three
months of 2005 compared to 5.3% in the comparable prior period. Realized investment gains and losses are comprised of three items; capital gains and losses from
the sale of securities, derivative features of certain convertible securities and
other-than-temporary impairments. 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): Three Months Ended March 31, 2005
    
    
    Three Months Ended March 31, 2004Pre-Tax
    
    
    After-Tax
    
    
    Earnings
    
    
    Pre-Tax
    
    
    After-Tax
    
    
    EarningsGain (Loss)
    
    
    Gain (Loss)
    
    
    Per Share
    
    
    Gain (Loss)
    
    
    Gain (Loss)
    
    
    Per ShareCapital Gains
    
    $
    1,541
    
    
    $
    1,002
    
    
    $
    0.05
    
    
    $
    4,538
    
    
    $
    2,950
    
    
    $
    0.15Derivatives
    
    
    (738
    )
    
    
    (480
    )
    
    
    (0.03
    )
    
    
    168
    
    
    
    109
    
    
    
    0.01Total Realized Investment
Gains
    
    $
    803
    
    
    $
    522
    
    
    $
    0.02
    
    
    $
    4,706
    
    
    $
    3,059
    
    
    $
    0.16
 16




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##### Table of Contents



The Company experienced no other-than-temporary impairments during the first three months of
2005 or the first three months of 2004. 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 first quarter of 2005 decreased 20.7%
to $62.9 million from $79.3 million in the prior years first quarter. This decrease in losses was
due to the improved loss experience related to the manufactured housing, motorcycle and mortgage
fire products combined with favorable development in the claims settled related to the companys
run-off commercial liability books of business. Catastrophe losses as a percentage of earned
premiums remained relatively constant as they contributed 2.0 percentage points to the combined
ratio in the first quarter of 2005 compared to 1.9 percentage points in the first quarter of 2004. Insurance Commissions and Other Policy Acquisition Costs American Moderns commissions and other policy acquisition costs increased 11.6% to $57.7 million
in the first quarter of 2005 from $51.7 million in the first quarter of 2004. These increases are
due primarily to an increase in performance-based commission expense as a result of the improved
underwriting results achieved in the first three months of 2005 compared to the first three months
of 2004. The fluctuations in performance-based commission expense are attributable, in part, to
American Moderns Pay-for-Performance commission policy which reduces the up-front commission
paid but rewards favorable underwriting performance with a higher performance-based commission. M/G Transport M/G Transport, Midlands transportation subsidiary, reported revenues for the first quarter of 2005
of $10.8 million compared to $9.3 million in the prior years first quarter. Pre-tax operating
profit was $0.6 million in the current quarter as compared to $0.1 million in the prior years
first quarter. The increase in transportation revenues and pre-tax operating profit is primarily
due to an increase in tonnage hauled related to petroleum coke, coal and barite commodities
combined with an increase in shipping rates. Outlook Given the results of the first quarter ended March 31, 2005 coupled with the strong underwriting
results from our major product lines so far in 2005, we anticipate a property and casualty combined
ratio, assuming normal weather, in the range of 94.5% to 96.0% for the full year 2005 noting that
weather patterns and seasonal products such as motorcycle and watercraft tend to increase the
combined ratio during the second and third quarters. 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 $2.77 to $3.02 per share
(diluted), which would include the after-tax impact of $0.02 per share (diluted) from realized
investment gains. 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 March
31, 2005, 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
    
    $
    82,316
    
    
    $
    15,312
    
    
    $
    43,004
    
    
    $
    24,000Other notes payable
    
    
    20,771
    
    
    
    20,771
    
    
    
    
    
    
    
    Annual commitments under
non-cancelable leases
    
    
    6,621
    
    
    
    929
    
    
    
    2,836
    
    
    
    2,856Purchase obligations
    
    
    15,078
    
    
    
    11,880
    
    
    
    3,198
    
    
    
    Other obligations
    
    
    406
    
    
    
    406
    
    
    
    
    
    
    
    Insurance policy loss reserves
    
    
    220,635
    
    
    
    114,730
    
    
    
    90,461
    
    
    
    15,444Total
    
    $
    345,827
    
    
    $
    164,028
    
    
    $
    139,499
    
    
    $
    42,300
 The table above excludes contracts and agreements that relate to maintenance and service agreements
which, individually and in the aggregate, are not material to the Companys operations or financial
condition, and are terminable by the Company with minimal advance notice and at little or no cost
to the Company. The insurance policy loss reserve payment projections in the above table are based on actuarial
assumptions. The actual payments will vary, in both amount and time periods, from the estimated
amounts represented in this table. See further discussion regarding insurance policy loss reserves
under the Critical Accounting Policies section. The Company has entered into a contract to purchase certain transportation equipment in 2005 for
$9.4 million. However, the Company, in all likelihood, will finance this purchase contract with an
operating lease or debt agreement which will spread the cash obligations over several years. Other Items No shares were repurchased in the open market under the Companys share repurchase program during
the first three months of 2005 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 three-month period ended March 31, 2005, the Company repurchased
approximately $0.5 million of treasury shares in connection with associate stock incentive
programs. 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, 18




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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 March 31, 2005, Midland had $4.8 million of
commercial paper debt outstanding, $3.9 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 2.7% as of March 31, 2005, a rate that management considers to be
competitive with the market rates offered for similar instruments. As of March 31, 2005, Midland
also had $83.0 million of conventional short-term credit lines available at costs not exceeding
prime borrowing rates, of which $16.0 million was outstanding. These short-term borrowings
decreased $13.0 million since December 31, 2004. 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. The Company also has a mortgage obligation related to the financing of our corporate headquarters
building. As of March 31, 2005, the outstanding balance of this mortgage was $14.6 million. This
mortgage obligation includes normal and customary debt covenants for instruments of this type.
Monthly principal and interest payments are required until maturity in December 2005. The
effective interest rate on this obligation is 6.8%. On October 21, 2003 Midland filed a shelf registration statement with the Securities and Exchange
Commission. This registration statement will allow the Company to offer from time to time up to
$150 million in various types of securities, including debt, preferred stock and common stock. On
February 5, 2004, Midland sold 1,150,000 shares of its common stock authorized by this shelf
registration. The net proceeds received of $25.1 million were used to increase the capital base of
its insurance subsidiaries to provide for future growth and for other general corporate purposes. During the second quarter of 2004, Midland, through a wholly owned trust, issued $24.0 million of
junior subordinated debt securities ($12.0 million on April 29 and $12.0 million on May 26). These
transactions were part of the Companys participation in pooled trust preferred offerings. The
proceeds from these transactions were used to increase the capital of the insurance subsidiaries to
fund future growth and for general corporate purposes. The debt issues have 30-year terms and are
callable after five years. The interest related to the debt is variable in nature. The debt
contains certain provisions which are typical and customary for this type of security. Investment in Marketable Securities The market value of Midlands consolidated investment portfolio (comprised primarily of the
investment holdings of American Modern) decreased 3.2% to $940.5 million at March 31, 2005 from
$971.4 million at December 31, 2004. This decrease was due primarily to a $22.8 million decrease
in unrealized appreciation in the market value of securities held combined with $12.4 million of
short-term debt repayments. The decrease in the unrealized appreciation was due to a $14.0 million
decrease in unrealized appreciation related to the fixed income portfolio combined with a $8.8
million decrease in the unrealized appreciation related to the equity portfolio. Midlands largest
equity holding, 2.5 million shares of U.S. Bancorp, decreased to $70.9 million in market value as
of March 31, 2005 from $77.1 million as of December 31, 2004. Securities with unrealized gains and losses by category (equity and fixed income) and by time frame
are summarized in the chart below (amounts in 000s): 19




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##### Table of Contents



Unrealized Gain (Loss) as of March 31, 2005 Unrealized
    
    
    Fair
    
    
    # ofGain (Loss)
    
    
    Value
    
    
    PositionsFixed Income SecuritiesTotal held in a gain position
    
    $
    16,657
    
    
    $
    452,230
    
    
    
    574Held in a loss position for less than 3 months
    
    
    (2,540
    )
    
    
    166,202
    
    
    
    177Held in a loss position for more than 3 months
and less than 9 months
    
    
    (1,497
    )
    
    
    67,210
    
    
    
    72Held in a loss position for more than 9 months
and less than 18 months
    
    
    (1,322
    )
    
    
    53,711
    
    
    
    46Held in a loss position for more than 18 months
    
    
    (183
    )
    
    
    3,233
    
    
    
    7Fixed income total
    
    $
    11,115
    
    
    $
    742,586
    
    
    
    876
 Unrealized
    
    
    Fair
    
    
    # ofGain (Loss)
    
    
    Value
    
    
    PositionsEquity SecuritiesTotal held in a gain position
    
    $
    83,703
    
    
    $
    169,157
    
    
    
    159Held in a loss position for less than 3 months
    
    
    (689
    )
    
    
    10,518
    
    
    
    27Held in a loss position for more than 3 months
and less than 9 months
    
    
    (524
    )
    
    
    4,719
    
    
    
    14Held in a loss position for more than 9 months
and less than 18 months
    
    
    (293
    )
    
    
    4,523
    
    
    
    7Held in a loss position for more than 18 months
    
    
    
    
    
    
    
    
    
    
    Equity total
    
    $
    82,197
    
    
    $
    188,917
    
    
    
    207Total per above
    
    $
    93,112
    
    
    $
    931,503
    
    
    
    1,083Accrued interest and dividends
    
    
    
    
    
    
    9,019Total per balance sheet
    
    $
    93,112
    
    
    $
    940,522
 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 March 31, 2005. 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 Midlands fixed income security investment portfolio as of March 31, 2005
was 4.4 years which management believes provides adequate asset/liability matching. 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,
interest on debt, dividends and inter-company borrowings and the purchase of marketable securities. In each of the periods presented, funds
generated 20




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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 amounts expended for the development costs capitalized in connection with the development of
modernLINK®, our proprietary information systems and web enablement initiative, amounted to $0.5
million for the first three months of 2005 and a total of $19.2 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 is currently forecasted to involve future cash
expenditures of $11.0 million to $13.0 million in 2005, an additional $3.0 million to $8.0 million
annually over the following two to three years, and 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. The unamortized
balance of modernLINK®s software development costs was $11.3 million at March 31, 2005. American Modern has a $72.0 million long-term credit facility available on a revolving basis at
various rates. As of March 31, 2005, there was $36.0 million outstanding under these facilities. American Modern has an interest rate swap agreement with a consortium of three banks. Under the
terms of this agreement, the floating interest rate related to $30.0 million outstanding under
American Moderns long-term credit facility has been fixed at 5.6% until December 1, 2005, the
maturity date. The fair value of this agreement as of March 31, 2005 was $(0.2) million and is
included in other payables and accruals. At March 31, 2005, Midlands accounts receivable have remained relatively unchanged at $114.8 as
compared to $114.0 at December 31, 2004. Accounts receivable are 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 51% of American Moderns accounts receivables relate to premium due
directly from policyholders as of March 31, 2005. In the case of receivables due from agents,
American Modern has extended payment terms that are customary and normal in the insurance industry.
Management monitors its credit exposure with its agents and related concentrations on a regular
basis. However, as collectibility of such receivables is dependent upon the financial stability of
the agent, American Modern cannot assure collections in full. Where management believes
appropriate, American Modern has provided a reserve for such exposures. Reinsurance recoverables and prepaid reinsurance premiums remained relatively constant at March 31,
2005 compared to December 31, 2004 and consisted of the following amounts (amounts in 000s): March 31,
    
    
    December 31,2005
    
    
    2004Prepaid reinsurance premiums
    
    
    41,198
    
    
    
    40,215Reinsurance recoverable  unpaid losses
    
    
    37,643
    
    
    
    37,873Reinsurance recoverable  paid losses
    
    
    10,681
    
    
    
    9,638Total
    
    $
    89,522
    
    
    $
    87,726
 Unearned insurance premiums decreased to $378.9 million at March 31, 2005 compared to $390.4
million at December 31, 2004. American Modern typically generates less written premiums in the
first and fourth quarters and more written premiums in the second and third quarters. As such, it
is expected that premiums earned in the first quarter will outpace premiums written resulting in a
decrease in unearned premiums. The $12.3 million decrease in insurance loss reserves at March 31, 2005 compared to December 31,
2004 is due primarily to the payment of claims during the first quarter combined with favorable
loss experience during the quarter. 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. 21




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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 March
31, 2005, the transportation subsidiaries had $7.8 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-month periods ended March 31, 2005 and 2004, such
changes increased or (decreased), net of related income tax effects, by the following (amounts in
$000s): Three Months Ended March 31,2005
    
    
    2004Changes in net unrealized capital gains:Equity securities
    
    $
    (5,689
    )
    
    $
    (3,413
    )Fixed income securities
    
    
    (9,108
    )
    
    
    2,359Changes in fair value of interest
rate swap hedge
    
    
    139
    
    
    
    (10
    )Total
    
    $
    (14,658
    )
    
    $
    (1,064
    )
 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, liabilities, 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 22




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the related policies on the same basis as the related premiums are earned. Selling and
administrative expenses that are not primarily related to premiums written are expensed as
incurred. Insurance Policy Loss Reserves American Moderns reserve for insurance losses is based on past experience of settling known claims
as well as estimating those not yet reported. While management believes the amounts are fairly
stated, the ultimate liability, once fully developed, may be more than or less than that provided.
Management and its actuaries, both internal and external, regularly review these liabilities and
adjustments are made as necessary in the current period. Management does not foresee any
significant change in the manner in which it records its reserve for insurance losses. The following table provides additional detail surrounding the Companys insurance policy loss
reserves at March 31, 2005 and December 31, 2004: March 31,
    
    
    December 31,2005
    
    
    2004Gross case base loss reserves:Personal lines property
    
    $
    47,471
    
    
    $
    47,052Personal lines casualty
    
    
    29,135
    
    
    
    33,590Financial services
    
    
    9,951
    
    
    
    12,004All other insurance
    
    
    51,626
    
    
    
    53,669Gross loss reserves incurred but not reported
    
    
    62,631
    
    
    
    64,783Outstanding checks and drafts
    
    
    19,821
    
    
    
    21,817Total insurance loss reserves
    
    $
    220,635
    
    
    $
    232,915
 The recorded insurance loss reserves at the balance sheet date represent the Companys best
estimate, based on historical patterns, of its liabilities at that date. Management, along with
the Companys internal actuaries, periodically reviews the level of loss reserves against actual
loss development. This retrospective review is the primary criteria used in refining the levels of
loss reserves recorded in the financial statements. Additionally, management compares the
Companys estimate of loss reserves to ranges prepared by its external consulting actuaries to
ensure that such estimates are within the actuaries acceptable range. The external actuaries
perform an extensive review of loss reserves at year end along with a higher level review
throughout the year to ensure that the recorded loss reserves appear reasonable. At December 31,
2004, loss reserves, net of reinsurance recoverables, for our property and casualty companies
totaled $166.3 million. The Companys estimate was affirmed by the actuaries estimated range for
net loss reserves of $152.7 million to $168.7 million. At March 31, 2005, loss reserves, net of
reinsurance recoverables, for our property and casualty companies totaled $157.3 million. While management believes the amounts are fairly stated, the ultimate liability, once fully
developed, may be more than or less than the recorded amount. Management believes that the
likelihood that actual loss development patterns will differ significantly from past experience is
remote given the short-tail, property oriented nature of the Companys business. However, if the
ultimate pay outs would significantly exceed the expected amounts, the company has several
potential options to utilize in order to satisfy the additional obligations. The Company could
liquidate a portion of its investment portfolio. In addition, American Modern and the Company have
conventional short-term credit lines available, at costs not exceeding prime rates, which would be
sufficient to meet any increases in required loss payments. Reinsurance Risks In order to limit its exposure to certain levels of risks, the Company cedes varying portions of
its written premiums to other insurance companies. As such, the Company limits its loss exposure
to that portion of the insurable risk it retains. In addition, the Company pays a percentage of
earned premiums to reinsurers in return for coverage against catastrophic losses. However, if a
reinsurer fails to honor its obligations, American Modern could suffer additional losses as the
reinsurance contracts do not relieve American Modern of its obligations to policyholders. 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 23




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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. As of March 31, 2005, more than 85% of the Companys catastrophe reinsurers had an A.M.
Best or S&P rating of A or higher. In addition, American Modern may, in some cases, require reinsurers to establish trust funds and
maintain letters of credit to further minimize possible exposures. All reinsurance amounts owed to
American Modern are current and management believes that no allowance for uncollectible accounts
related to this recoverable is necessary. Management also believes there is no significant
concentration of credit risk arising from any single reinsurer. The Company also assumes a limited
amount of business on certain reinsurance contracts. Related premiums and loss reserves are
recorded based on records supplied by the ceding companies. Other-Than-Temporary Impairment of Investment Securities The Company 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 identify other-than-temporary impairments, we conduct quarterly comprehensive reviews
of individual portfolio holdings that have a market value less than their respective carrying
value. As part of our review for other-than-temporary impairment, we track the respective carrying
values and market values for all individual securities with an unrealized loss. 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 carrying value, 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 for
potential 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 March 31, 2005, 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 carrying value
    historical operating performance of the security
    issuer news releases, including those disclosing that the issuer has committed an event
of default (missed payment beyond grace period, bankruptcy filing, loss of principle
customer or supplier, debt downgrade, disposal of segment, etc.) 24




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
    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:  
    the recoverability of principle and interest
    the issuers ability to continue to make obligated payments to security holders
    the current interest rate environment The investment portfolio is comprised of various asset classes which are independently managed by
external professional portfolio managers under the oversight and guidelines established by our
investment committee. We evaluate the performance of the portfolio managers relative to benchmarks
we believe appropriate given the asset class. Investment managers will manage the portfolio under
these guidelines to maximize the return on their investment class. As part of their investment
strategy, the investment managers will buy and sell securities based on changes in the availability
of, and the yield on, alternative investments. Investment managers may also buy and sell
investments to diversify risk, attain a specific characteristic such as duration or credit quality,
rebalance or reposition the portfolio or for a variety of other reasons. It is our intent, and thus the intent of our investment managers, to hold securities that have an
unrealized gain or loss. For the securities with an unrealized loss, which in our judgement we
believe to be temporary, it is our intent to hold the security for a period of time that will allow
the security to recover in value. However, if the investment managers believe returns would be
enhanced by selling the security and reinvesting the proceeds, the managers may do so, in which
case the unrealized gain or loss will be recognized as a realized gain or loss. 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 March 31, 2005, 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, long-term bond yields and
historical performance of the invested pension assets over a ten-year period. If other assumptions
were used, the amount recorded as pension expense would be different from our current estimate. 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. 25




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New Accounting Standards In April 2005, the Financial Accounting Standards Board (FASB) delayed the effective date for
SFAS 123 (Revised 2004), Share-Based Payment, which makes it effective January 1, 2006 for the
Company. The revised statement (SFAS No. 123(R)) requires compensation cost relating to
share-based payment transactions to be recognized in a companys financial statements under the
fair value method. SFAS No. 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based
Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Impact of Inflation We do not consider the impact of the change in prices due to inflation to be material in the
analysis of our overall operations. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK Market risk is the risk that we will incur investment losses due to adverse changes in market
rates and prices. Our market risk exposures are substantially related to the Company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 the Company will incur economic losses due to adverse changes
in interest rates. The risk arises from many of the Companys investment activities, as the
Company invests substantial funds in interest-sensitive assets. The Company manages the interest
rate risk inherent in its investment assets relative to the interest rate risk inherent in its
liabilities. One of the measures the Company uses to quantify this exposure is duration. By
definition, duration is a measure of the sensitivity of the fair value of a fixed income portfolio
to changes in interest rates. Based upon the 4.4 year duration of the Companys fixed income
portfolio as of March 31, 2005, management estimates that a 100 basis point increase in interest
rates would decrease the market value of its $750.7 million fixed income portfolio by 4.4%, or
$33.0 million. Equity price risk is the risk that the Company will incur economic losses due to adverse changes in
a particular stock or stock index. The Companys equity exposure consists primarily of declines in
the value of its equity security holdings. As of March 31, 2005, the Company had $189.8 million in
equity holdings, including $70.9 million of U.S. Bancorp common stock. A 10% decrease in the
market value of U.S. Bancorps common stock would decrease the fair value of its equity portfolio
by approximately $7.1 million. As of March 31, 2005, the remainder of the Companys portfolio of
equity securities had a beta coefficient (a measure of stock price volatility) of 1.00. 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 10.0%. The active management of market risk is integral to the Companys operations. The Company 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 first fiscal quarter that have materially affected, or are 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 as of March 31, 2005, and the related condensed consolidated statements of income and
cash flows for the three-month periods ended March 31, 2005 and 2004. We conducted our reviews in accordance with the 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
the 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 the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of The Midland Company and
subsidiaries as of December 31, 2004, 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 March 1, 2005, 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, 2004 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 May 5, 2005 27




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PART II. OTHER INFORMATION
THE MIDLAND COMPANY AND SUBSIDIARIES
MARCH 31, 2005 
  Item 1.
    Legal ProceedingsNone 
  Item 2.
    Unregistered Sales of Equity Securities and Use of
Proceeds  a)
    Noneb)
    Nonec)
    During the three-month period ended March 31, 2005, the Company did
not purchase any of its equity securities pursuant to a publicly announced plan or
program. However, during the three-month period ended March 31, 2005, the Company
acquired 16,048 shares 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 3,325
shares from the Plan during the three-month period ended March 31, 2005. 
  Item 3.
    Defaults Upon Senior SecuritiesNone 
  Item 4.
    Submission of Matters to a Vote of Security HoldersAt the Companys 2004 Annual Meeting of Shareholders held on April
28, 2005, 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 2008 Annual Meeting and until their successors are
chosen and qualified: Votes
    
    
    
    
    
    BrokerName
    
    Votes For
    
    Withheld
    
    Abstentions
    
    Non-VotesJames E. Bushman
    
    
    17,750,742
    
    
    
    158,678
    
    
    
    0
    
    
    
    0James H. Carey
    
    
    17,459,586
    
    
    
    449,834
    
    
    
    0
    
    
    
    0John W. Hayden
    
    
    16,055,297
    
    
    
    1,854,123
    
    
    
    0
    
    
    
    0David B. OMaley
    
    
    17,057,382
    
    
    
    852,038
    
    
    
    0
    
    
    
    0
  b)
    A proposal by the Board of Directors to ratify the appointment of the
firm of Deloitte & Touche LLP, as Midlands independent auditors to conduct the
annual audit of the financial statements of Midland for the year ending December
31, 2005, was approved by the Shareholders. The Shareholders cast 17,826,367 votes
in favor of this proposal and 75,837 votes against it. There were 7,216
abstentions and no broker non-votes. 
  Item 5.
    Other InformationNone 
  Item 6.
    Exhibits Exhibit 15 - Letter re: Unaudited Interim Financial Information 28




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PART II. OTHER INFORMATION
THE MIDLAND COMPANY AND SUBSIDIARIES
MARCH 31, 2005 Exhibit 31.1 - Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 Exhibit 31.2 - Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 Exhibit 32 - Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350 
 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE MIDLAND COMPANYDate May 5, 2005
    
    /s/John I. Von LehmanJohn I. Von Lehman, Executive Vice President,Chief Financial Officer and Secretary
 29