-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DAGnXvDOhUmeLQo+F9ANwbKcCGb5gRcaZY243Lx6AnN/pay6eJGZB5e+uXEJ2Pdr SqyDrJFH4wvnbqHscQeS+A== 0000066025-98-000009.txt : 19981104 0000066025-98-000009.hdr.sgml : 19981104 ACCESSION NUMBER: 0000066025-98-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDLAND CO CENTRAL INDEX KEY: 0000066025 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310742526 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06026 FILM NUMBER: 98737231 BUSINESS ADDRESS: STREET 1: 7000 MIDLAND BLVD STREET 2: P O BOX 125 CITY: AMELIA STATE: OH ZIP: 45102-2607 BUSINESS PHONE: 5139437100 MAIL ADDRESS: STREET 2: P O BOX 1256 CITY: CINCINNATI STATE: OH ZIP: 45201 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended_____________September 30, 1998___________________ OR [ ] 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) ________Incorporated in Ohio___________ _______________31-0742526_______________ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) ________________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___X___. No______. The number of common shares outstanding as of September 30, 1998 was 9,322,391. PART I. FINANCIAL INFORMATION THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (Unaudited) Sept. 30, Dec. 31, ASSETS 1998 1997 -------------- -------------- CASH $ 3,916,000 $ 5,277,000 MARKETABLE SECURITIES: Fixed income (cost, $418,063,000 at September 30, 1998 and $397,033,000 at December 31, 1997) 432,926,000 404,038,000 Equity (cost, $36,597,000 at September 30, 1998 and $33,928,000 at December 31, 1997) 103,271,000 94,791,000 -------------- -------------- Total 536,197,000 498,829,000 -------------- -------------- RECEIVABLES: Accounts receivable 65,060,000 59,492,000 Less allowance for losses 753,000 753,000 -------------- -------------- Net 64,307,000 58,739,000 -------------- -------------- REINSURANCE RECOVERABLES AND PREPAID REINSURANCE PREMIUMS 38,649,000 49,016,000 -------------- -------------- PROPERTY, PLANT AND EQUIPMENT - AT COST 114,589,000 111,418,000 Less accumulated depreciation and amortization 45,022,000 39,806,000 -------------- -------------- Property, Plant and Equipment - Net 69,567,000 71,612,000 -------------- -------------- OTHER INVESTMENTS IN REAL ESTATE 14,779,000 14,779,000 -------------- -------------- DEFERRED INSURANCE POLICY ACQUISITION COSTS 64,643,000 55,590,000 -------------- -------------- OTHER ASSETS 6,879,000 6,621,000 -------------- -------------- TOTAL $ 798,937,000 $ 760,463,000 ============== ============== See notes to the consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (Unaudited) Sept. 30, Dec. 31, LIABILITIES & SHAREHOLDERS' EQUITY 1998 1997 -------------- -------------- NOTES PAYABLE WITHIN ONE YEAR: Banks $ 4,000,000 $ 24,000,000 Commercial paper 7,514,000 5,791,000 -------------- -------------- Total 11,514,000 29,791,000 -------------- -------------- INSURANCE COMMISSIONS PAYABLE 18,681,000 19,033,000 -------------- -------------- OTHER PAYABLES AND ACCRUALS 46,691,000 49,998,000 -------------- -------------- FUNDS HELD UNDER REINSURANCE AGREEMENTS AND REINSURANCE PAYABLES 14,572,000 15,443,000 -------------- -------------- UNEARNED INSURANCE PREMIUMS 261,954,000 240,340,000 -------------- -------------- INSURANCE LOSS RESERVES 133,894,000 120,134,000 -------------- -------------- DEFERRED FEDERAL INCOME TAX 30,851,000 26,180,000 -------------- -------------- LONG-TERM DEBT 59,591,000 62,518,000 -------------- -------------- SHAREHOLDERS' EQUITY: Common stock (issued and outstanding: 9,322,000 shares at September 30, 1998 and 9,334,000 shares at December 31, 1997 after deducting treasury stock of 1,606,000 shares and 1,594,000 shares, respectively - The December 31, 1997 amounts have been adjusted for the three-for-one stock split - Note 2) 911,000 911,000 Additional paid-in capital 15,643,000 15,359,000 Retained earnings 169,027,000 153,797,000 Accumulated other comprehensive income (net unrealized gain on marketable securities) 53,007,000 44,123,000 Treasury stock - at cost (15,566,000) (14,704,000) Unvested restricted stock awards (1,833,000) (2,460,000) -------------- -------------- Total 221,189,000 197,026,000 -------------- -------------- TOTAL $ 798,937,000 $ 760,463,000 ============== ============== See notes to the consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (Unaudited) FOR THE NINE AND THREE - MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 Nine-Mos. Ended Sept. 30, Three-Mos. Ended Sept. 30, --------------------------- --------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- REVENUES: Insurance: Premiums earned $280,600,000 $229,251,000 $ 96,068,000 $ 75,570,000 Net investment income 17,779,000 15,646,000 5,995,000 5,447,000 Net realized investment gains 4,935,000 3,774,000 1,667,000 2,364,000 Other insurance income 1,979,000 1,129,000 915,000 302,000 Transportation 24,315,000 24,504,000 7,790,000 8,616,000 Other 598,000 243,000 103,000 126,000 ------------- ------------- ------------- ------------- Total 330,206,000 274,547,000 112,538,000 92,425,000 ------------- ------------- ------------- ------------- COSTS AND EXPENSES: Insurance: Losses and loss adjustment expenses 162,555,000 127,746,000 54,759,000 44,409,000 Commissions and other policy acquisition costs 76,245,000 60,267,000 25,184,000 17,296,000 Operating and administrative expenses 40,879,000 36,703,000 13,221,000 13,108,000 Transportation operating expenses 20,928,000 21,288,000 7,055,000 7,077,000 Interest expense 3,759,000 3,612,000 1,238,000 1,202,000 Other operating and administrative expenses 2,510,000 3,195,000 813,000 626,000 ------------- ------------- ------------- ------------- Total 306,876,000 252,811,000 102,270,000 83,718,000 ------------- ------------- ------------- ------------- INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL INCOME TAX 23,330,000 21,736,000 10,268,000 8,707,000 PROVISION FOR FEDERAL INCOME TAX 6,353,000 6,312,000 2,969,000 2,595,000 ------------- ------------- ------------- ------------- INCOME FROM CONTINUING OPERATIONS 16,977,000 15,424,000 7,299,000 6,112,000 ------------- ------------- ------------- ------------- DISCONTINUED OPERATIONS: Loss from discontinued operations less related income tax credits of $1,881,000 and $685,000, respectively - (3,492,000) - (1,250,000) Loss on disposal of assets less related income tax credit of $1,790,000 - (3,325,000) - (3,325,000) ------------- ------------- ------------- ------------- LOSS FROM DISCONTINUED OPERATIONS - (6,817,000) - (4,575,000) ------------- ------------- ------------- ------------- NET INCOME $ 16,977,000 $ 8,607,000 $ 7,299,000 $ 1,537,000 ============= ============= ============= ============= BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Continuing operations $ 1.88 $ 1.72 $ 0.81 $ 0.68 Discontinued operations - (0.76) - (0.51) ------------- ------------- ------------- ------------- Total $ 1.88 $ .96 $ 0.81 $ 0.17 ============= ============= ============= ============= DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Continuing operations $ 1.80 $ 1.67 $ 0.77 $ 0.66 Discontinued operations - (0.74) - (0.50) ------------- ------------- ------------- ------------- Total $ 1.80 $ 0.93 $ 0.77 $ 0.16 ============= ============= ============= ============= CASH DIVIDENDS PER SHARE OF COMMON STOCK $ .1875 $ .175 $ .0625 $ .0583 ============= ============= ============= ============= See notes to the consolidated financial statements. All prior period per share amounts have been adjusted for the three-for-one stock split (Note 2). THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited) Amounts in 000's Accumulated Unvested Additional Other Com- Restricted Compre- Common Paid-In Retained prehensive Treasury Stock hensive Stock Capital Earnings Income Stock Awards Total Income ----------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 $ 911 $ 14,846 $ 138,423 $ 23,587 $ (16,621) $ (1,458) $ 159,688 Comprehensive income: Net income 8,607 8,607 $ 8,607 Changes in unrealized gain on marketable securities, net of tax 13,185 13,185 13,185 -------- Total comprehensive income $21,792 Issuance of treasury stock, ======== net 63 104 167 Cash dividends declared (1,632) (1,632) Exercise of stock options (25) 135 110 Restricted stock awards 626 1,808 (2,434) Amortization and cancellation of unvested restricted stock awards (155) (296) 1,105 654 ------------------------------------------------------------------------------------------ BALANCE, SEPTEMBER 30, 1997 $ 911 $ 15,355 $ 145,398 $ 36,772 $ (14,870) $ (2,787) $ 180,779 ========================================================================================== BALANCE, DECEMBER 31, 1997 $ 911 $ 15,359 $ 153,797 $ 44,123 $ (14,704) $ (2,460) $ 197,026 Comprehensive income: Net income 16,977 16,977 $16,977 Changes in unrealized gain on marketable securities, net of tax 8,884 8,884 8,884 -------- Total comprehensive income $25,861 Purchase of treasury stock, ======== net 258 (1,092) (834) Cash dividends declared (1,747) (1,747) Exercise of stock options 58 286 344 Amortization and cancellation of unvested restricted stock awards (32) (56) 627 539 ------------------------------------------------------------------------------------------ BALANCE, SEPTEMBER 30, 1998 $ 911 $ 15,643 $ 169,027 $ 53,007 $ (15,566) $ (1,833) $ 221,189 ========================================================================================== See notes to the consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 1998 1997 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 16,977,000 $ 8,607,000 Loss from discontinued operations - 6,817,000 -------------- -------------- Income from continuing operations 16,977,000 15,424,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,524,000 8,252,000 Increase in unearned insurance premiums 21,614,000 16,989,000 Increase in insurance loss reserves 13,760,000 15,623,000 Decrease (increase) in reinsurance recoverables and prepaid reinsurance premiums 10,367,000 (3,863,000) Increase in deferred insurance policy acquisition costs (9,053,000) (462,000) Increase in net accounts receivable (5,568,000) (15,104,000) Increase (decrease) in other accounts payable and accruals (3,890,000) 6,848,000 Increase in funds held under reinsurance agreements and reinsurance payables (871,000) (328,000) Increase (decrease) in insurance commissions payable (352,000) 2,547,000 Decrease (increase) in other assets (258,000) 107,000 Decrease in deferred federal income tax (113,000) (260,000) Other-net 1,005,000 13,000 -------------- -------------- Net cash provided by continuing operations 50,142,000 45,786,000 Net cash used in discontinued operations - (3,629,000) -------------- -------------- Net cash provided by operating activities 50,142,000 42,157,000 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (198,242,000) (144,948,000) Sale of marketable securities 119,188,000 66,197,000 Maturity of marketable securities 30,274,000 32,023,000 Decrease in cash equivalent marketable securities 23,886,000 25,434,000 Acquisition of property, plant and equipment (4,216,000) (17,198,000) Sale of property, plant and equipment 522,000 1,034,000 Proceeds from sale of discontinued operations - 13,330,000 -------------- -------------- Net cash used in investing activities (28,588,000) (24,128,000) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in net short-term borrowings (18,277,000) (14,188,000) Repayment of long-term debt (2,621,000) (2,293,000) Dividends paid (1,163,000) (1,589,000) Net issuance (purchase) of treasury stock (548,000) 302,000 Payment of capitalized lease obligations (306,000) (278,000) Issuance of long-term debt - 2,300,000 -------------- -------------- Net cash used in financing activities (22,915,000) (15,746,000) -------------- -------------- NET INCREASE (DECREASE) IN CASH (1,361,000) 2,283,000 CASH AT BEGINNING OF PERIOD 5,277,000 3,342,000 -------------- -------------- CASH AT END OF PERIOD $ 3,916,000 $ 5,625,000 ============== ============== See Notes to the Consolidated Financial Statements. THE MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of The Midland Company and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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, 1997 has been derived from the audited consolidated financial statements of the Company. Revenue and operating results for the three and nine-month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 1997 included in the Company's Annual Report on Form 10-K. Certain reclassifications (minor in nature) have been made to the 1997 amounts to conform to 1998 classifications. 2. THREE-FOR-ONE STOCK SPLIT On April 9, 1998, the Company approved a three-for-one stock split effective May 21, 1998 for holders of record on April 30, 1998. Accordingly, data related to the Company's common stock (number of shares, average shares outstanding, earnings per share and dividends per share) have been adjusted for the prior periods to reflect the impact of this stock split. 3. 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 restricted stock awards for diluted EPS. Shares used for EPS calculations were as follows: For Basic EPS For Diluted EPS Nine months ended September 30: ------------- --------------- 1998 9,011,000 9,410,000 ========= ========= 1997 8,949,000 9,256,000 ========= ========= 4. INCOME TAXES The federal income tax provisions for the three and nine-month periods ended September 30, 1998 and 1997 are different from amounts derived by applying the statutory tax rates to income before federal income tax as follows: Nine-Mos. Ended Sept. 30, Three-Mos. Ended Sept. 30, ------------------------- -------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Federal income tax at statutory rate $8,166,000 $3,937,000 $3,594,000 $ 580,000 Add (deduct) the tax effect of: Tax exempt interest and excludable dividend income (1,654,000) (1,167,000) (641,000) (402,000) Investment tax credits (126,000) (274,000) (42,000) (92,000) Other - net (33,000) 145,000 58,000 34,000 ----------- ----------- ---------- ----------- Provision for federal income tax $6,353,000 $2,641,000 $2,969,000 $ 120,000 =========== =========== =========== =========== THE MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. SUPPLEMENTAL CASH FLOW DISCLOSURES The Company paid interest of $3,675,000 and $4,800,000 in the first nine months of 1998 and 1997, respectively. The Company paid income taxes of $4,423,000 and $4,449,000 during the first nine months of 1998 and 1997, respectively. In January, 1997, the Company issued 196,050 shares (on a post-split basis) of treasury stock under a restricted stock award program that decreased treasury stock by approximately $1,808,000 and also increased paid-in capital by approximately $626,000. 6. COMPREHENSIVE INCOME Statement of Financial Accounting Standards ("SFAS") No. 130 requires the reporting of comprehensive income, and the Company adopted SFAS No. 130 beginning in 1998. Comprehensive income for the Company consists of net income and the after-tax effect of changes in the market values of the Company's marketable securities. Comprehensive income is disclosed in the "Consolidated Statements of Changes in Shareholders' Equity". 7. SEGMENT DISCLOSURES SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", will be adopted by the Company for its annual financial statements for 1998. Adoption will not impact the reported results of operations of the Company but will require additional disclosures. INDEPENDENT ACCOUNTANTS' REPORT The Midland Company: We have reviewed the accompanying consolidated balance sheet of The Midland Company and subsidiaries as of September 30, 1998, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 1998 and 1997 and of cash flows and changes in shareholders' equity for the nine-month periods ended September 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, 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 review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Midland Company and subsidiaries as of December 31, 1997, and the related consolidated statements of income and of cash flows for the year then ended (not presented herein); and in our report dated February 12, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997 is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. s/Deloitte & Touche LLP - ----------------------- Deloitte & Touche LLP Cincinnati, Ohio October 15, 1998 THE MIDLAND COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A detailed discussion of the Company's liquidity and capital resources is included in the 1997 Annual Report on Form 10-K. Except as discussed below, no material changes have taken place since that date and, accordingly, the discussion is not repeated herein. RESULTS OF OPERATIONS Insurance Property and Casualty Premiums For the Company's insurance subsidiary, American Modern Insurance Group, Inc. (AMIG), direct and assumed written premiums increased 7.2% in the third quarter to $122.4 million from $114.2 million for the same quarter of 1997. Net earned premiums for the third quarter increased 27.1% to $94.2 million from $74.1 million for the comparable quarter in 1997. The primary factor contributing to the growth in direct and assumed written premiums was continued volume increases in manufactured home insurance premium. Manufactured home direct and assumed written premium increased 13.1% to $81.2 million from $71.8 million for the same quarter of 1997. On a year-to-date basis, direct and assumed written premium increased 7.8% to $344.9 million from $319.9 million for the same nine-month period in 1997. Year-to-date net earned premiums increased 22.4% to $275.3 million from $224.9 million for the same period in 1997. Manufactured home direct and assumed written premium increased 16.0% to $229.2 million from $197.6 million for the same nine-month period of 1997. Volume decreases in the production of certain other specialty insurance lines and discontinued programs for the three and nine-month periods ended September 30, 1998 partially offset the volume increases of the manufactured home premium. A large portion of the difference in growth rates between the direct and assumed written premium and net earned premiums for the periods presented is due to changes in AMIG's quota share reinsurance agreement in 1998 compared to 1997. Investment Income and Realized Capital Gains AMIG's net investment income (before taxes and excluding capital gains) increased by approximately 10.1% to $6.0 million in the third quarter of 1998 from $5.4 million for the third quarter of 1997. On a year-to-date basis, AMIG's net investment income (before taxes and excluding capital gains) increased 13.6% to $17.8 million in 1998 from $15.6 million for the same period in 1997. The increases in investment income were primarily the result of the positive cash flow generated by underwriting activities coupled with the continued growth of AMIG's investment portfolio. AMIG's net realized capital gains (after-tax) decreased to $1.1 million, $0.11 per share (diluted), for the third quarter of 1998 from $1.5 million, $0.17 per share (diluted), for the same quarter in 1997. On a year-to-date basis, net realized capital gains (after-tax) increased to $3.2 million, $0.34 per share (diluted), from $2.5 million, $0.27 per share (diluted), for the same nine-month period in 1997. Losses and Loss Adjustment Expenses (LAE) Losses and LAE in the third quarter of 1998 increased 23.3% to $54.8 million from $44.4 million for the third quarter of 1997. This increase is primarily the result of an increase in the level of weather-related catastrophe losses for the quarter. Such losses resulted primarily from Hurricanes Bonnie and Georges that made landfall in July and September of 1998, respectively. AMIG's total weather-related catastrophe losses for the third quarter were $9.8 million on a pre-tax basis compared with $2.8 million for the same period in 1997. These losses had an after-tax impact of approximately $0.68 per share (diluted) in this year's third quarter compared with $0.20 per share (diluted) last year. Excluding catastrophe losses, the property and casualty combined ratio for the third quarter was 86.2% vs. 94.5% for the third quarter of 1997. On a year-to-date basis, losses and LAE increased 27.2% to $162.6 million from $127.7 million in the first nine months of 1997. This increase is due primarily to an increase in the level of weather-related catastrophe losses that occurred during the first nine months of 1998 compared to the prior year. AMIG's total weather-related catastrophe losses were $28 million on a pre-tax basis compared with $14 million during the first nine months of 1997. Those losses had an after-tax impact of approximately $1.94 per share (diluted) in this year's nine months compared with $0.98 per share (diluted) last year. Also contributing to the increase in losses and LAE is the fact that the Company's absorbing more losses and LAE (as well as retaining more premiums) as a result of the aforementioned changes in quota share reinsurance agreements. Excluding catastrophe losses, the property and casualty combined ratio for the nine-month period was 88.4% vs. 90.9% for the same period in 1997. Commissions, Other Policy Acquisition Costs and Other Operating and Administration Expenses Commissions, other policy acquisitions costs and other operating and administrative expenses for the third quarter increased 26.4% to $38.4 million from $30.4 million for the third quarter of 1997. On a year-to-date basis, commissions, other policy acquisitions costs and other operating and administrative expenses increased 20.8% to $117.1 million from $97.0 million for the same period in 1997. These increases are due primarily to the continued growth in earned premium. Despite the dollar increases in expenses, the year-to-date underwriting expense ratio (ratio of underwriting expenses to earned premium) decreased to 41.7% in 1998 from 42.3% in 1997. This decrease was due to expenses increasing at a slower pace than earned premium. Overall Underwriting Results AMIG's property and casualty operations generated a pre-tax underwriting income of $3.2 million for the third quarter of 1998 compared to a pre-tax underwriting income of $1.3 million for the same quarter in 1997. For the quarter, AMIG's combined ratio (ratio of losses and expenses as a percent of earned premium) for its property and casualty business was 96.6% vs. 98.3% a year ago. On a year-to-date basis, AMIG's property and casualty operations generated a pre-tax underwriting income of $3.9 million in 1998 compared to $6.6 million in the first nine months of the prior year. For the nine months, the combined ratio for AMIG's property and casualty operations was 98.6% vs. 97.1% in the comparable prior period. The decrease in underwriting profit from the prior year is due primarily to the larger amount of weather related catastrophe losses occurring in the first nine months of 1998 compared to the prior year. Transportation For the three and nine-month periods, the Company's transportation subsidiary, M/G Transport Services Group, (M/G) reported operating profits and revenues comparable with last year. Net income from M/G contributed $500,000, or $0.05 per share (diluted), in the third quarter of 1998, compared with $1.0 million, or $0.11 per share (diluted), in the third quarter of 1997. For both the first nine months of 1998 and 1997, M/G's net income was $2.1 million, or $0.22 per share (diluted). Discontinued Operations As previously reported, on September 29, 1997, the Company's sportswear subsidiary, CS Crable Sportswear, Inc., sold the majority of its assets to Brazos, Inc., a subsidiary of Brazos Sportswear, Inc. After-tax losses from the discontinued operations for the third quarter and first nine months of 1997 amounted to $(4.6 million), $(0.50) per share (diluted), and $(6.8 million), $(0.74) per share (diluted), respectively. There have been no material financial results reported from this subsidiary since the date of sale. FINANCIAL CONDITION Cash flows from operations, were used to decrease the Company's short-term borrowings from year-end 1997. Shareholders' equity increased 12.3% to $221.2 million at September 30, 1998 from $197.0 million at year-end 1997. This increase is due to the net income generated in 1998 coupled with the increase in the net unrealized gain on marketable securities resulting from an increase in the market value of the Company's investment portfolio. The decreases in reinsurance recoverables, prepaid reinsurance premiums and funds held under reinsurance agreements are due primarily to changes in the amount of insurance premium ceded to reinsurers under certain reinsurance treaties. The increase in unearned premiums and loss reserves are due primarily to the continued growth in written premium. The increase in deferred acquisition costs is due to changes in the amount of insurance premium ceded to reinsurers under certain reinsurance treaties and the continued growth in written premium. Management expects that cash and other liquid investments, coupled with future operating cash flows, will be readily available to match the Company's operating cash requirements for the next twelve months. The Company declared $1.8 million in dividends to its shareholders during the first nine months of 1998. OTHER MATTERS Comprehensive Income For the Company, the only difference between net income and comprehensive income is the net change in unrealized gain on marketable securities. For the three-month and nine-month periods ended September 30, 1998 and 1997, such net unrealized gains increased (net of income tax effects) by the following amounts (in thousands): 1998 1997 ------ ------- Three months ended September 30 $2,027 $5,163 Nine months ended September 30 $8,884 $13,185 Changes in net unrealized gains result from both market conditions and realized gains recognized in a reporting period. The Company recognized less realized gains, as discussed above, and less of an increase in unrealized gains in the third quarter of 1998 than in the second quarter of 1997. For the nine months ended September 30, 1998, the combined total of realized and unrealized gains (net of income taxes) amounted to $5 million less than for the same period in 1997. This is a result of less unrealized appreciation in third quarter 1998 than in third quarter 1997 as indicated above. Year 2000 Compliance Year 2000 Work Plan The Company has developed a comprehensive Year 2000 work plan to deal with the Year 2000 Issue. The Company's Year 2000 Work Plan consists of five phases: 1.) awareness; 2.) assessment; 3.) remediation; 4.) testing; and 5.) implementation. During the awareness phase, the Company formed a multi-disciplinary task force to address the Year 2000 issue, defined the Year 2000 Issue, obtained executive level support, and educated Company personnel concerning the Year 2000 Issue and its potential affects on the Company. During the assessment phase, the Company collected a comprehensive list of internal items (e.g., computer hardware and software systems, other equipment with embedded chips, services and products provided by others to the Company, etc.) that might be affected by Year 2000 Issues. The Company also identified critical business relationships that might be affected by the Year 2000 Issue (e.g., customer, vendors, suppliers, etc.). The Company then evaluated these items and business relationships to determine whether they faced Year 2000 Issues and what effect they would have on the Company if they failed due to Year 2000 Issues. The remediation phase includes an analysis of the items that are affected by Year 2000 Issues, identification of problem areas, and recommendations concerning repair of critical non-Year 2000 compliant items. Similarly, during the remediation phase, the Company is communicating and working with its critical business relationships to help them understand and remediate their Year 2000 Issues. The testing phase follows the remediation phase and includes a thorough testing of all proposed remediation. Testing includes present and forward date testing which simulates dates in the Year 2000. The Company has tested, or will test, all of its critical internal systems and will attempt to verify Year 2000 compliance of its critical business relationships. The implementation phase consists of placing all items that have been remediated and successfully tested into production. Status of Year 2000 Work Plan The Company's MIS professional staff began preparing for the Year 2000 Issue as early as 1992. Since that time, the Company has been upgrading and replacing its computer hardware and software systems. These upgrades and replacements have been driven by non-Year 2000 related business requirements. However, all systems that have been upgraded and replaced since 1992 have been certified by their suppliers as Year 2000 compliant. The Company's Year 2000 Work Plan calls for all mission-critical internal computer hardware and software systems to be Year 2000 compliant by the end of 1998. The Company believes it is currently on schedule to meet this deadline. As of September 30, 1998, the Company generally had met the schedule established in its Year 2000 Work Plan. The awareness and assessment phases of its Year 2000 Work Plan have been substantially completed. Successful completion of the Company's Year 2000 Work Plan is expected to significantly reduce the Company's level of uncertainty about Year 2000 Issues, and, in particular, about the Year 2000 compliance and readiness of its material business relationships. The Company believes that with the implementation of its new computer hardware and software systems and completion of its Year 2000 Work Plan as scheduled, the possibility of significant interruptions of normal operations should be reduced. Contingency Plans The Company is preparing a Year 2000 specific contingency plan to deal with business failures brought about by Year 2000 Issues. During the last few months of 1998 and the first few months of 1999, the Company will document its Year 2000 specific contingency plan as part of its company-wide disaster planning process. Cost of the Year 2000 Issue Based upon currently available information, the Company estimates that the total cost of implementing its Year 2000 Work Plan will be less than $1 million. This estimate does not include costs associated with converting the Company's mainframe operating system. As discussed above, this migration to a new mainframe system was made, primarily, to address specific business needs rather than to address the Year 2000 issue. The cost estimate, however, does include all activities undertaken on Year 2000 related matters across the Company including activities pursued as part of all five phases of the Company's Year 2000 Work Plan. Through September 30, 1998, the Company had expended approximately $600,000 on the Year 2000 Work Plan. The majority of the remaining costs are expected to be directed primarily towards testing, remediation and implementation activities. These costs have been, and will continue to be, funded through operating cash flow and are expensed generally in the period in which they are incurred. Private Securities Reform Act of 1995 - Forward Looking Statements Disclosure This Report may contain forward-looking statements. For purposes of this Report, a "Forward Looking Statement", within the meaning of the Securities Reform Act of 1995, is any statement concerning the remainder of the year 1998 and beyond. The actions and performance of the Company and its subsidiaries could deviate materially from what is contemplated by the forward-looking statements contained in this Report. Factors which might cause deviations from the forward looking statements include, without limitations, the following: 1) changes in the laws or regulations affecting the operations of the Company or any of its subsidiaries; 2) changes in the business tactics or strategies of the Company or any of its subsidiaries; 3) acquisition(s) of assets or of new or complementary operations, or divestiture of any segment of the existing operations of the Company or any of its subsidiaries; 4) changing market forces or litigation which necessitate, in Management's judgment, changes in plans, strategy or tactics of the Company or its subsidiaries and 5) adverse weather conditions, fluctuations in the investment markets, changes in the retail marketplace or fluctuations in interest rates, any one of which might materially affect the operations of the Company and/or its subsidiaries. PART II. OTHER INFORMATION THE MIDLAND COMPANY AND SUBSIDIARIES SEPTEMBER 30, 1998 Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a.) Exhibit 15 - Letter re: Unaudited Interim Financial Information b.) Exhibits 27 - Financial Data Schedules (4) c.) Reports on Form 8-K - None 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 dully authorized. THE MIDLAND COMPANY Date _______October 15, 1998_______ s/John I. Von Lehman__________________ John I. Von Lehman, Executive Vice President and Chief Financial Officer EX-15 2 EXHIBIT 15 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION The Midland Company: We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of The Midland Company and subsidiaries for the periods ended September 30, 1998 and 1997, as indicated in our report dated October 15, 1998; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, is incorporated by reference in Registration Statements No. 33-64821 on Form S-3 and No. 33-48511 on Form S-8. We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. s/Deloitte & Touche LLP - ----------------------- Deloitte & Touche LLP Cincinnati, Ohio October 15, 1998 EX-27 3
7 9-MOS DEC-31-1998 SEP-30-1998 421,280,000 0 0 103,271,000 0 0 536,197,000 15,562,000 21,815,000 64,643,000 798,937,000 133,894,000 261,954,000 0 33,253,000 71,105,000 0 0 911,000 220,278,000 798,937,000 280,600,000 17,779,000 4,935,000 26,892,000 162,555,000 76,245,000 40,879,000 23,330,000 6,353,000 16,977,000 0 0 0 16,977,000 1.88 1.80 108,334,000 0 0 0 0 114,563,000 0
EX-27 4
7 The JUN-30-1998 Financial Data Schedule is being amended to correct the "PERIOD-END" on the original filing to read JUN-30-1998. 6-MOS DEC-31-1998 JUN-30-1998 390,739,000 0 0 108,138,000 0 0 515,612,000 22,092,000 21,552,000 60,786,000 779,217,000 133,949,000 249,900,000 0 31,259,000 75,803,000 0 0 911,000 211,159,000 799,217,000 184,533,000 11,784,000 3,268,000 18,083,000 107,796,000 51,061,000 27,658,000 13,062,000 3,384,000 9,678,000 0 0 0 9,678,000 1.07 1.03 108,334,000 0 0 0 0 115,107,000 0
EX-27 5
5 These Financial Data Schedules are being restated to present basic and diluted earnings per share in connection with FAS 128. 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 6,385,000 3,617,000 4,301,000 6,041,000 3,674,000 367,054,000 400,462,000 352,390,000 354,944,000 362,336,000 94,677,000 112,055,000 99,635,000 108,873,000 128,787,000 1,362,000 1,301,000 1,364,000 1,345,000 1,332,000 6,954,000 13,329,000 5,196,000 15,176,000 16,575,000 0 0 0 0 0 131,616,000 124,672,000 128,219,000 128,549,000 127,000,000 45,767,000 42,997,000 42,282,000 43,806,000 43,918,000 604,703,000 659,539,000 590,102,000 614,018,000 641,678,000 0 0 0 0 0 62,470,000 62,470,000 61,702,000 60,938,000 60,169,000 0 0 0 0 0 0 0 0 0 0 911,000 911,000 911,000 911,000 911,000 155,684,000 158,777,000 147,103,000 145,105,000 149,506,000 604,703,000 659,539,000 590,102,000 614,018,000 641,678,000 37,732,000 32,754,000 5,732,000 7,577,000 19,631,000 350,960,000 370,492,000 86,062,000 172,932,000 270,332,000 35,215,000 27,179,000 5,761,000 7,708,000 16,685,000 330,080,000 362,348,000 92,127,000 168,606,000 256,133,000 3,462,000 3,115,000 1,187,000 1,979,000 2,503,000 468,000 (75,000) (10,000) (10,000) (10,000) 4,434,000 5,873,000 1,426,000 2,918,000 4,480,000 12,516,000 (769,000) (8,668,000) (8,269,000) (9,459,000) 2,964,000 (1,837,000) (3,424,000) (3,679,000) (4,475,000) 9,552,000 1,068,000 (5,244,000) (4,590,000) (4,984,000) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 9,552,000 1,068,000 (5,244,000) (4,590,000) (4,984,000) 3.24 .36 (1.78) (1.56) (1.69) 3.11 .35 (1.78) (1.57) (1.70)
EX-27 6
5 These Financial Data Schedules are being restated to present basic and diluted earnings per share in connection with FAS 128. 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 4,644,000 5,249,000 5,625,000 394,367,000 410,873,000 441,931,000 107,113,000 120,515,000 126,446,000 1,301,000 1,301,000 (799,000) 13,898,000 15,101,000 0 0 0 0 137,593,000 137,446,000 131,144,000 43,183,000 45,559,000 (43,183,000) 662,877,000 689,472,000 711,174,000 0 0 0 63,859,000 63,094,000 62,199,000 0 0 0 0 0 0 911,000 911,000 911,000 162,948,000 173,480,000 179,868,000 662,877,000 689,472,000 711,174,000 5,058,000 10,221,000 0 95,087,000 193,035,000 275,759,000 4,993,000 9,663,000 0 83,792,000 168,316,000 247,216,000 785,000 2,567,000 3,195,000 0 (28,000) 0 1,391,000 2,925,000 3,612,000 4,126,000 9,592,000 21,736,000 1,035,000 2,521,000 6,312,000 3,091,000 7,071,000 15,424,000 0 0 (6,817,000) 0 0 0 0 0 0 3,091,000 7,071,000 8,607,000 1.04 2.38 2.89 1.01 2.30 2.79
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