-----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, A9NocaNiZljijMZF71i991CVc4yLqQ6w6qqqRcD99pBdoBg74bzFxOrJKDyFZQwB vDj3jKtKoq9AEt9dN6BCFA== 0000066025-99-000016.txt : 19991108 0000066025-99-000016.hdr.sgml : 19991108 ACCESSION NUMBER: 0000066025-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991105 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: 99741659 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, 1999_____________________ 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 incorporation (I.R.S. Employer Identification or organization) 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 ___X___. No_______. The number of common shares outstanding as of September 30, 1999 was 9,530,196. PART I. FINANCIAL INFORMATION THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 Amounts in 000's (Unaudited) Sept. 30, Dec. 31, ASSETS 1999 1998 ---------- ---------- MARKETABLE SECURITIES AVAILABLE FOR SALE: Fixed income (cost, $452,444 at September 30, 1999 and $443,975 at December 31, 1998) $ 447,795 $ 453,422 Equity (cost, $44,483 at September 30, 1999 and $37,736 at December 31, 1998) 128,291 136,748 ---------- ---------- Total 576,086 590,170 ---------- ---------- CASH 5,447 3,687 ---------- ---------- RECEIVABLES: Accounts receivable 69,985 60,094 Less allowance for losses 783 753 ---------- ---------- Net 69,202 59,341 ---------- ---------- REINSURANCE RECOVERABLES AND PREPAID REINSURANCE PREMIUMS 65,141 33,955 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT - AT COST 112,604 114,466 Less accumulated depreciation and amortization 48,539 46,629 ---------- ---------- Net 64,065 67,837 ---------- ---------- OTHER REAL ESTATE - NET - 8,700 ---------- ---------- DEFERRED INSURANCE POLICY ACQUISITION COSTS 79,377 63,962 ---------- ---------- OTHER ASSETS 12,664 9,568 ---------- ---------- TOTAL ASSETS $ 871,982 $ 837,220 ========== ========== See notes to the consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 Amounts in 000's (Unaudited) Sept. 30, Dec. 31, LIABILITIES & SHAREHOLDERS' EQUITY 1999 1998 ---------- ---------- UNEARNED INSURANCE PREMIUMS $ 290,952 $ 255,115 ---------- ---------- INSURANCE LOSS RESERVES 158,779 125,496 ---------- ---------- INSURANCE COMMISSIONS PAYABLE 21,648 20,272 ---------- ---------- FUNDS HELD UNDER REINSURANCE AGREEMENTS AND REINSURANCE PAYABLES 14,348 14,624 ---------- ---------- LONG-TERM DEBT 44,921 54,563 ---------- ---------- OTHER NOTES PAYABLE: Banks 1,000 15,000 Commercial paper 6,406 6,522 ---------- ---------- Total 7,406 21,522 ---------- ---------- DEFERRED FEDERAL INCOME TAX 28,997 39,305 ---------- ---------- OTHER PAYABLES AND ACCRUALS 56,966 57,491 ---------- ---------- COMMITMENTS AND CONTINGENCIES - - ---------- ---------- SHAREHOLDERS' EQUITY: Common stock (issued and outstanding: 9,530 shares at September 30, 1999 and 9,352 shares at December 31, 1998 after deducting treasury stock of 1,398 shares and 1,576 shares, respectively) 911 911 Additional paid-in capital 17,441 15,947 Retained earnings 196,790 178,398 Accumulated other comprehensive income 51,366 70,507 Treasury stock - at cost (15,225) (15,293) Unvested restricted stock awards (3,318) (1,638) ---------- ---------- Total 247,965 248,832 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 871,982 $ 837,220 ========== ========== See notes to the consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Amounts in 000's (except per share information) Nine-Mos. Three-Mos. Ended Sept. 30, Ended Sept. 30, --------------------- --------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- REVENUES: Insurance: Premiums earned $ 298,152 $ 280,600 $ 100,178 $ 96,068 Net investment income 18,619 17,779 6,347 5,995 Net realized investment gains 2,564 4,935 825 1,667 Other insurance income 5,136 1,979 3,036 915 Transportation 22,728 24,315 7,170 7,790 Other 1,077 598 289 103 ---------- ---------- ---------- ---------- Total 348,276 330,206 117,845 112,538 ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Insurance: Losses and loss adjustment expenses 158,316 162,555 54,423 54,759 Commissions and other policy acquisition costs 85,627 76,245 26,934 25,184 Operating and administrative expenses 47,207 40,879 17,275 13,221 Transportation operating expenses 21,649 20,928 6,719 7,055 Interest expense 3,087 3,759 948 1,238 Other operating and administrative expenses 4,277 2,510 1,462 813 ---------- ---------- ---------- ---------- Total 320,163 306,876 107,761 102,270 ---------- ---------- ---------- ---------- INCOME BEFORE FEDERAL INCOME TAX 28,113 23,330 10,084 10,268 PROVISION FOR FEDERAL INCOME TAX 7,792 6,353 2,834 2,969 ---------- ---------- ---------- ---------- NET INCOME $ 20,321 $ 16,977 $ 7,250 $ 7,299 ========== ========== ========== ========== BASIC EARNINGS PER SHARE OF COMMON STOCK: $ 2.23 $ 1.88 $ 0.80 $ 0.81 ========== ========== ========== ========== DILUTED EARNINGS PER SHARE OF COMMON STOCK: $ 2.15 $ 1.80 $ 0.77 $ 0.77 ========== ========== ========== ========== CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ .2025 $ .1875 $ 0.0675 $ 0.0625 ========== ========== ========== ========== See notes to the consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 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, 1997 $911 $15,359 $153,797 $44,123 $(14,704) $(2,460) $197,026 Comprehensive income: Net income 16,977 16,977 $ 16,977 Increase in unrealized gain on marketable securities, net of related income tax effect of $4,784 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 ================================================================================= BALANCE, DECEMBER 31, 1998 $911 $15,947 $178,398 $70,507 $(15,293) $(1,638) $248,832 Comprehensive income: Net income 20,321 20,321 $ 20,321 Decrease in unrealized gain on marketable securities, net of related income tax effect of $10,309 (19,141) (19,141) (19,141) --------- Total comprehensive income $ 1,180 ========= Purchase of treasury stock, net 191 (2,765) (2,574) Cash dividends declared (1,929) (1,929) Exercise of stock options (84) 1,587 1,503 Restricted stock awards 1,411 1,267 (2,678) - Amortization and cancellation of unvested restricted stock awards (24) (21) 998 953 --------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1999 $911 $17,441 $196,790 $51,366 $(15,225) $(3,318) $247,965 ================================================================================= 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, 1999 AND 1998 Amount in 000's 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 20,321 $ 16,977 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,845 6,524 Net realized investment gains (2,564) (4,935) Increase in unearned insurance premiums 35,837 21,614 Increase in insurance loss reserves 33,283 13,760 Decrease (increase) in reinsurance recoverables and prepaid reinsurance premiums (31,186) 10,367 Increase in deferred insurance policy acquisition costs (15,415) (9,053) Increase in net accounts receivable (9,408) (5,568) Decrease in other accounts payable and accruals (2,080) (3,890) Increase (decrease) in insurance commissions payable 1,376 (352) Decrease in funds held under reinsurance agreements and reinsurance payables (276) (871) Decrease (increase) in other assets 129 (258) Other-net 1,951 892 ---------- ---------- Net cash provided by operating activities 38,813 45,207 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (113,943) (182,142) Sale of marketable securities 60,000 124,123 Maturity of marketable securities 25,203 30,274 Decrease in cash equivalent marketable securities 14,713 7,786 Net cash used in business acquisitions (2,636) - Acquisition of property, plant and equipment (2,521) (4,216) Sale of property, plant and equipment 8,747 522 ---------- ---------- Net cash used in investing activities (10,437) (23,653) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in net short-term borrowings (14,116) (18,277) Repayment of long-term debt (9,642) (2,927) Dividends paid (1,871) (1,163) Net treasury stock transactions (987) (548) ---------- ---------- Net cash used in financing activities (26,616) (22,915) ---------- ---------- NET INCREASE (DECREASE) IN CASH 1,760 (1,361) CASH AT BEGINNING OF PERIOD 3,687 5,277 ---------- ---------- CASH AT END OF PERIOD $ 5,447 $ 3,916 ========== ========== See notes to the consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) SEPTEMBER 30, 1999 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, 1998 has been derived from the audited consolidated financial statements of the Company. Revenue and operating results for the nine-month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K. Certain reclassifications (minor in nature) have been made to the 1998 amounts to conform to 1999 classifications. 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 restricted stock awards for diluted EPS. Shares used for EPS calculations were as follows (000's): For Basic EPS For Diluted EPS ------------- --------------- Nine months ended September 30: 1999 9,110 9,444 ===== ===== 1998 9,011 9,410 ===== ===== 3. INCOME TAXES The federal income tax provisions for the three and nine-month periods ended September 30, 1999 and 1998 are different from amounts derived by applying the statutory tax rates to income before federal income tax as follows (000's): Nine-Mos. Three-Mos. Ended Sept. 30, Ended Sept. 30, ------------------ ------------------ 1999 1998 1999 1998 -------- -------- -------- -------- Federal income tax at statutory rate $ 9,840 $ 8,166 $ 3,530 $ 3,594 Add (deduct) the tax effect of: Tax exempt interest and excludable dividend income (2,310) (1,654) (787) (641) Other - net 262 (159) 91 16 -------- -------- -------- -------- Provision for federal income tax $ 7,792 $ 6,353 $ 2,834 $ 2,969 ======== ======== ======== ======== THE MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) 4. SUPPLEMENTAL CASH FLOW DISCLOSURES The Company paid interest of $3.1 million and $3.7 million in the first nine months of 1999 and 1998, respectively. The Company paid income taxes of $8.5 million and $4.4 million during the first nine months of 1999 and 1998. In February 1999, the Company issued 119,500 shares of treasury stock under a restricted stock award program that decreased treasury stock by approximately $1.3 million and also increased paid-in capital by approximately $1.4 million. 5. SEGMENT DISCLOSURES Since the Company's annual report for 1998, there have been no changes in reportable segments or the manner in which the Company determines reportable segments or measures segment profit or loss. Summarized segment information for the interim periods for 1999 and 1998 is as follows (000's): Nine Months Three Months Ended Sept. 30, 1999 Ended Sept. 30, 1999 ------------------------------ --------------------- Revenues- Revenues- Total External Pre-Tax External Pre-Tax Assets Customers Income Customers Income -------- ---------- ---------- ---------- --------- Reportable Segments: Insurance: Manufactured housing n/a $209,203 $ 31,046 $69,857 $10,881 Other n/a 94,089 2,745 33,361 970 Unallocated $818,590 - (895) - (250) Transportation 36,347 22,728 925 7,170 415 Corporate and all other - - (5,708) - (1,932) --------- --------- $ 28,113 $10,084 ========= ========= Nine Months Three Months Ended Sept. 30, 1998 Ended Sept. 30, 1998 ------------------------------ --------------------- Revenues- Revenues- Total External Pre-Tax External Pre-Tax Assets Customers Income Customers Income -------- ---------- ---------- ---------- --------- Reportable Segments: Insurance: Manufactured housing n/a $190,643 $ 23,448 $66,363 $ 9,163 Other n/a 91,940 4,484 30,624 2,247 Unallocated $721,331 - (2,698) - (46) Transportation 41,096 24,315 3,087 7,790 640 Corporate and all other - - (4,991) - (1,736) ---------- --------- $ 23,330 $10,268 ========== ========= Intersegment revenues are insignificant. Revenues reported above, by definition, exclude investment income and realized gains. Certain amounts are not allocated to segments ("n/a" above) by the Company. 6. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", must (as modified by SFAS 137) be adopted by the Company effective with the first quarter of 2001. The Company is currently evaluating the impact of adoption of SFAS 133. INDEPENDENT ACCOUNTANTS' REPORT The Midland Company: We have reviewed the accompanying consolidated balance sheet of The Midland Company and subsidiaries as of September 30, 1999, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 1999 and 1998 and of changes in shareholders' equity and cash flows for the nine-month periods ended September 30, 1999 and 1998. 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, 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 11, 1999, 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, 1998 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 14, 1999 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 1998 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 - --------- Insurance Premiums Direct and assumed written premiums generated from AMIG's property and casualty and life insurance operations increased 7.6% in the third quarter to $135.4 million from $125.8 million for the same quarter of 1998. Net earned premiums for the third quarter increased 4.3% to $100.2 million from $96.1 million for the comparable quarter in 1998. On a year-to-date basis, direct and assumed written premiums generated by AMIG's insurance operations increased 4.9% to $371.2 million from $353.9 million for the same nine-month period in 1998. Year-to-date net earned premiums increased 6.3% to $298.2 million from $280.6 million for 1998. The disparity in growth rates between direct and assumed written premiums and net earned premiums for the periods presented was due primarily to AMIG's decision to cede less business to its reinsurers in 1999 compared to 1998. The growth in direct and assumed written premiums for the periods presented is primarily the result of continued volume increases in manufactured home and related coverages insurance premium. Manufactured home and related coverages direct and assumed written premium generated in the third quarter increased 8.6% to $88.2 million from $81.2 million for the same quarter of 1998. On a year-to-date basis, manufactured home and related coverages direct and assumed written premium increased 6.2% to $243.5 million from $229.2 million. Volume decreases in the production of certain other specialty and discontinued property and casualty insurance programs for the three and nine-month periods ended September 30, 1999 partially offset the increases in manufactured home and related coverages premiums. Direct and assumed written premiums of all other property and casualty specialty insurance products collectively decreased 2.2% to $40.6 million for the third quarter of 1999 from $41.5 million for the same quarter in 1998. On a year-to-date basis, direct and assumed written premiums of all other specialty insurance products collectively decreased 1.5% to $114.6 million from $116.4 million for the same period in 1998. These volume decreases were due, in part, to AMIG's underwriting strategies relative to improving the profitability of certain specialty insurance programs. Investment Income and Realized Capital Gains AMIG's net investment income (before taxes and excluding capital gains) increased 5.9% to $6.3 million in the third quarter of 1999 from $6.0 million for the third quarter of 1998. On a year-to-date basis, AMIG's net investment income increased 4.7% to $18.6 million from $17.8 million for the same nine- month period in 1998. The increase in investment income was primarily the result of investment of positive cash flow from underwriting activities and the continued growth of AMIG's investment portfolio. AMIG's net realized capital gains (after-tax) decreased to $0.5 million, $.06 per share (diluted), for the third quarter, from $1.1 million, $.11 per share (diluted), for the same quarter in 1998. On a year-to-date basis, AMIG's net realized capital gains (after-tax) decreased to $1.7 million, $.18 per share (diluted) from $3.2 million, $.34 per share (diluted) for the same nine-month period in 1998. Losses and Loss Adjustment Expenses AMIG's losses and loss adjustment expenses in the third quarter decreased 0.6% to $54.4 million from $54.8 million for the third quarter of 1998. The decrease in losses and loss adjustment expenses is particularly noteworthy given the fact that, in September, AMIG incurred significant losses in several coastal states as a result of wind and flood damage inflicted by Hurricane Floyd. The net loss attributable to Hurricane Floyd was approximately $2.1 million, $.22 per share (diluted), after considering the reinsurer's share of more than $30 million, reinstatement premiums, taxes and other items. AMIG's total weather-related catastrophe losses (net of reinsurance recoveries) for the third quarter amounted to $5.0 million on a pre-tax basis compared with $7.6 million for the same quarter of 1998. These losses had an after-tax impact of approximately $.34 per share (diluted) in the third quarter compared to $.53 per share (diluted) in the third quarter of 1998. Excluding catastrophe losses and the related impact of catastrophe reinsurance reinstatement premiums, the property and casualty combined ratio for the third quarter was 88.3% compared to 88.5% for the same quarter in 1998. On a year-to-date basis, AMIG's losses and loss adjustment expenses decreased 2.6% to $158.3 million from $162.6 million for the same nine-month period of 1998. This decrease is primarily the result of a decrease in the level of weather-related catastrophe losses. AMIG's weather-related catastrophe losses for the first nine months of 1999 amounted to $19.9 million on a pre-tax basis compared with $25.9 million for the same period in 1998. These losses had an after-tax impact of approximately $1.37 per share (diluted) in the first nine months of 1999 compared to $1.79 per share (diluted) in the same period of 1998. Excluding catastrophe losses and the related impact of catastrophe reinsurance reinstatement premiums, the property and casualty combined ratio for the first nine months of 1999 was 88.6% compared to 89.2% for the same period in 1998. Commissions, Other Policy Acquisition Costs and Other Operating and Administration Expenses AMIG's commissions and other policy acquisition costs and other operating and administrative expenses for the third quarter increased 15.1% to $44.2 million from $38.4 million for the third quarter of 1998. On a year-to-date basis, AMIG's commissions and other policy acquisition costs and other operating and administrative expenses for the first nine months increased 13.4% to $132.8 million from $117.1 million for the same nine-month period of 1998. These increases are due primarily to the continued growth in net earned premiums coupled with improvements in the underlying loss experience and the level of reinsurance activities. Property and Casualty Underwriting Results AMIG's property and casualty operations generated a pre-tax underwriting income of $4.1 million for the third quarter of 1999 compared to $3.2 million for the same quarter of 1998. For the current quarter, AMIG's combined ratio (ratio of losses and expenses as a percent of earned premium) for its property and casualty business was 95.8% compared to 96.6% in the third quarter of 1998. On a year-to-date basis, AMIG's property and casualty pre-tax underwriting income increased to $11.1 million from $3.9 million for the nine-month period in 1998. AMIG's combined ratio for its property and casualty business was 96.2% for the first nine months compared to 98.6% for the same period in 1998. Transportation - -------------- M/G Transport (M/G), the Company's transportation subsidiary, reported transportation revenues for the third quarter of $7.2 million compared with $7.8 million in the third quarter of 1998. M/G's pre-tax operating profits for the third quarter decreased to $0.4 million from $0.6 million for the same quarter of 1998. On a year-to-date basis, transportation revenues have decreased to $22.7 million from $24.3 million for the same nine-month period of the prior year. M/G's pre-tax operating profits for the first nine months decreased to $0.9 million from $3.1 million for the same period of 1998. These decreases are primarily the result of lower prices and reduced demand for petroleum coke and barite products that have affected shipping patterns. LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION Cash flows from operating and investing activities were used to decrease the Company's short-term borrowings (Other Notes Payable) from year-end 1998. The decrease in long-term debt and other real estate - net was primarily a result of the 1999 third quarter sale of the discontinued sportswear division's former headquarters building. The changes in receivables, deferred insurance policy acquisition costs, and unearned insurance premiums are the result of the continued growth in written premiums generated by AMIG. The increase in reinsurance recoverables and prepaid reinsurance premiums and insurance loss reserves is the direct result of losses incurred in September related to Hurricane Floyd. Shareholders' equity decreased slightly to $248.0 million at September 30, 1999 from $248.8 million at year-end 1998 due primarily to the decrease in accumulated other comprehensive income resulting from a decrease in the market value of the Company's investment portfolio. The decrease in the market value of the investment portfolio is a result of the decrease in the market value of fixed maturity investments from an increase in interest rates since December 31, 1998 and a decrease in the market value of equity securities. The decrease in accumulated other comprehensive income also resulted in a decrease in deferred federal income tax. During the third quarter of 1999, M/G Transport entered into a fifteen year operating lease for 20 new jumbo hopper barges. Aggregate rental payments over the next fifteen years will approximate $8.2 million. Management expects that cash and other liquid investments, coupled with future operating cash flows, will be readily available to meet the Company's operating cash requirements for the next twelve months. The Company declared $1.9 million in dividends to its shareholders during the first nine months of 1999. OTHER MATTERS Comprehensive Income - -------------------- The only difference between net income and comprehensive income is the net after-tax change in unrealized gains on marketable securities. For the three and nine-month periods ended September 30, 1999 and 1998, such net unrealized gains increased or (decreased), net of related income tax effects, by the following amounts (in thousands): 1999 1998 Three months ended September 30 ($ 7,408) $2,027 Nine months ended September 30 ($19,141) $8,884 Changes in net unrealized gains on marketable securities result from both market conditions and realized gains recognized in a reporting period. Year 2000 Compliance - -------------------- The Year 2000 Issue The Year 2000 Issue arises from the common computer programming convention of using a two digit shorthand to represent a calendar year (i.e., "99" means 1999). Some computer systems and embedded chips may not recognize the entry "00" as the two digit shorthand for calendar year 2000. This could lead to erroneous results or, in the worst case, to system shutdowns. Status of the Company's Response to the Year 2000 Issue The Company's information systems 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, the Company believes that all of its mission-critical, internal computer hardware and software systems are now Year 2000 compliant. The Company developed a comprehensive Year 2000 work plan to deal with the Year 2000 Issue. As of September 30, 1999, the Company, with minor exceptions, had met the schedule established in its Year 2000 Work Plan. The Company's Year 2000 Work Plan consists of five phases: 1) awareness; 2) assessment; 3) remediation; 4) testing and 5) implementation. The awareness and assessment phases of the Company's Year 2000 Work Plan are ongoing, but have been substantially completed. Remediation, testing and implementation have been completed for all of the Company's internal mission critical systems. 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, customers, suppliers and policyholders concerning the Year 2000 Issue and its potential affects on the Company. Education efforts are ongoing. During the assessment phase the Company collected a comprehensive list of internal items (e.g., computer hardware and software, 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., customers, 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 Company continues to try to identify potential Year 2000 Issues. During the remediation phase the Company analyzed the items that are affected by Year 2000 Issues, identified problem areas and remediated those 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. During the testing phase the Company thoroughly tested all installed remediation to critical internal systems. Testing included present and forward date testing which simulated critical dates in the Year 2000. The Company believes it has successfully tested all of its critical internal systems and will continue to verify Year 2000 compliance of its critical business relationships. During the implementation phase the Company placed all items that had been remediated and successfully tested into use. 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. Risks The Company believes that its internal mission critical computer hardware and software and other mission critical equipment is substantially Year 2000 compliant. The Company believes, based on responses to Year 2000 questionnaires it has received to date, that its significant business partners, including vendors, suppliers (including suppliers of utilities) and customers, will be Year 2000 compliant before December 31, 1999. If the Company's Year 2000 Work Plan has failed to identify or correct Year 2000 Issues in the Company's mission critical computer hardware and software or other equipment, the Company might not be able to communicate with and/or provide services to suppliers, customers and policyholders until corrective measures have been taken. Under such a worst case scenario, the Company might not be able to process policy applications and collect premium revenue or conduct normal operations for some period of time. If corrective actions cannot be taken in a timely fashion, this could have a material adverse effect on the Company's financial condition or results of operations. Sustained Year 2000 failures by certain of the Company's vendors and suppliers (especially suppliers of utility services such as electric and telephone) could have similar consequences for the Company. The Company cannot currently predict the impact of the Year 2000 Issue on its customers. However, sustained Year 2000 failures by customers which, in the aggregate, provide a material portion of the Company's revenues could materially reduce cash flow available to the Company. This, in turn, could have a material adverse effect on the Company's financial condition or results of operations. Contingency Plans The Company has prepared internal Year 2000 contingency plans to deal with business failures in its operations brought about by Year 2000 Issues. Contingency planning includes plans for alternative processing of business from customers who experience disruptions due to the Year 2000 Issue. The Company's internal contingency plan involves invoking existing disaster recovery plans where appropriate. The Company is currently discussing contingency planning with significant customers. 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 $1.0 million. This estimate does not include costs associated with converting the Company's mainframe operating system but does include an allocation of internal costs (such as salaries) dedicated to the Year 2000 Work Plan. As discussed above, the migration to the Company's 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, 1999, the Company had expended approximately $0.9 million on the Year 2000 Work Plan. The majority of the remaining costs are expected to be directed primarily towards testing and contingency planning 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 contains 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 year 1999 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, Year 2000 related issues or fluctuations in interest rates, any one of which might materially affect the operations of the Company and/or its subsidiaries. Any forward looking statement speaks 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. PART II. OTHER INFORMATION THE MIDLAND COMPANY AND SUBSIDIARIES SEPTEMBER 30, 1999 Item 1. Legal Proceedings Reference is made to Item 3 of Registrant's December 31, 1995, Form 10-K and to Item 3 of Registrant's December 31, 1998, Form 10-K concerning criminal litigation against M/G Transport Services, Inc. (M/G), a subsidiary of Registrant. On April 22, 1999, a three judge panel of the Sixth Circuit Court of Appeals issued an opinion which reversed the earlier ruling of the trial court which had dismissed six of the eight counts against M/G and several counts against individual defendants formerly employed by M/G. All of the verdicts against M/G on the six counts which had been dismissed by the trial court were reinstated by the Court of Appeals. The trial court has not yet set a date for sentencing on the reinstated verdicts. However, during the sentencing phase of the original trial, the probation department recommended total fines of $1,000,000 against M/G for all eight verdicts. M/G has already paid $250,000 in fines on the two counts the trial court did not dismiss. Registrant believes that based upon the original fines proposed by the probation department, it has established and maintained adequate accruals related to any additional fines which may be imposed by the trial court and believes that any such fines will not have a material adverse affect on the financial condition or results of operations of Registrant. 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 Exhibit 27 - Financial Data Schedule b.) 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 duly authorized. THE MIDLAND COMPANY Date_______October 14, 1999_______ /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, 1999 and 1998, as indicated in our report dated October 14, 1999; 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, 1999, 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 14, 1999 EX-27 3
7 9-MOS DEC-31-1999 SEP-30-1999 447,795,000 0 0 128,291,000 0 0 576,086,000 5,447,000 50,694,000 79,377,000 871,982,000 158,779,000 290,952,000 0 35,996,000 52,327,000 0 0 911,000 247,054,000 871,982,000 298,152,000 18,619,000 2,564,000 28,941,000 158,316,000 85,627,000 47,207,000 28,113,000 7,792,000 20,321,000 0 0 0 20,321,000 2.23 2.15 88,267,000 0 0 0 0 84,751,000 0
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