10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-6026

The Midland Company

(Exact name of registrant as specified in its charter)

Ohio	31-0742526
(State or other jurisdiction of incorporation	(I.R.S. Employer Identification No.)
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 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.

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o. No þ.

     The number of common shares outstanding as of November 4, 2005 was 18,933,798.

PART I.
ITEM I. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
Amounts in 000’s

	(Unaudited)
	September 30,		December 31,
ASSETS	2005		2004
MARKETABLE SECURITIES AVAILABLE FOR SALE:
Fixed income (cost, $768,407 at September 30, 2005 and $745,514 at December 31, 2004)	$	779,140	$	770,639
Equity (cost, $104,299 at September 30, 2005 and $109,851 at December 31, 2004)		187,003		200,799
Total		966,143		971,438
CASH		4,897		6,858
ACCOUNTS RECEIVABLE — NET		135,846		113,979
REINSURANCE RECOVERABLES AND PREPAID REINSURANCE PREMIUMS		218,270		87,726
PROPERTY, PLANT AND EQUIPMENT — NET		84,087		68,312
DEFERRED INSURANCE POLICY ACQUISITION COSTS		94,594		90,423
OTHER ASSETS		27,001		25,948
TOTAL ASSETS	$	1,530,838	$	1,364,684

See notes to condensed consolidated financial statements.

THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
Amounts in 000’s

	(Unaudited)
	September 30,			December 31,
LIABILITIES & SHAREHOLDERS’ EQUITY	2005			2004
UNEARNED INSURANCE PREMIUMS	$	412,135		$	390,447
INSURANCE LOSS RESERVES		356,462			232,915
INSURANCE COMMISSIONS PAYABLE		43,685			45,374
FUNDS HELD UNDER REINSURANCE AGREEMENTS AND REINSURANCE PAYABLES		15,457			11,465
LONG-TERM DEBT		68,310			58,729
OTHER NOTES PAYABLE		13,167			33,177
DEFERRED FEDERAL INCOME TAX		39,821			47,604
OTHER PAYABLES AND ACCRUALS		93,136			88,697
JUNIOR SUBORDINATED DEBENTURES		24,000			24,000
TOTAL LIABILITIES		1,066,173			932,408
COMMITMENTS AND CONTINGENCIES		—			—
SHAREHOLDERS’ EQUITY:
Common stock (issued and outstanding: 18,943 shares at September 30, 2005 and 18,807 shares at December 31, 2004 after deducting treasury stock of 4,063 shares and 4,199 shares, respectively)		959			959
Additional paid-in capital		54,465			51,184
Retained earnings		393,249			350,141
Accumulated other comprehensive income		58,571			73,027
Treasury stock — at cost		(42,579	)		(43,035	)
TOTAL SHAREHOLDERS’ EQUITY		464,665			432,276
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,530,838		$	1,364,684

See notes to condensed consolidated financial statements.

THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Amounts in 000’s (except per share information)

	Nine-Mos. Ended Sept. 30,				Three-Mos. Ended Sept, 30,
	2005		2004		2005		2004
REVENUES:
Premiums earned	$	473,226	$	503,350	$	147,946	$	169,296
Other insurance income		9,542		10,246		3,148		1,943
Net investment income		30,247		27,062		10,128		9,318
Net realized investment gains		5,378		5,726		3,162		318
Transportation		31,554		32,701		8,859		12,006
Total		549,947		579,085		173,243		192,881
COSTS AND EXPENSES:
Losses and loss adjustment expenses		221,452		276,688		86,742		108,796
Commissions and other policy acquisition costs		147,584		146,469		45,539		43,207
Operating and administrative expenses		81,823		78,432		26,860		26,000
Transportation operating expenses		28,563		31,090		8,019		11,336
Interest expense		4,853		3,886		1,774		1,325
Total		484,275		536,565		168,934		190,664
INCOME BEFORE FEDERAL INCOME TAX		65,672		42,520		4,309		2,217
PROVISION (CREDIT) FOR FEDERAL INCOME TAX		19,374		11,924		295		(207	)
NET INCOME	$	46,298	$	30,596	$	4,014	$	2,424
BASIC EARNINGS PER SHARE OF COMMON STOCK:	$	2.45	$	1.65	$	0.21	$	0.13
DILUTED EARNINGS PER SHARE OF COMMON STOCK:	$	2.39	$	1.60	$	0.21	$	0.12
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.16875	$	0.15375	$	0.05625	$	0.05125

See notes to condensed consolidated financial statements.

THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (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, 2003	$	911	$	23,406	$	299,752		$	73,455		$	(41,442	)	$	(24	)	$	356,058
Comprehensive income:
Net income						30,596												30,596		$	30,596
Decrease in unrealized gain on marketable securities, net of related income tax effect of $2,628									(4,880	)								(4,880	)		(4,880	)
Other, net of federal income tax of $253									470									470			470
Total comprehensive income																				$	26,186
Public stock offering		48		25,022														25,070
Purchase of treasury stock												(2,770	)					(2,770	)
Issuance of treasury stock for options exercised and employee savings plan				1,138								1,028						2,166
Cash dividends declared						(2,885	)											(2,885	)
Federal income tax benefit related to the exercise or granting of stock awards				1,085														1,085
Amortization and cancellation of unvested restricted stock awards															24			24
BALANCE, SEPTEMBER 30, 2004	$	959	$	50,651	$	327,463		$	69,045		$	(43,184	)	$	—		$	404,934
BALANCE, DECEMBER 31, 2004	$	959	$	51,184	$	350,141		$	73,027		$	(43,035	)	$	—		$	432,276
Comprehensive income:
Net income						46,298												46,298		$	46,298
Decrease in unrealized gain on marketable securities, net of related income tax effect of $7,923									(14,714	)								(14,714	)		(14,714	)
Other, net of federal income tax of $139									258									258			258
Total comprehensive income																				$	31,842
Purchase of treasury stock												(1,347	)					(1,347	)
Issuance of treasury stock for options exercised and employee savings plan				2,938								1,803						4,741
Cash dividends declared						(3,190	)											(3,190	)
Federal income tax benefit related to the exercise or granting of stock awards				343														343
BALANCE, SEPTEMBER 30, 2005	$	959	$	54,465	$	393,249		$	58,571		$	(42,579	)	$	—		$	464,665

See notes to condensed consolidated financial statements.

THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Amounts in 000’s

	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	46,298		$	30,596
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,195			8,420
Net realized investment gains		(4,066	)		(6,540	)
Increase in unearned insurance premiums		21,688			21,611
Increase in deferred insurance policy acquisition costs		(4,171	)		(4,061	)
Increase in reinsurance recoverables and prepaid reinsurance premiums		(130,544	)		(26,337	)
Increase in accounts receivable — net		(21,867	)		(23,276	)
Increase in insurance loss reserves		123,547			55,891
Increase in funds held under reinsurance agreements and reinsurance payables		3,992			6,528
Increase in other payables and accruals		5,077			21,456
Increase in other assets		(1,053	)		(725	)
Increase (decrease) in insurance commissions payable		(1,689	)		10,223
Other-net		2,182			1,567
Net cash provided by operating activities		47,589			95,353
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities		(385,397	)		(421,328	)
Sale of marketable securities		333,399			241,279
Decrease (increase) in cash equivalent marketable securities		(39,834	)		8,791
Maturity of marketable securities		76,274			59,412
Acquisition of property, plant and equipment		(24,018	)		(7,144	)
Proceeds from sale of property, plant and equipment		151			480
Net cash used in investing activities		(39,425	)		(118,510	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance		—			25,070
Decrease in net short-term borrowings		(20,010	)		(17,851	)
Issuance of treasury stock		4,741			2,166
Dividends paid		(3,090	)		(2,760	)
Purchase of treasury stock		(1,347	)		(2,770	)
Borrowing (repayment) of long-term debt		9,581			(1,170	)
Issuance of junior subordinated debentures		—			24,000
Net cash provided by (used in) financing activities		(10,125	)		26,685
NET INCREASE (DECREASE) IN CASH		(1,961	)		3,528
CASH AT BEGINNING OF PERIOD		6,858			2,386
CASH AT END OF PERIOD	$	4,897		$	5,914
INTEREST PAID	$	4,354		$	3,156
INCOME TAXES PAID	$	18,600		$	14,800

See notes to the condensed consolidated financial statements.

THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 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 nine and three month periods ended September 30, 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. All significant intercompany amounts have been eliminated.

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 EPS
Nine months ended September 30:
2005		18,878		19,369
2004		18,561		19,100
Three months ended September 30:
2005		18,914		19,401
2004		18,775		19,307

3. INCOME TAXES

The federal income tax provisions for the nine and three month periods ended September 30, 2005 and 2004 are different from amounts derived by applying the statutory tax rates to income before federal income tax as follows (000’s):

	Nine-Mos. Ended Sept. 30,						Three-Mos. Ended Sept. 30,
	2005			2004			2005			2004
Federal income tax at statutory rate	$	22,985		$	14,882		$	1,508		$	776
Tax effect of:
Tax exempt interest and excludable dividend income		(3,812	)		(3,146	)		(1,291	)		(1,059	)
Other — net		201			188			78			76
Provision for federal income tax	$	19,374		$	11,924		$	295		$	(207	)

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):

	Nine Months Ended Sept. 30, 2005								Nine Months Ended Sept. 30, 2004
				Revenues-		Pre-Tax						Revenues-		Pre-Tax
	Total			External		Income			Total			External		Income
	Assets			Customers		(Loss)			Assets			Customers		(Loss)
Reportable Segments:
Insurance:
Residential property		n/a		$	289,436	$	28,907			n/a		$	305,792	$	30,235
Recreational casualty		n/a			79,950		7,736			n/a			92,924		(1,512	)
Financial institutions		n/a			57,814		7,850			n/a			59,555		4,049
All other insurance		n/a			55,568		17,531			n/a			55,325		7,658
Unallocated insurance	$	1,420,363			—		4,352		$	1,264,714			—		13,955
Transportation		49,946			31,554		2,883			34,682			32,701		1,274
Corporate and all other		97,786			—		(3,587	)		108,939			—		(3,406	)
Intersegment Eliminations		(37,257	)		—		—			(47,264	)		—		(9,733	)
Total	$	1,530,838		$	514,322	$	65,672		$	1,361,071		$	546,297	$	42,520

	Three Months Ended Sept. 30, 2005								Three Months Ended Sept. 30, 2004
				Revenues-		Pre-Tax						Revenues-		Pre-Tax
	Total			External		Income			Total			External		Income
	Assets			Customers		(Loss)			Assets			Customers		(Loss)
Reportable Segments:
Insurance:
Residential property		n/a		$	89,202	$	(4,005	)		n/a		$	101,067	$	2,762
Recreational casualty		n/a			25,134		(2,509	)		n/a			29,885		(7,286	)
Financial institutions		n/a			18,770		3,291			n/a			22,556		1,220
All other insurance		n/a			17,988		5,422			n/a			17,732		5,517
Unallocated insurance	$	1,420,363			—		2,777		$	1,264,714			—		(4	)
Transportation		49,946			8,859		908			34,682			12,005		567
Corporate and all other		97,786			—		(1,575	)		108,939			—		(559	)
Intersegment Eliminations		(37,257	)		—		—			(47,264	)		—		—
Total	$	1,530,838		$	159,953	$	4,309		$	1,361,071		$	183,245	$	2,217

The amounts shown for residential property, recreational casualty, financial institutions, 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 nine and three month periods ended September 30, 2005 and 2004. During the nine month period ended September 30, 2004, the Midland parent company purchased 492,634 shares of U.S. Bancorp common stock from American Modern Insurance Group, Inc. No shares were purchased during the three month period ended September 30, 2004 or during the nine or three month periods ended September 30, 2005. The effects of these transactions 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 within the segment disclosures to conform with current year presentation.

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 nine and three months ended September 30, 2005 and 2004 would have been reduced to the pro forma amounts indicated below (amounts in 000’s, except per share data):

	Nine Months Ended Sept. 30,				Three Months Ended Sept. 30,
	2005		2004		2005		2004
Net Income as Reported	$	46,298	$	30,596	$	4,014	$	2,424
Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects		973		822		284		232
Pro forma Net Income	$	45,325	$	29,774	$	3,730	$	2,192
Basic Shares		18,878		18,561		18,914		18,775
Diluted Shares		19,369		19,100		19,401		19,307
Earnings per share:
Basic — as reported	$	2.45	$	1.65	$	0.21	$	0.13
Basic — pro forma		2.40		1.61		0.20		0.12
Diluted — as reported	$	2.39	$	1.60	$	0.21	$	0.12
Diluted — pro forma		2.34		1.56		0.19		0.11

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 September 30, 2005 and 2004, Midland’s investment portfolio included approximately $43.5 million and $51.1 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 nine and three month periods ended September 30, 2005, Midland recorded pre-tax realized gains on these securities of $1,312,000 and $1,787,000, respectively. For the nine and three month periods ended September 30, 2004, Midland recorded pre-tax realized losses on these securities of $(814,000) and $(1,056,000), respectively.

Midland has entered into a series of interest rate swap agreements converting $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 September 30, 2005 and 2004, the derivative gain recorded in Other Comprehensive Income, net of deferred taxes, amounted to $257,000 and $470,000, respectively. The swaps mature on December 1, 2005.

7. DEFINED BENEFIT PENSION PLANS

Midland has a funded qualified defined benefit pension plan and an unfunded non-qualified defined benefit pension plan. The measurement date for Midland’s defined benefit retirement plans is December 31. The components of net periodic pension cost related to both plans for the nine and three month periods ended September 30, 2005 and 2004 are (000’s):

	Nine Months Ended Sept. 30,						Three Months Ended Sept. 30,
	2005			2004			2005			2004
Service cost	$	626		$	682		$	184		$	246
Interest cost		1,233			1,271			425			478
Expected return on assets		(1,182	)		(1,381	)		(396	)		(584	)
Amortization of transition asset		—			(61	)		—			(25	)
Amortization of prior service cost		23			26			7			10
Amortization of net loss		260			73			112			20
Net periodic cost	$	960		$	610		$	332		$	145

The Company paid its required cash contribution of $0.6 million for the 2005 plan year during the third quarter of 2005.

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 September 30, 2005 was $4.2 million, $3.3 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 3.7% as of September 30, 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 supersedes 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.

In June 2005, FASB issued Statement No. 154, “Accounting Changes and Error Corrections”. Statement No. 154 requires that any change in the method of depreciation, amortization or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. This statement supersedes both APB Opinion No. 20 and FASB Statement No. 3, but contains elements of each. FASB has issued the new standard as part of its broader effort of developing a single set of high-quality accounting standards with the International Accounting Standards Board. Statement No. 154 will be effective for the Company for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

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: residential property, recreational casualty, financial institutions, 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 residential property segment includes primarily manufactured housing and site-built dwelling insurance products. Our recreational casualty segment includes specialty insurance products such as motorcycle, watercraft, recreational vehicle, collector car and snowmobile. Our financial institutions 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 seven 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.

EXECUTIVE OVERVIEW OF RECENT TRENDS AND OTHER DEVELOPMENTS

Excellent Non-Catastrophe Underwriting Results Offset By Third Quarter Hurricanes

The catastrophe losses from hurricanes Katrina, Rita and Dennis offset the excellent non-catastrophe underwriting results experienced during the third quarter of 2005. American Modern’s property and casualty combined ratio (losses and expenses as a percent of earned premium) was 106.6% in the third quarter of 2005 compared to 105.9% in the third quarter of 2004. However, excluding catastrophe losses, American Modern’s third quarter combined ratio improved to 88.1% compared to 88.6% in the third quarter of 2004. On a year-to-date basis, American Modern’s property and casualty combined ratio was 94.7% in 2005 compared to 98.9% in 2004. Excluding the impact of catastrophe losses, American Modern’s combined ratio for the first nine months of 2005 was 87.3% compared to 90.8% in 2004.

Diversification of Insurance Products

As previously mentioned in the introduction, American Modern continues to experience significant contributions to its written premiums and profit from insurance products other than manufactured housing. For the first nine months of 2005, approximately 46% of American Modern’s total direct and assumed written premiums related 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. As a point of reference, manufactured housing direct and assumed written premiums accounted for 65% of total direct and assumed written premiums in 1999.

In addition, American Modern has also experienced a significant increase in profit related to these non-manufactured housing product lines. For the first nine months of 2005, the pre-tax profit related to the manufactured housing insurance product equaled 40% of American Modern’s total insurance pre-tax profit. In 1999, manufactured housing contributed over 95% of American Modern’s total insurance pre-tax profit.

Motorcycle

American Modern continues to experience favorable underwriting trends related to its motorcycle product. The combined ratio for the motorcycle product improved to 93.2% for the first nine months of 2005 compared to 106.7% in the first nine months of 2004. The combined ratio for the motorcycle product remained relatively unchanged at 114.9% in the third quarter of 2005 compared to 115.1% in the third 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 profitably grow this line of business over the long term, the aforementioned rate increases and other corrective underwriting actions have resulted in decreased written premiums in recent quarters. The motorcycle direct and assumed written premiums decreased to $32.8 million in the first nine months of 2005 from $42.4 million in the first nine months of 2004. The motorcycle direct and assumed written premiums decreased to $9.0 million for the third quarter of 2005 from $11.1 million in the third quarter of 2004.

Manufactured Housing

Manufactured housing direct and assumed written premiums for the third quarter of 2005 increased to $91.4 million compared to $89.3 million in the third quarter of 2004. American Modern has 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 downturn in the 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 increased to 112.5% in the third quarter of 2005 compared to 106.7% in the third quarter of 2004. However, excluding the effects of catastrophe losses, the manufactured housing combined ratio improved to 82.8% in the third quarter of 2005 compared to 83.7% during the same period of 2004. On a year-to-date basis, the manufactured housing combined ratio improved to 94.3% compared to 95.1% for the first nine months of 2004. Excluding catastrophe losses, the combined ratio improved to 84.3% compared to 85.8% for the first nine months of 2004. The improvement in the non-catastrophe combined ratio is due primarily to rate increases combined with improved underwriting.

RESULTS OF OPERATIONS

The Midland Company reported net income of $4.0 million, or $0.21 per diluted share, for the third quarter of 2005 compared with $2.4 million, or $0.12 per diluted share, for the third quarter of 2004. Revenue for the third quarter of 2005 was $173.2 million compared to $192.9 million in the third quarter of 2004.

On a year to date basis, net income was $46.3 million, or $2.39 per diluted share, compared with $30.6 million, or $1.60 per diluted share, for the first nine months of 2004. Revenue for the first nine months of 2005 was $549.9 million compared to $579.1 million for the first nine months of 2004.

American Modern’s gross losses from hurricane Katrina are estimated to be approximately $110 million, which is at the upper limit of our reinsurance program. In addition, American Modern is anticipating state assessments of approximately $4 million. After considering reinsurance and other catastrophe related items, hurricane Katrina impacted earnings on an after-tax basis by $12.0 million, or 62 cents per share, in the third quarter of 2005.

American Modern’s property and casualty direct and assumed written premiums for the third quarter decreased to $185.8 million compared to $189.6 million in the third quarter of 2004. However, manufactured housing written premiums increased to $91.4 million in the third quarter of 2005 compared to $89.3 million in the third quarter of 2004. American Modern experienced declines in motorcycle and watercraft written premiums caused by deliberate underwriting actions intended to enhance profitability and to manage risk exposure. American Modern also experienced a decrease in mortgage fire written premiums which resulted from the sale of a mortgage portfolio serviced by one of our agents within this line.

On a year-to-date basis, direct and assumed written premiums decreased 4.0% to $533.3 million in 2005 compared to $555.7 million in 2004. A large portion of this decrease was due to the aforementioned motorcycle and watercraft products combined with the collateral protection product. In the second quarter of 2004, American Modern assumed a new book of collateral protection business. This transaction included a one-time assumption of $13.6 million of unearned premiums that was included in written premiums during the second quarter of 2004. Manufactured housing premiums were level at $257.7 million for the first nine months of 2005 and 2004.

Outlook

Given the results of the nine and three month periods ended September 30, 2005, the anticipated impact of hurricane Wilma, and the strong non-catastrophe underwriting results from our major product lines so far in 2005, we anticipate a property and casualty combined ratio, assuming normal weather for the remainder of the fourth quarter, in the range of 93.5% to 94.5% for the full year. 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 $3.15 to $3.35 per share (diluted), which would include the after-tax impact of $0.20 per share (diluted) from realized investment gains. Additionally, given the market dynamics in 2005, we expect our direct and assumed written premiums for the full year of 2005 to be approximately 3 percent less than our direct and assumed written premiums for 2004.

Financial Highlights

(amounts in thousands except per share data)

	Nine Months Ended Sept. 30,							Three Months Ended Sept. 30,
	2005		2004		%			2005		2004		%
Income Statement Data
Insurance Revenue	$	518,393	$	546,384		(5.1	)%	$	164,384	$	180,875		(9.1	)%
Transportation Revenue		31,554		32,701		(3.5	)%		8,859		12,006		(26.2	)%
Total Revenue	$	549,947	$	579,085		(5.0	)%	$	173,243	$	192,881		(10.2	)%
Net Income	$	46,298	$	30,596				$	4,014	$	2,424
Balance Sheet Data
Cash & Invested Assets	$	971,040	$	961,384		1.0	%
Total Assets	$	1,530,838	$	1,361,071		12.5	%
Total Debt	$	105,477	$	100,821		4.6	%
Shareholders’ Equity	$	464,665	$	404,934		14.8	%
Common Shares Outstanding		18,943		18,783
Per Share Data
Net Income (Diluted)	$	2.39	$	1.60				$	0.21	$	0.12
Dividends Declared	$	0.16875	$	0.15375		9.8	%	$	0.05625	$	0.05125		9.8	%
Market Value	$	36.03	$	27.35		31.7	%
Book Value	$	24.53	$	21.56		13.8	%

	Nine Months Ended Sept. 30,									Three Months Ended Sept. 30,
	2005			2004			%			2005			2004			%
AMIG’s Property and Casualty Operations
Direct and Assumed Written Premiums	$	533,294		$	555,679			(4.0	)%	$	185,778		$	189,592			(2.0	)%
Net Written Premium	$	483,419		$	515,768			(6.3	)%	$	159,602		$	177,288			(10.0	)%
Combined Ratio Before Catastrophes		87.3	%		90.8	%					88.1	%		88.6	%
Catastrophe Effects on Combined Ratio		7.4	%		8.1	%					18.5	%		17.3	%
Combined Ratio		94.7	%		98.9	%					106.6	%		105.9	%

Overview of Revenues

The following chart provides detail related to the Company’s revenues for the nine and three month periods ended September 30, 2005 and 2004 ($000’s):

Revenues

	Nine-Mos. Ended Sept. 30,				Three-Mos. Ended Sept. 30,
	2005		2004		2005		2004
Insurance:
Residential property		289,436		305,792		89,202		101,067
Recreational casualty		79,950		92,924		25,134		29,884
Financial institutions		57,814		59,555		18,770		22,556
All other insurance		55,568		55,325		17,988		17,732
Total insurance		482,768		513,596		151,094		171,239
Net investment income		30,247		27,062		10,128		9,318
Net realized investment gains		5,378		5,726		3,162		318
Transportation		31,554		32,701		8,859		12,006
Total revenues	$	549,947	$	579,085	$	173,243	$	192,881

The insurance revenues in the above table include service fee revenues related to payment plans offered to American Modern’s policyholders.

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 nine and three-month periods ended September 30, 2005 and 2004 (millions). Gross written premium, also described as direct and assumed written premium, is the amount of premium charged for policies issued during a fiscal period. Net written premium is the amount of premium that American Modern retains after ceding varying portions of its gross written premium to other insurance companies. Net earned premium is the amount included in our condensed consolidated statements of operations. Premiums are considered earned and are included in the financial results on a pro-rata basis over the policy period. The portion of written premium applicable to the unexpired terms of the policies is recorded as unearned premium in our condensed consolidated balance sheets.

     Net written premium and net earned premium during the nine and three months ended September 30, 2005 were impacted by an $11.8 million increase in reinstatement premiums compared to the comparable periods in 2004. These reinstatement premiums were necessary in order to restore our property catastrophe reinsurance program after the significant losses experienced from hurricanes Katrina and Rita. Reinstatement premiums are considered ceded premiums and are earned immediately.

	Nine-Mos. Ended Sept. 30, 2005						Nine-Mos. Ended Sept. 30, 2004
	Gross		Net		Net		Gross		Net		Net
	Written		Written		Earned		Written		Written		Earned
Business Segment	Premium		Premium		Premium		Premium		Premium		Premium
Residential Property	$	324.6	$	294.6	$	285.1	$	326.4	$	307.1	$	301.6
Recreational Casualty		83.6		81.5		78.1		93.8		92.6		91.2
Financial Institutions		53.7		48.8		57.2		75.9		74.5		59.6
All Other Insurance		99.0		64.9		52.8		83.0		51.4		51.0
Total	$	560.9	$	489.8	$	473.2	$	579.1	$	525.6	$	503.4

	Three Mos. Ended Sept. 30, 2005						Three Mos. Ended Sept. 30, 2004
	Gross		Net		Net		Gross		Net		Net
	Written		Written		Earned		Written		Written		Earned
Business Segment	Premium		Premium		Premium		Premium		Premium		Premium
Residential Property	$	115.0	$	97.4	$	87.7	$	112.9	$	105.2	$	99.6
Recreational Casualty		25.5		24.0		24.5		27.7		27.1		29.3
Financial Institutions		21.0		18.9		18.8		26.7		25.9		22.6
All Other Insurance		34.4		21.8		16.9		31.1		22.4		17.8
Total	$	195.9	$	162.1	$	147.9	$	198.4	$	180.6	$	169.3

Residential Property

     The following chart is an overview of the results of operations of the company’s residential property products (in 000’s).

	Nine-Mos. Ended Sept. 30,						Three-Mos Ended Sept. 30,
	2005		2004				2005			2004
Residential Property
Direct and Assumed Written Premiums	$	324,603	$	326,372	(0.5	)%	$	114,953		$	112,907	1.8	%
Net Written Premiums	$	294,633	$	307,136	(4.1	)%	$	97,391		$	105,233	(7.5	)%
Net Earned Premium	$	285,112	$	301,580	(5.5	)%		87,745			99,591	(11.9	)%
Service Fees		4,324		4,212	2.7	%		1,457			1,476	(1.3	)%
Total Revenues	$	289,436	$	305,792	(5.3	)%	$	89,202		$	101,067	(11.7	)%
Pre-Tax Income (Loss)	$	28,907	$	30,235			$	(4,005	)	$	2,762

On a year-to-date basis, manufactured housing direct and assumed written premiums remained level at $257.7 million for both 2005 and 2004. Site-built dwelling direct and assumed written premiums decreased to $65.2 million in the first nine months of 2005 compared to $67.0 million in 2004. The decrease in pre-tax income was due to the higher level of catastrophe losses in 2005 compared to 2004.

Manufactured housing direct and assumed written premiums for the third quarter of 2005 increased to $91.4 million compared to $89.3 million for the third quarter of 2004. Site-built dwelling direct and assumed written premiums remained level at $23.0 million in the third quarter of both 2005 and 2004. The decrease in pre-tax income was due to the higher level of catastrophe losses experienced in the third quarter of 2005 compared to the same period in 2004.

Recreational Casualty

     The following chart is an overview of the results of operations of the company’s recreational casualty products (in 000s).

	Nine-Mos. Ended Sept. 30,							Three-Mos Ended Sept. 30,
	2005		2004					2005			2004
Recreational Casualty
Direct and Assumed Written Premiums	$	83,592	$	93,779		(10.9	)%	$	25,498		$	27,714		(8.0	)%
Net Written Premiums	$	81,523	$	92,583		(11.9	)%	$	23,998		$	27,104		(11.5	)%
Net Earned Premium	$	78,134	$	91,215		(14.3	)%	$	24,522		$	29,286		(16.3	)%
Service Fees		1,816		1,709		6.3	%		612			599		2.2	%
Total Revenues	$	79,950	$	92,924		(14.0	)%	$	25,134		$	29,885		(15.9	)%
Pre-Tax Income (Loss)	$	7,736	$	(1,512	)			$	(2,509	)	$	(7,286	)

Direct and assumed written premiums for our casualty products decreased due primarily to motorcycle premiums decreasing by $9.6 million in the first nine months of 2005 compared to 2004 and decreasing by $2.1 million in the third quarter of 2005 compared to the third 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 93.2% for the first nine months of 2005 compared to 106.6% in 2004. The motorcycle combined ratio decreased to 114.9% in the third quarter of 2005 compared to 115.1% in the third quarter of 2004. The watercraft product also contributed $2.3 million to the improved pre-tax income in the third quarter of 2005 due primarily to less catastrophe losses experienced in the third quarter of 2005 compared to 2004.

Financial Institutions

     The following chart is an overview of the results of operations of the company’s financial institutions insurance products (in 000s).

	Nine-Mos. Ended Sept. 30,						Three-Mos Ended Sept. 30,
	2005		2004				2005		2004
Financial Institutions
Direct and Assumed Written Premiums	$	53,640	$	75,921	(29.3	)%	$	20,981	$	26,697	(21.4	)%
Net Written Premiums	$	48,781	$	74,450	(34.5	)%	$	18,857	$	25,816	(27.0	)%
Net Earned Premium/Total Revenues	$	57,184	$	59,555	(4.0	)%	$	18,770	$	22,556	(16.8	)%
Pre-Tax Income	$	7,850	$	4,049			$	3,291	$	1,220

The decrease in direct and assumed written premiums for our financial institutions insurance products was driven primarily by the collateral protection and mortgage fire products which decreased $11.9 million and $6.2 million, respectively, in the first nine months of 2005 compared to the first nine months of 2004. Direct and assumed written premiums decreased in the third quarter of 2005 compared to 2004 primarily due to a $4.3 million decrease in the mortgage fire product. The decrease in mortgage fire written premiums resulted from the sale of a mortgage portfolio serviced by one of our agents within this line.

The collateral protection written premiums were higher in 2004 due to the assumption of a new book of collateral protection business in 2004. This transaction included a one-time assumption of $13.6 million of unearned premiums that was included in direct and assumed written premiums during the second quarter of 2004.

All Other Insurance

The following chart is an overview of the results of operations of the company’s other insurance products (in 000s).

	Nine-Mos. Ended Sept. 30,						Three-Mos Ended Sept. 30,
	2005		2004				2005		2004
All Other Insurance
Direct and Assumed Written Premiums	$	99,032	$	83,026	19.3	%	$	34,471	$	31,117	10.8	%
Net Written Premiums	$	64,845	$	51,437	26.1	%	$	21,788	$	22,410	(2.8	)%
Net Earned Premium/Total Revenues	$	55,568	$	55,325	0.4	%	$	17,988	$	17,732	1.4	%
Pre-Tax Income	$	17,531	$	7,658			$	5,422	$	5,517

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 nine months of 2005 compared to the first nine months of 2004. Excess and surplus lines direct and assumed written premiums increased $8.9 million to $41.5 million in the first nine months of 2005 from $32.6 million in the first nine months of 2004. Credit life direct and assumed written premiums increased $4.2 million to $27.6 million in 2005 from $23.4 million in 2004.

The improvement in profitability in the first nine months of 2005 compared to 2004 was due primarily to the increased profitability related to the excess and surplus lines product and the manufactured housing park and dealer commercial property products.

ALL INSURANCE

Investment Income and Realized Capital Gains

Net investment income increased to $10.1 million in the third quarter of 2005 from $9.3 million in the prior year’s third quarter. On a year-to-date basis, net investment income increased to $30.2 million in 2005 from $27.1 million in the prior year. This increase is due primarily to the increase in the size of the investment portfolio. The increase in portfolio size was due primarily to positive cash flow generated from operations. Reinvestment rates continue to be low due to the current interest rate environment. The annualized pre-tax equivalent investment yield, on a cost basis, of American Modern’s fixed income portfolio was 5.3% in the first nine months of 2005 compared to 5.2% 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):

	Nine Months Ended Sept. 30, 2005						Nine Months Ended Sept. 30, 2004
	Pre-Tax		After-Tax		Earnings		Pre-Tax			After-Tax			Earnings
	Gain (Loss)		Gain (Loss)		Per Share		Gain (Loss)			Gain (Loss)			Per Share
Capital Gains	$	4,066	$	2,643	$	0.14	$	6,540		$	4,251		$	0.22
Derivatives		1,312		853		0.04		(814	)		(529	)		(0.03	)
Total Realized Investment Gains	$	5,378	$	3,496	$	0.07	$	5,726		$	3,722		$	0.19

	Three Months Ended Sept. 30, 2005						Three Months Ended Sept. 30, 2004
	Pre-Tax		After-Tax		Earnings		Pre-Tax			After-Tax			Earnings
	Gain (Loss)		Gain (Loss)		Per Share		Gain (Loss)			Gain (Loss)			Per Share
Capital Gains	$	1,375	$	894	$	0.05	$	1,374		$	893		$	0.05
Derivatives		1,787		1,161		0.06		(1,056	)		(686	)		(0.04	)
Total Realized Investment Gains	$	3,162	$	2,055	$	0.11	$	318		$	207		$	0.01

The Company experienced no other-than-temporary impairments during the nine and three month periods of 2005 or 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 third quarter of 2005 decreased 20.3% to $86.7 million from $108.8 million in the prior year’s third quarter. Losses and loss adjustment expenses reported in the Condensed Consolidated Statements of Operations are presented net of the impact of reinsurance. The decrease in losses was due primarily to the improved loss experience related to several products including the manufactured housing, motorcycle, excess and surplus lines and mortgage fire products.

On a year-to-date basis, losses and loss adjustment expenses decreased 19.9% to $221.5 million in 2005 from $276.7 million in 2004. American Modern experienced a decrease in losses across many of its products, but the decrease was due primarily to the improved loss experience related to the manufactured housing, excess and surplus lines, mortgage fire and motorcycle products. In addition, catastrophe losses as a percentage of earned premiums improved as they contributed 7.4 percentage points to the combined ratio in the first nine months of 2005 compared to 8.1 percentage points in 2004.

Insurance Commissions and Other Policy Acquisition Costs

American Modern’s commissions and other policy acquisition costs increased 5.4% to $45.5 million in the third quarter of 2005 from $43.2 million in the third quarter of 2004. On a year-to-date basis, American Modern’s commissions and other policy acquisition costs increased 0.8% to $147.6 million in 2005 compared to $146.5 million in 2004. These increases are due primarily to increases in performance-based commissions in 2005 compared to 2004.

M/G Transport

M/G Transport, Midland’s transportation subsidiary, reported revenues for the third quarter of 2005 of $8.9 million compared to $12.0 million in the prior year’s third quarter. Pre-tax operating profit was $0.9 million in the current quarter as compared to $0.6 million in the prior year’s third quarter. On a year-to-date basis, M/G Transport’s revenues were $31.6 million in 2005 compared to $32.7 million in 2004. Pre-tax income improved to $2.9 million in 2005 compared to $1.3 million in 2004. M/G Transport’s results in 2005 compared to 2004 were impacted by changes in customer mix combined with changes in market conditions.

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 September 30, 2005, the aggregate obligations on a consolidated basis were as follows (amounts in $000’s):

			Payments Due by Period
			Less than		2nd-5th		After 5
	Total		1 Year		Years		Years
Long-term debt	$	68,310	$	15,340	$	44,774	$	8,196
Junior subordinated debentures		24,000		—		—		24,000
Other notes payable		13,167		13,167		—		—
Annual commitments under non-cancelable leases		6,559		1,166		2,855		2,538
Purchase obligations		25,964		12,852		13,112		—
Other obligations		293		293		—		—
Insurance policy loss reserves		356,462		245,035		95,177		16,250
Total	$	494,755	$	287,853	$	155,918	$	50,984

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.

In October of 2005, M/G Transport also committed to purchase an additional 20 barges for approximately $8.1 million. The payments required under this contract are in addition to the purchase obligations noted in the above table and are currently forecasted to occur in the 2 to 5 year timeframe.

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.

Other Items

Long term debt increased $9.6 million to $68.3 million at September 30, 2005 compared to $58.7 million at December 31, 2004. The increase is due to the long term financing related to the Company’s purchase of transportation equipment.

No shares were repurchased in the open market under the Company’s share repurchase program during the first nine 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 nine month period ended September 30, 2005, the Company repurchased approximately $0.6 million of treasury shares in connection with associate stock incentive programs. The Company repurchased $0.1 million of treasury shares related to this program during the third quarter of 2005.

We expect that our existing cash and other liquid investments, coupled with future operating cash flows and our short-term borrowing capacity, will meet our operating cash requirements for the next 12 months.

Holding Company Operations

Midland and American Modern are holding companies which rely primarily on dividends and management fees from subsidiaries to assist in servicing debt, paying operating expenses and paying dividends to the respective shareholders. The payment of dividends to these holding companies from American Modern’s insurance subsidiaries is restricted by state regulatory agencies. Such restrictions, however, have not had, and are not expected to have, a significant impact on the Company’s, or American Modern’s, liquidity or ability to meet their respective long or short-term operating, financing or capital obligations.

Midland has a commercial paper program under which qualified purchasers may invest in the short-term unsecured notes of Midland. As of September 30, 2005, Midland had $4.2 million of commercial paper debt outstanding, $3.3 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 3.7% as of September 30, 2005, a rate that management considers to be competitive with the market rates offered for similar instruments. As of September 30, 2005, Midland also had $83.0 million of conventional short-term credit lines available at costs not exceeding prime borrowing rates, of which $9.0 million was outstanding. These short-term borrowings decreased $20.0 million since December 31, 2004. The Company was able to reduce these short-term borrowings primarily through the positive cash flow generated from operations. 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 September 30, 2005, the outstanding balance of this mortgage was $14.1 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. 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 0.5% to $966.1 million at September 30, 2005 from $971.4 million at December 31, 2004. The investment portfolio balance was impacted by a $22.6 million decrease in unrealized appreciation in the market value of securities. This decrease was offset by additional cash invested which was generated through positive operating cash flows. The decrease in the unrealized appreciation was due to a $14.4 million decrease in unrealized appreciation related to the fixed income portfolio combined with an $8.2 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 $69.1 million in market value as of September 30, 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):

Unrealized Gain (Loss) as of September 30, 2005

	Unrealized			Fair		# of
	Gain (Loss)			Value		Positions
Fixed Income Securities
Total held in a gain position	$	15,639		$	448,948		512
Held in a loss position for less than 3 months		(2,181	)		200,515		173
Held in a loss position for more than 3 months and less than 9 months		(1,212	)		59,511		101
Held in a loss position for more than 9 months and less than 18 months		(1,082	)		48,787		64
Held in a loss position for more than 18 months		(431	)		13,138		17
Fixed income total	$	10,733		$	770,899		867

	Unrealized			Fair		# of
	Gain (Loss)			Value		Positions
Equity Securities
Total held in a gain position	$	83,718		$	167,374		152
Held in a loss position for less than 3 months		(221	)		8,986		15
Held in a loss position for more than 3 months and less than 9 months		(485	)		7,212		9
Held in a loss position for more than 9 months and less than 18 months		(243	)		1,911		5
Held in a loss position for more than 18 months		(65	)		610		1
Equity total	$	82,704		$	186,093		182
Total fixed income and equity	$	93,437		$	956,992		1,049
Accrued interest and dividends					9,151
Total per balance sheet				$	966,143

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 September 30, 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 September 30, 2005 was 4.9 years which management believes provides adequate asset/liability matching. The duration has increased to 4.9 years from 4.4 years as of September 30, 2004 as Midland has increased its investment in longer term municipal bonds.

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 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 $7.0 million for the first nine months of 2005 and a total of $25.7 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 cash expenditures of $12 million to $14 million during 2005, an additional $20 million to $25 million 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 $16.3 million at September 30, 2005.

American Modern has a $72.0 million long-term credit facility available on a revolving basis at various rates. As of September 30, 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 September 30, 2005 was less than $(0.1) million and is included in other payables and accruals.

At September 30, 2005, Midland’s accounts receivable increased $21.9 million compared to December 31, 2004. The increase was attributable to an increase in premiums due from both policyholders and agents which is driven primarily by increased written premiums in the third quarter of 2005 compared to the fourth quarter of 2004. 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 63% of American Modern’s accounts receivables relate to premium due directly from policyholders as of September 30, 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 increased to $218.3 million at September 30, 2005 compared to $87.7 million at December 31, 2004 and consisted of the following amounts (amounts in 000’s):

	September 30,		December 31,
	2005		2004
Prepaid reinsurance premiums		45,587		40,215
Reinsurance recoverable – unpaid losses		149,798		37,873
Reinsurance recoverable – paid losses		22,885		9,638
Total	$	218,270	$	87,726

Prepaid reinsurance premiums increased primarily due to the increased premiums related to the Company’s excess and surplus lines business. Reinsurance loss recoverables increased due to the significant losses related to hurricanes Katrina and Rita.

Property, plant and equipment increased $15.8 million to $84.1 million at September 30, 2005 compared to $68.3 million at December 31, 2004. The increase was due to the purchase of transportation equipment combined with the additional capitalization of modernLINK development costs.

The $123.6 million increase in insurance loss reserves at September 30, 2005 compared to December 31, 2004 is due to the impact of hurricanes Katrina and Rita. A large portion of these loss reserves are subject to reinsurance and are reflected as reinsurance recoverables as noted above.

Long term debt increased $9.6 million to $68.3 million at September 30, 2005 compared to $58.7 million at December 31, 2004. The increase is due to the long term financing related to the Company’s purchase of transportation equipment.

Cash flow from the insurance operations is expected to remain sufficiently positive to meet American Modern’s future operating requirements and to provide for reasonable dividends to Midland.

Transportation

M/G Transport generates its cash inflows primarily from affreightment revenue. Its primary outflows of cash relate to the payment of barge charter costs, debt service obligations, operating expenses, income taxes, dividends to Midland and the acquisition of capital equipment. As of September 30, 2005, the transportation subsidiaries had $18.2 million of collateralized equipment obligations outstanding. Like the insurance operations, cash flow from the transportation subsidiaries is expected to remain sufficiently positive to meet future operating requirements.

OTHER MATTERS

Comprehensive Income

The only differences between the Company’s net income and comprehensive income is the net after-tax change in unrealized gains on marketable securities and the after-tax change in the fair value of the interest rate swap agreement. For the nine and three month periods ended September 30, 2005 and 2004, such changes increased or (decreased), net of related income tax effects, by the following (amounts in $000’s):

	Nine Months Ended Sept. 30,						Three Months Ended Sept. 30,
	2005			2004			2005			2004
Changes in net unrealized capital gains:
Equity securities	$	(5,359	)	$	(3,124	)	$	(268	)	$	1,358
Fixed income securities		(9,355	)		(1,756	)		(7,108	)		8,840
Changes in fair value of interest rate swap hedge		258			470			57			62
Total	$	(14,456	)	$	(4,410	)	$	(7,319	)	$	10,260

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 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 September 30, 2005 and December 31, 2004:

	September 30,		December 31,
	2005		2004
Gross case base loss reserves:
Residential property	$	109,261	$	47,052
Recreational casualty		42,776		33,590
Financial institutions		8,740		12,004
All other insurance		59,365		53,669
Gross loss reserves incurred but not reported		98,169		64,783
Outstanding checks and drafts		38,151		21,817
Total insurance loss reserves	$	356,462	$	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

independent consulting actuaries to ensure that such estimates are within the actuaries’ acceptable range. The independent actuaries perform an extensive review of loss reserves at year end along with periodic reviews throughout the year to ensure that the recorded loss reserves are reasonably stated. 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 September 30, 2005, loss reserves, net of reinsurance recoverables, for our property and casualty companies totaled $162.7 million.

While management believes the amounts are fairly stated, the ultimate liability, once fully developed, may be more than or less than the recorded amount. Management believes that the likelihood that actual loss development patterns will differ significantly from past experience is remote given the short-tail, property oriented nature of the Company’s business. However, if the ultimate pay outs would significantly exceed the expected amounts, the company has several potential options to utilize in order to satisfy the additional obligations. The Company could liquidate a portion of its investment portfolio. In addition, American 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 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 September 30, 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 has entered into a limited number of reinsurance contracts where it assumes business from other insurance companies. 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 investment 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 September 30, 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 principal customer or supplier, debt downgrade, disposal of segment, etc.)

• near term prospects for improvement of the issuer and/or its industry to include relevant industry conditions and trends

• industry research and communications with industry specialists

• third party research reports

• credit rating reports

• financial models and expectations

• discussions with issuer’s management by investment manager

• our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery

• time to conversion with respect to a mandatory convertible security

For fixed income securities, we also consider the following factors:

• 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 September 30, 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.

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 supersedes 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.

In June 2005, FASB issued Statement No. 154, “Accounting Changes and Error Corrections”. Statement No. 154 requires that any change in the method of depreciation, amortization or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. This statement supersedes both APB Opinion No. 20 and FASB Statement No. 3, but contains elements of each. FASB has issued the new standard as part of its broader effort of developing a single set of high-quality accounting standards with the International Accounting Standards Board. Statement No. 154 will be effective for the Company for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

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 4.9 year duration of the Company’s fixed income portfolio as of September 30, 2005, management estimates that a 100 basis point increase in interest rates would decrease the market value of its $779.1 million fixed income portfolio by 4.9%, or $38.2 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 September 30, 2005, the Company had $187.0 million in equity holdings, including $69.1 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 $6.9 million. As of September 30, 2005, the remainder of the Company’s portfolio of equity securities had a beta coefficient (a measure of stock price volatility) of 1.01. 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 10.1%.

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 quarter ending September 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Midland Company
Cincinnati, Ohio

We have reviewed the accompanying condensed consolidated balance sheet of The Midland Company and subsidiaries (the “Corporation”) as of September 30, 2005, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2005 and 2004, and of cash flows and changes in shareholders’ equity for the nine-month periods ended September 30, 2005 and 2004. These interim financial statements are the responsibility of the Corporation’s management.

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 (such report includes an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangibles,” in 2002). 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.

/s/ Deloitte & Touche LLP

Cincinnati, Ohio

November 7, 2005

PART II. OTHER INFORMATION
THE MIDLAND COMPANY AND SUBSIDIARIES
SEPTEMBER 30, 2005

Item 1. Legal Proceedings

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

a)	None
b)	None
c)	During the nine and three month periods ended September 30, 2005, the Company did not purchase any of its equity securities pursuant to a publicly announced plan or program. However, during the nine and three month periods ended September 30, 2005, the Company acquired 17,770 shares and 1,722 shares, respectively, in private transactions from employees in connection with its stock incentive plans. These transactions essentially accommodate employees’ funding requirements of the exercise price and tax liabilities arising from the exercise or receipt of equity-based incentive awards. Additionally, pursuant to the Company’s Salaried Employees’ 401(k) Savings Plan, the Company acquired 17,371 shares and 12,797 shares from the Plan during the nine and three month periods ended September 30, 2005, respectively.

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

     Exhibit 15 — Letter re: Unaudited Interim Financial Information

     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 COMPANY
Date November 7, 2005	/s/ John I. Von Lehman
	John I. Von Lehman, Executive Vice President,
	Chief Financial Officer and Secretary

EX-15

Exhibit 15

LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION

November 7, 2005

The Midland Company
7000 Midland Blvd.
Cincinnati, Ohio

We have made a review, in accordance with standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim financial information of The Midland Company and subsidiaries for the periods ended September 30, 2005 and 2004, as indicated in our report dated November 4, 2005; 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 nine-month period ended September 30, 2005, is incorporated by reference in Registration Statement No. 33-48511, 333-40560, and 333-101390 on Form S-8 and Registration Statement No. 33-64821, 333-109867, 333-115355, 333-115354, and 333-128492 on Form S-3.

We also are 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

Cincinnati, Ohio

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934

     I, John W. Hayden, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of The Midland Company;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

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     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2005

/s/ John W. Hayden  

President and Chief Executive Officer 

(Principal Executive Officer) 

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EX-31.2

Exhibit 31.2

Certification of Principal Financial Officer
Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934

     I, John I. Von Lehman, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of The Midland Company;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

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     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2005

/s/John I. Von Lehman  

Executive Vice President, Chief  

Financial Officer and Secretary
(Principal Financial Officer) 

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EX-32

EXHIBIT 32

CERTIFICATION OF

CHIEF EXECUTIVE OFFICER AND

CHIEF FINANCIAL OFFICER

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002

In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of The Midland Company (the “Company”) on Form 10-Q for the period ending September 30, 2005 (the “Report”), John W. Hayden, Chief Executive Officer of the Company, and John I. Von Lehman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John W. Hayden	/s/ John I. Von Lehman
John W. Hayden	John I. Von Lehman
President and Chief Executive Officer	Executive Vice President,
	Chief Financial Officer and Secretary
November 7, 2005
	A signed original of this written statement required by Section 906 has been provided to The Midland Company and will be retained by The Midland Company and furnished to the Securities and Exchange Commission or its staff upon request.

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