UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2006

OR

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

For the transition period from              to             

Commission file number 1-6026

The Midland Company

(Exact name of registrant as specified in its charter)

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

7000 Midland Boulevard, Amelia, Ohio 45102-2607

(Address of principal executive offices)

(Zip Code)

(513) 943-7100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x.    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of common shares outstanding as of November 3, 2006 was 19,145,649.

PART I.

ITEM I. FINANCIAL INFORMATION

THE MIDLAND COMPANY

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2006 AND DECEMBER 31, 2005

Amounts in 000’s

(Unaudited)

	September 30, 2006		December 31, 2005
ASSETS
MARKETABLE SECURITIES AVAILABLE FOR SALE:
Fixed income (cost, $779,364 at September 30, 2006 and $743,354 at December 31, 2005)	$	787,036	$	751,651
Equity (cost, $113,759 at September 30, 2006 and $109,020 at December 31, 2005)		212,997		195,445
Total		1,000,033		947,096
CASH		5,487		3,368
ACCOUNTS RECEIVABLE - NET		147,903		137,125
REINSURANCE RECOVERABLES AND PREPAID REINSURANCE PREMIUMS		123,996		132,737
PROPERTY, PLANT AND EQUIPMENT - NET		102,679		89,888
DEFERRED INSURANCE POLICY ACQUISITION COSTS		102,916		88,374
OTHER ASSETS		33,976		29,525
TOTAL ASSETS	$	1,516,990	$	1,428,113

See notes to condensed consolidated financial statements.

THE MIDLAND COMPANY

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2006 AND DECEMBER 31, 2005

Amounts in 000’s

(Unaudited)

	September 30, 2006			December 31, 2005
LIABILITIES & SHAREHOLDERS’ EQUITY
UNEARNED INSURANCE PREMIUMS	$	459,961		$	395,007
INSURANCE LOSS RESERVES		226,248			254,660
INSURANCE COMMISSIONS PAYABLE		44,474			41,900
FUNDS HELD UNDER REINSURANCE AGREEMENTS AND REINSURANCE PAYABLES		13,711			11,655
LONG-TERM DEBT		66,828			67,766
OTHER NOTES PAYABLE		7,654			20,005
DEFERRED FEDERAL INCOME TAX		43,477			38,350
OTHER PAYABLES AND ACCRUALS		84,960			90,393
JUNIOR SUBORDINATED DEBENTURES		24,000			24,000
TOTAL LIABILITIES		971,313			943,736
COMMITMENTS AND CONTINGENCIES		—			—
SHAREHOLDERS’ EQUITY:
Common stock (issued and outstanding: 19,147 shares at September 30, 2006 and 18,964 shares at December 31, 2005 after deducting treasury stock of 3,859 shares and 4,042 shares, respectively)		959			959
Additional paid-in capital		63,505			57,061
Retained earnings		457,287			411,210
Accumulated other comprehensive income		65,815			57,863
Treasury stock - at cost		(41,889	)		(42,716	)
TOTAL SHAREHOLDERS’ EQUITY		545,677			484,377
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,516,990		$	1,428,113

See notes to condensed consolidated financial statements.

THE MIDLAND COMPANY

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

Amounts in 000’s (except per share information)

(Unaudited)

	Nine-Mos. Ended Sept. 30,				Three-Mos. Ended Sept. 30,
	2006		2005		2006		2005
REVENUES:
Premiums earned	$	497,226	$	473,226	$	175,726	$	147,946
Other insurance income		9,747		9,542		3,284		3,148
Net investment income		30,978		30,247		10,474		10,128
Net realized investment gains		5,492		5,378		1,094		3,162
Transportation		38,475		31,554		14,235		8,859
Total		581,918		549,947		204,813		173,243
COSTS AND EXPENSES:
Losses and loss adjustment expenses		234,788		221,452		81,949		86,742
Commissions and other policy acquisition costs		154,334		147,584		56,405		45,539
Operating and administrative expenses		88,507		83,320		30,194		27,294
Transportation operating expenses		32,372		28,563		11,904		8,019
Interest expense		4,016		4,853		1,281		1,774
Total		514,017		485,772		181,733		169,368
INCOME BEFORE FEDERAL INCOME TAX		67,901		64,175		23,080		3,875
PROVISION FOR FEDERAL INCOME TAX		18,316		18,850		5,735		143
NET INCOME	$	49,585	$	45,325	$	17,345	$	3,732
BASIC EARNINGS PER SHARE OF COMMON STOCK:	$	2.60	$	2.40	$	0.91	$	0.20
DILUTED EARNINGS PER SHARE OF COMMON STOCK:	$	2.53	$	2.34	$	0.88	$	0.19
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.18375	$	0.16875	$	0.06125	$	0.05625

2005 results have been adjusted to reflect the retrospective application of FAS 123(R ), which the Company adopted in the 4th quarter of 2005.

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, 2006 AND 2005

Amounts in 000’s

(Unaudited)

	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Com- prehensive Income			Treasury Stock			Total			Compre- hensive Income
BALANCE, DECEMBER 31, 2004	$	959	$	51,184	$	350,141		$	73,027		$	(43,035	)	$	432,276
Comprehensive income:
Net income						45,325									45,325		$	45,325
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																	$	30,869
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
Stock Option Expense				1,497											1,497
BALANCE, SEPTEMBER 30, 2005	$	959	$	55,962	$	392,276		$	58,571		$	(42,579	)	$	465,189
BALANCE, DECEMBER 31, 2005	$	959	$	57,061	$	411,210		$	57,863		$	(42,716	)	$	484,377
Comprehensive income:
Net income						49,585									49,585		$	49,585
Increase in unrealized gain on marketable securities, net of related income tax effect of $4,236									7,952						7,952			7,952
Total comprehensive income																	$	57,537
Purchase of treasury stock												(1,650	)		(1,650	)
Issuance of treasury stock for options exercised and employee savings plan				3,756								2,477			6,233
Cash dividends declared						(3,508	)								(3,508	)
Federal income tax benefit related to the exercise or granting of stock awards				703											703
Stock Option Expense				1,985											1,985
BALANCE, SEPTEMBER 30, 2006	$	959	$	63,505	$	457,287		$	65,815		$	(41,889	)	$	545,677

See notes to condensed consolidated financial statements.

2005 results have been adjusted to reflect the retrospective application of FAS 123(R), which the Company adopted in the 4th quarter of 2005.

THE MIDLAND COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

Amount in 000’s

(Unaudited)

	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	49,585		$	45,325
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,307			8,195
Stock-based compensation		3,335			3,090
Net realized investment gains		(4,809	)		(4,066	)
Changes in:
Unearned insurance premiums		43,213			21,688
Deferred insurance policy acquisition costs		(8,840	)		(4,171	)
Reinsurance recoverables and prepaid reinsurance premiums		17,633			(130,544	)
Net accounts receivable		(10,561	)		(21,867	)
Insurance loss reserves		(31,130	)		123,547
Funds held under reinsurance agreements and reinsurance payables		1,906			3,992
Other accounts payable and accruals		(5,179	)		4,147
Other assets		335			(1,053	)
Insurance commissions payable		2,564			(1,689	)
Other-net		1,292			2,182
Net cash provided by operating activities		66,651			48,776
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired		(15,534	)		—
Purchase of marketable securities		(269,156	)		(385,397	)
Sale of marketable securities		215,755			333,399
Decrease (increase) in cash equivalent marketable securities		18,777			(39,834	)
Maturity of marketable securities		18,705			76,274
Acquisition of property, plant and equipment		(32,461	)		(24,018	)
Proceeds from sale of property, plant and equipment		12,919			151
Net cash used in investing activities		(50,995	)		(39,425	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in net short-term borrowings		(12,351	)		(20,010	)
Issuance of treasury stock		4,254			3,412
Dividends paid		(3,402	)		(3,090	)
Purchase of treasury stock		(1,650	)		(1,347	)
Issuance (repayment) of long-term debt		(938	)		9,581
Excess tax benefits from exercise of stock options		550			142
Net cash used in financing activities		(13,537	)		(11,312	)
NET INCREASE (DECREASE) IN CASH		2,119			(1,961	)
CASH AT BEGINNING OF PERIOD		3,368			6,858
CASH AT END OF PERIOD	$	5,487		$	4,897
INTEREST PAID	$	4,519		$	4,354
INCOME TAXES PAID	$	20,250		$	18,600

See notes to the condensed consolidated financial statements.

2005 results have been adjusted to reflect the retrospective application of FAS 123(R), which the Company adopted in the 4th quarter of 2005.

THE MIDLAND COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(Unaudited)

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, 2005 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, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2005 included in Midland’s Annual Report on Form 10-K.

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:
2006	19,050	19,585
2005	18,878	19,369
Three months ended September 30:
2006	19,109	19,644
2005	18,914	19,401

3. INCOME TAXES

The federal income tax provisions for the nine and three month periods ended September 30, 2006 and 2005 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,
	2006			2005			2006			2005
Federal income tax at statutory rate	$	23,765		$	22,461		$	8,078		$	1,356
Tax effect of:
Tax exempt interest and excludable dividend income		(5,877	)		(3,812	)		(1,983	)		(1,291	)
Other - net		428			201			(360	)		78
Provision for federal income tax	$	18,316		$	18,850		$	5,735		$	143

4. SEGMENT DISCLOSURES

Since the Company’s annual report for 2005, 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 2006 and 2005 is as follows (000’s):

	Nine Months Ended Sept. 30, 2006								Nine Months Ended Sept. 30, 2005
	Total Assets			Revenues- External Customers		Pre-Tax Income (Loss)			Total Assets			Revenues- External Customers		Pre-Tax Income (Loss)
Reportable Segments:
Insurance:
Residential property		n/a		$	295,999	$	28,585			n/a		$	289,436	$	28,907
Recreational casualty		n/a			73,487		6,682			n/a			79,950		7,736
Financial institutions		n/a			74,392		9,395			n/a			57,814		7,850
All other insurance		n/a			63,095		17,675			n/a			55,568		17,531
Unallocated insurance	$	1,392,348			—		5,170		$	1,420,363			—		4,352
Transportation		52,586			38,475		5,907			49,946			31,554		2,883
Corporate and all other		116,451			—		(5,513	)		97,786			—		(5,084	)
Intersegment Eliminations		(44,395	)		—		—			(37,257	)		—		—
Total	$	1,516,990		$	545,448	$	67,901		$	1,530,838		$	514,322	$	64,175
	Three Months Ended Sept. 30, 2006								Three Months Ended Sept. 30, 2005
	Total Assets			Revenues- External Customers		Pre-Tax Income (Loss)			Total Assets			Revenues- External Customers		Pre-Tax Income (Loss)
Reportable Segments:
Insurance:
Residential property		n/a		$	100,909	$	15,281			n/a		$	89,202	$	(4,005	)
Recreational casualty		n/a			24,263		(1,178	)		n/a			25,134		(2,509	)
Financial institutions		n/a			30,471		4,212			n/a			18,770		3,291
All other insurance		n/a			23,367		3,126			n/a			17,988		5,422
Unallocated insurance	$	1,392,348			—		1,010		$	1,420,363			—		2,777
Transportation		52,586			14,235		2,259			49,946			8,859		908
Corporate and all other		116,451			—		(1,630	)		97,786			—		(2,009	)
Intersegment Eliminations		(44,395	)		—		—			(37,257	)		—		—
Total	$	1,516,990		$	193,245	$	23,080		$	1,530,838		$	159,953	$	3,875

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, 2006 and 2005.

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.

5. STOCK OPTIONS AND AWARD PLANS

During the fourth quarter of 2005, the Company elected to early adopt SFAS 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”) under the modified retrospective approach, restating only prior interim periods in fiscal 2005. As a result, the Company has applied SFAS 123(R) to new awards after January 1, 2005. Additionally, compensation cost for the portion of awards for which the requisite service had not been rendered, that were outstanding as of January 1, 2005, are being recognized as the requisite service is rendered on or after January 1, 2005 (generally over the remaining option vesting period). The compensation cost for that portion of awards has been based on the grant-date fair value of those awards as calculated previously for pro forma disclosures. For the nine and three month periods ended September 30, 2006, the Company recognized $1,985,000 and $546,000, respectively, of expense related to stock options compared to $1,497,000 and $435,000 for the nine and three month periods ended September 30, 2005, respectively.

The Company also has a performance stock award program. Under this program, shares vest after a three-year performance measurement period and will only be awarded if pre-established performance levels have been achieved. The expected fair value of these awards is charged to compensation expense over the performance period. The Company recognized $1,350,000 and $450,000 of expense related to performance stock awards for the nine and three month periods ended September 30, 2006 compared to $1,593,000 and $531,000 for the nine and three month periods ended September 30, 2005.

6. DERIVATIVE FINANCIAL INSTRUMENTS

At September 30, 2006 and 2005, Midland’s investment portfolio included approximately $25.4 million and $43.5 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, 2006, Midland recorded pre-tax realized gains (losses) on these securities of $683,000 and $(201,000), respectively. 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.

During March 2002, Midland entered into a series of interest rate swap agreements to convert $30 million of its floating-rate debt to a fixed rate. The swaps matured on December 1, 2005. The swaps qualified as cash flow hedges and were deemed to be 100% effective and thus the changes in the fair value of the swap agreements were recorded as a separate component of shareholders’ equity and had no income statement impact. At September 30, 2005, the derivative gain recorded in Other Comprehensive Income, net of deferred taxes, amounted to $257,000. As the swaps matured in December 2005, there was no impact on Comprehensive Income for the period ended September 30, 2006.

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, 2006 and 2005 are as follows (000’s):

	Nine Months Ended Sept. 30,						Three Months Ended Sept. 30,
	2006			2005			2006			2005
Service cost	$	685		$	626		$	231		$	184
Interest cost		1,300			1,233			438			425
Expected return on assets		(1,247	)		(1,182	)		(437	)		(396	)
Amortization of prior service cost		23			23			7			7
Amortization of net loss		360			260			122			112
Net periodic cost	$	1,121		$	960		$	361		$	332

The Company paid its required cash contribution of approximately $0.6 million for the 2005 plan year, which was due in 2006, during 2005. The Company also contributed an additional $1.0 million for the 2005 plan year during July 2006. Consequently, the Company has no additional required cash contribution for the 2006 plan year.

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, 2006 was $7.7 million, $6.7 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 5.41% as of September 30, 2006, a rate that is considered to be competitive with the market rates offered for similar instruments.

9. ACQUISITIONS

In July 2006, the Company acquired all of the outstanding stock of Southern Pioneer Life Insurance Company, a privately held insurance company located in Trumann, Arkansas. Southern Pioneer has written credit life and disability insurance since 1980 and its annualized credit insurance premiums are approximately $15 million. While the Company has substantially completed the purchase price allocation, there is the potential for adjustments in future periods up to a year from the date of purchase. Operating results emanating from this purchase are reported in the “All other insurance” segment.

10. NEW ACCOUNTING STANDARDS

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140,” which permits fair value remeasurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133; and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS No. 155 is effective for all financial instruments acquired or issued in a fiscal year beginning after September 15, 2006. The Company is currently assessing the impact that SFAS No. 155 will have on its consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of

a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related de-recognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. The interpretation is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact of this new pronouncement on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The Company is assessing the impact that FAS 157 will have on its consolidated financial statements.

Also in September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement No. 87, 88, 106 and 132(R)” (“FAS 158”). This Standard requires recognition of the funded status of a benefit plan in the statement of financial position. The Standard also requires recognition in other comprehensive income certain gains and losses that arise during the period but are deferred under pension accounting rules, as well as modifies the timing of reporting and adds certain disclosures. The recognition and disclosure elements of FAS 158 are effective for fiscal years ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company is still assessing the impact that FAS 158 will have on its consolidated financial statements. However, based on the Company’s year end 2005 position, shareholders’ equity would have been reduced by approximately 2%.

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 Private 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 2006 and beyond. In some cases you can identify forward-looking statements by such terms as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions or the negative versions of such expressions. These forward-looking statements reflect Midland’s current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that may cause results to differ materially from those anticipated in those statements. Many of the factors that will determine future events or achievements are beyond Midland’s ability to control or predict. 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, the financial condition of the Company’s 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. Midland qualifies all of its forward-looking statements by these cautionary statements.

INTRODUCTION

The Midland Company is a highly focused provider of specialty insurance products and services through its American Modern Insurance Group subsidiary (American Modern), which contributes approximately 93% of the Company’s revenues. The Company also maintains a profitable investment in a niche river transportation business, M/G Transport Services, Inc. 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. Approximately 41% of American Modern’s property and casualty and credit life direct and assumed written premium relates to physical damage insurance and related coverages on manufactured homes, generally written for a term of 12 months with many coverages similar to homeowner’s insurance policies. Our 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.

American Modern controls eight property and casualty insurance companies, seven 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

Exposure Management

American Modern’s catastrophe reinsurance program is a significant aspect of our exposure management. Our 2006 reinsurance structure is similar to the 2005 program with a $3.0 million increase in retention, from $7 million to $10 million, and the purchase of an additional $40 million of protection on top of our previous $110 million cover. Due to the volatile weather patterns of 2005, we will absorb a significant increase in our base reinsurance cost in 2006 which will nearly double the base cost of 2005. This increase, along with the additional cover, will adversely impact our 2006 earnings per share by approximately 42 cents. We have already begun efforts to recoup these costs through appropriate rate increases, commission adjustments and/or product changes. However, this is a process that takes some time, including additional time after state approvals to get the new rates and product changes into place within the renewal book and earned premium. These efforts are producing minimal benefit to our 2006 profits, and likely will not be fully realized until 2007.

Diversification – Growth of Non-Manufactured Housing Products

American Modern has continued to experience significant premium growth in non-manufactured housing product lines, including site built dwelling, mortgage fire, credit life and excess and surplus lines. Our direct and assumed written premiums also benefited from a strategic alliance under which we assume a portion of a ceding company’s personal lines homeowners business through a quota share reinsurance contract. This alliance contributed $13.4 million in assumed written premiums during the second and third quarters of 2006 and is expected to contribute approximately $20 million for the full year of 2006. We also received final regulatory approval of our acquisition of Southern Pioneer Life Insurance Company in the first half of July 2006. This acquisition contributed $3.5 million of direct and assumed written premiums in the third quarter of 2006 and is expected to reach approximately $8 million of direct and assumed written premiums by the end of 2006.

Collectively, our non-manufactured housing direct and assumed written premiums grew 22.0% in the first nine months of 2006 compared to the first nine months of 2005. Non-manufactured housing products represented 59% and 61% of American Modern’s direct and assumed written premiums and related pre-tax profit, respectively, for the first nine months of 2006.

RESULTS OF OPERATIONS

The Midland Company reported net income of $17.3 million, or $0.88 per diluted share, for the third quarter of 2006 compared with $3.7 million, or $0.19 per diluted share, for the third quarter of 2005. Revenue for the third quarter of 2006 was $204.8 million compared to $173.2 million in the third quarter of 2005.

On a year to date basis, net income was $49.6 million, or $2.53 per diluted share, compared with $45.3 million, or $2.34 per diluted share, for the first nine months of 2005. Revenue for the first nine months of 2006 was $581.9 million compared to $549.9 million for the first nine months of 2005.

Financial Highlights

(amounts in thousands except per share data)

	Nine Months Ended Sept. 30,								Three Months Ended Sept. 30,
	2006			2005			%		2006			2005			%
Income Statement Data
Insurance Revenue	$	543,443		$	518,393		4.8	%	$	190,578		$	164,384		15.9	%
Transportation Revenue		38,475			31,554		21.9	%		14,235			8,859		60.7	%
Total Revenue	$	581,918		$	549,947		5.8	%	$	204,813		$	173,243		18.2	%
Net Income	$	49,585		$	45,325				$	17,345		$	3,732
Balance Sheet Data
Cash & Invested Assets	$	1,005,520		$	971,040		3.6	%
Total Assets	$	1,516,990		$	1,530,838		(0.9	)%
Total Debt	$	98,482		$	105,477		(6.6	)%
Shareholders’ Equity	$	545,677		$	465,189		17.3	%
Common Shares Outstanding		19,147			18,943
Per Share Data
Net Income (Diluted)	$	2.53		$	2.34				$	0.88		$	0.19
Dividends Declared	$	0.18375		$	0.16875		8.9	%	$	0.06125		$	0.05625		8.9	%
Market Value	$	43.32		$	36.03		20.2	%
Book Value	$	28.50		$	24.56		16.0	%
AMIG’s Property and Casualty Operations
Direct and Assumed Written Premiums	$	597,172		$	533,294		12.0	%	$	212,707		$	185,778		14.5	%
Net Written Premium	$	522,079		$	483,419		8.0	%	$	185,828		$	159,602		16.4	%
Combined Ratio Before Catastrophes		88.9	%		87.3	%				92.6	%		88.1	%
Catastrophe Effects on Combined Ratio		5.8	%		7.4	%				2.5	%		18.5	%
Combined Ratio		94.7	%		94.7	%				95.1	%		106.6	%

Overview of Revenues

The following chart provides detail related to the Company’s revenues for the nine and three month periods ended September 30, 2006 and 2005 ($000’s):

Revenues

	Nine-Mos. Ended Sept. 30,				Three-Mos. Ended Sept. 30,
	2006		2005		2006		2005
Insurance:
Residential property	$	295,999	$	289,436	$	100,909	$	89,202
Recreational casualty		73,487		79,950		24,263		25,134
Financial institutions		74,392		57,814		30,471		18,770
All other insurance		63,095		55,568		23,367		17,988
Total insurance		506,973		482,768		179,010		151,094
Net investment income		30,978		30,247		10,474		10,128
Net realized investment gains		5,492		5,378		1,094		3,162
Transportation		38,475		31,554		14,235		8,859
Total revenues	$	581,918	$	549,947	$	204,813	$	173,243

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, 2006 and 2005 (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 for physical damage and other property and casualty related coverages, net of premium ceded to reinsurers, are considered earned and are included in the financial results 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. The portion of written premium applicable to the unexpired terms of the policies is recorded as unearned premium in our condensed consolidated balance sheets.

	Nine-Mos. Ended Sept. 30, 2006						Nine-Mos. Ended Sept. 30, 2005
Business Segment	Gross Written Premium		Net Written Premium		Net Earned Premium		Gross Written Premium		Net Written Premium		Net Earned Premium
Residential Property	$	348.9	$	314.3	$	291.4	$	324.6	$	294.6	$	285.1
Recreational Casualty		78.3		77.1		72.1		83.6		81.5		78.1
Financial Institutions		90.1		83.0		74.4		53.7		48.8		57.2
All Other Insurance		113.5		58.0		59.3		99.0		64.9		52.8
Total	$	630.8	$	532.4	$	497.2	$	560.9	$	489.8	$	473.2
	Three-Mos. Ended Sept. 30, 2006						Three-Mos. Ended Sept. 30, 2005
Business Segment	Gross Written Premium		Net Written Premium		Net Earned Premium		Gross Written Premium		Net Written Premium		Net Earned Premium
Residential Property	$	119.4	$	106.3	$	99.4	$	115.0	$	97.4	$	87.7
Recreational Casualty		24.0		23.6		23.7		25.5		24.0		24.5
Financial Institutions		41.9		40.1		30.5		21.0		18.9		18.8
All Other Insurance		41.7		21.3		22.1		34.4		21.8		16.9
Total	$	227.0	$	191.3	$	175.7	$	195.9	$	162.1	$	147.9

For the nine and three month periods ended September 30, 2006, American Modern has continued to experience significant premium growth in non-manufactured housing product lines, including site built dwelling, mortgage fire, credit life and excess and surplus lines.

Residential Property

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

	Nine-Mos. Ended Sept. 30,						Three-Mos Ended Sept. 30,
	2006		2005				2006		2005
Residential Property
Direct and Assumed Written Premiums	$	348,926	$	324,603	7.5	%	$	119,432	$	114,953		3.9	%
Net Written Premiums	$	314,236	$	294,633	6.7	%	$	106,265	$	97,391		9.1	%
Net Earned Premium	$	291,375	$	285,112	2.2	%	$	99,374	$	87,745		13.3	%
Service Fees		4,624		4,324	7.0	%		1,535		1,457		5.4	%
Total Revenues	$	295,999	$	289,436	2.3	%	$	100,909	$	89,202		13.1	%
Pre-Tax Income (Loss)	$	28,585	$	28,907			$	15,281	$	(4,005	)

On a year-to-date basis, manufactured housing direct and assumed written premiums increased 1.1% to $259.5 million compared to $256.6 million in the first nine months of 2005. For the three month period ended September 30, 2006, manufactured housing direct and assumed written premiums decreased 3.1% to $88.0 million compared to $90.8 million for the same period in 2005. Manufactured housing premiums continue to be impacted by the decline in our lender business channel. For the nine month period ended September 30, 2006, site built dwelling direct and assumed written premiums increased 10.2% to $71.8 million. For the third quarter, site-built dwelling direct and assumed written premiums increased 8.6% to $24.9 million. In addition, direct and assumed written premiums increased in both the nine and three month periods ended September 30, 2006 due to the addition of a new strategic alliance which has resulted in $13.4 million and $4.7 million, respectively, of personal lines homeowners business through a quota share reinsurance contract.

The increase in pre-tax income for the three month period ended September 30, 2006 was due to the decrease in catastrophe losses in the third quarter of 2006 compared to the third quarter of 2005. Pre-tax income for the nine month period ended September 30, 2006 was relatively unchanged as the lower catastrophe losses in the third quarter of 2006 were offset by the increase in catastrophe losses experienced in the second quarter of 2006 as compared to 2005 combined with increased costs associated with our reinsurance program in 2006.

Recreational Casualty

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

	Nine-Mos. Ended Sept. 30,						Three-Mos Ended Sept. 30,
	2006		2005				2006			2005
Recreational Casualty
Direct and Assumed Written Premiums	$	78,271	$	83,592	(6.4	)%	$	23,997		$	25,498		(5.9	)%
Net Written Premiums	$	77,115	$	81,523	(5.4	)%	$	23,598		$	23,998		(1.7	)%
Net Earned Premium	$	72,165	$	78,134	(7.6	)%	$	23,824		$	24,522		(2.8	)%
Service Fees		1,322		1,816	(27.2	)%		439			612		(28.3	)%
Total Revenues	$	73,487	$	79,950	(8.1	)%	$	24,263		$	25,134		(3.5	)%
Pre-Tax Income (Loss)	$	6,682	$	7,736			$	(1,178	)	$	(2,509	)

The decrease in direct and assumed written premiums for our recreational casualty insurance products was driven by the motorcycle and watercraft products which decreased $2.2 million and $4.5 million, respectively, on a year-to-date basis and $0.2 million and $2.0 million, respectively, for the third quarter compared to similar periods in 2005. The decrease in motorcycle direct and assumed written premiums was due primarily to the implementation in recent years of new underwriting modifications such as restrictions on certain types of coverages and implementation of a more sophisticated motorcycle make/model table to improve accuracy of class and identification of ineligible units. The decrease in watercraft direct and assumed written premiums was due primarily to underwriting actions taken to balance our coastal exposures. Although these actions are currently reducing our ability to grow these lines, we believe the recreational casualty products are now better positioned to provide profitable growth in the upcoming years.

Profitability remained relatively consistent in the nine and three month periods ended September 30, 2006 compared to the same periods in 2005. The pre-tax losses experienced in the third quarter of both 2006 and 2005 are consistent with management’s expectations due to the seasonal usage of the recreational casualty products.

Financial Institutions

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

	Nine-Mos. Ended Sept. 30,						Three-Mos Ended Sept. 30,
	2006		2005				2006		2005
Financial Institutions
Direct and Assumed Written Premiums	$	90,063	$	53,640	67.9	%	$	41,903	$	20,981	99.7	%
Net Written Premiums	$	82,966	$	48,781	70.1	%	$	40,145	$	18,857	112.9	%
Net Earned Premium/Total Revenues	$	74,392	$	57,184	30.1	%	$	30,471	$	18,770	62.3	%
Pre-Tax Income	$	9,395	$	7,850			$	4,212	$	3,291

The increase in direct and assumed written premiums for our financial institutions insurance products was driven by the mortgage fire and debt cancellation products which increased $25.5 million and $6.9 million, respectively, on a year-to-date basis and $18.7 million and $2.4 million, respectively, for the third quarter compared to similar periods in 2005. These increases were due primarily to the signing of several large new accounts.

Pre-tax income was slightly higher for the nine and three month periods ended September 30, 2006 due primarily to the improved underwriting results related to our mortgage fire business.

All Other Insurance

The following chart is an overview of the results of operations of the Company’s all other insurance segment (in 000s).

	Nine-Mos. Ended Sept. 30,						Three-Mos Ended Sept. 30,
	2006		2005				2006		2005
All Other Insurance
Direct and Assumed Written Premiums	$	113,588	$	99,032	14.7	%	$	41,752	$	34,471	21.1	%
Net Written Premiums	$	58,061	$	64,845	(10.5	)%	$	21,269	$	21,788	(2.4	)%
Net Earned Premium	$	59,299	$	52,799	12.3	%	$	22,060	$	16,910	30.5	%
Agency Revenues		3,791		2,706	40.1	%		1,305		1,057	23.5	%
Service Fees		5		63	(92.1	)%		2		21	(90.5	)%
Total Revenues	$	63,095	$	55,568	13.5	%	$	23,367	$	17,988	29.9	%
Pre-Tax Income	$	17,675	$	17,531			$	3,126	$	5,422

American Modern’s excess and surplus lines and credit life products were the primary drivers of the increase in gross written premiums for the all other insurance segment in the third quarter of 2006 compared to the third quarter of 2005. Excess and surplus lines direct and assumed written premiums increased to $17.7 million in the third quarter of 2006 from $13.3 million in the third quarter of 2005. Credit life direct and assumed written premiums increased to $14.4 million in the third quarter of 2006 from $10.1 million in 2005. The remainder of the increase was distributed throughout our long haul truck physical damage and other commercial lines products.

On a year-to-date basis, direct and assumed written premiums increased due primarily to the excess and surplus lines and the credit life products. Excess and surplus lines direct and assumed written premiums increased to $49.1 million in the first nine months of 2006 compared to $41.5 million in the same period of 2005. Credit life direct and assumed written premiums increased to $33.7 million through nine months of 2006 compared to $27.6 million in 2005. The remainder of the year-to-date increase was also distributed throughout our long haul truck physical damage and other commercial lines products.

This segment continued to generate solid pre-tax income in the nine and three month periods ended September 30, 2006 primarily due to the underwriting results related to our excess and surplus lines, credit life, commercial property, long haul truck physical damage and auto rental products.

Midland Consolidated

Investment Income and Realized Capital Gains

Third quarter net investment income was $10.5 million in 2006 compared to $10.1 million in the third quarter of 2005. On a year-to-date basis, net investment income increased to $31.0 million in 2006 compared to $30.2 million in the prior year. This slight increase is due primarily to the increase in the annualized pre-tax equivalent investment yield which reflects the current interest rate environment. The annualized pre-tax equivalent investment yield, on a cost basis, of Midland’s fixed income portfolio was 5.8% for the first nine months of 2006 compared to 5.3% for the first nine months of 2005.

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, 2006									Nine Months Ended Sept. 30, 2005
	Pre-Tax Gain (Loss)			After-Tax Gain (Loss)			Earnings Per Share			Pre-Tax Gain (Loss)		After-Tax Gain (Loss)		Earnings Per Share
Capital Gains	$	4,809		$	3,126		$	0.16		$	4,066	$	2,643	$	0.14
Derivatives		683			444			0.02			1,312		853		0.04
Total Realized Investment Gains	$	5,492		$	3,570		$	0.18		$	5,378	$	3,496	$	0.18
	Three Months Ended Sept. 30, 2006									Three Months Ended Sept. 30, 2005
	Pre-Tax Gain (Loss)			After-Tax Gain (Loss)			Earnings Per Share			Pre-Tax Gain (Loss)		After-Tax Gain (Loss)		Earnings Per Share
Capital Gains	$	1,295		$	842		$	0.04		$	1,375	$	894	$	0.05
Derivatives		(201	)		(131	)		(0.01	)		1,787		1,161		0.06
Total Realized Investment Gains	$	1,094		$	711		$	0.03		$	3,162	$	2,055	$	0.11

The Company experienced no other-than-temporary impairments during the nine or three month periods ended September 30, 2006 or 2005.

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.

M/G Transport

M/G Transport, Midland’s transportation subsidiary, reported revenues for the third quarter of 2006 of $14.2 million compared to $8.9 million in the prior year’s third quarter. Pre-tax income was $2.3 million for the third quarter of 2006 compared to $0.9 million for the third quarter of 2005. On a year-to-date basis, M/G Transport reported revenues of $38.5 million in 2006 compared to $31.6 million in 2005. Pre-tax income improved to $5.9 million for the first nine months of 2006 compared to $2.9 million for the first nine months of 2005. The increases in transportation revenues and pre-tax income are primarily due to an improved freight rate environment.

Outlook

As we look to the remainder of 2006, we intend to continue to leverage our underwriting expertise and diverse distribution platform to achieve our profit objectives and grow the top line. We expect our top line growth to finish in the high single digit to low double digit range. With respect to profit, assuming normal weather for the remainder of the year, we anticipate a full year property and casualty combined ratio in the range of 93.5% to 94.5%. Based on this level of anticipated underwriting profit, we estimate our full year earnings will be in the range of $3.32 to $3.52 per share (diluted), which includes $0.22 per share (diluted) related to the after-tax impact of realized investment gains.

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, 2006, the aggregate obligations on a consolidated basis were as follows (amounts in $000’s):

			Payments Due by Period
	Total		Less than 1 Year		1-5 Years		After 5 Years
Long-term debt	$	90,828	$	1,308	$	57,942	$	31,578
Other notes payable		7,654		7,654		—		—
Annual commitments under non-cancelable leases		19,845		2,048		6,305		11,492
Purchase obligations		52,730		40,338		12,392		—
Other obligations		218		218		—		—
Insurance policy loss reserves		226,248		128,961		82,581		14,706
Total	$	397,523	$	180,527	$	159,220	$	57,776

The table above excludes contracts and agreements that relate to maintenance and service agreements which, individually and in the aggregate, are not material to the Company’s operations or financial condition, and are terminable by the Company with minimal advance notice and at little or no cost to the Company.

The insurance policy loss reserve payment projections in the above table are based on actuarial assumptions. The actual payments will vary, in both amount and time periods, from the estimated amounts represented in this table. See further discussion regarding insurance policy loss reserves under the Critical Accounting Policies section.

The Company is in the process of significantly expanding its headquarters. The expansion, which is scheduled for completion in September 2007, will add approximately 205,000 square feet of new office space and will expand an existing training center by approximately 20,000 square feet. The new facility, which is expected to cost approximately $29 million (included in the purchase obligations line in the above table), will be financed through operating cash flows and short term debt borrowings during the construction phase. The Company is considering various financing options for the building after construction is completed.

The Company has entered into contracts to take delivery of 100 barges for its river transportation operations. The first 30 barges were delivered in the third quarter of 2006 and were subsequently financed through a non-cancelable operating lease. The remaining barges will be delivered in the fourth quarter of 2006, the first quarter of 2007 and the fourth quarter of 2007 at a cost of approximately $30 million. The Company is evaluating various financing options related to these remaining barge deliveries.

We do not utilize any special-purpose financing vehicles or have any undisclosed off balance sheet arrangements. Similarly, the Company holds no fair-value contracts for which a lack of marketplace quotations would necessitate the use of fair value techniques.

Other Items

No shares were repurchased in the open market under the Company’s share repurchase program during the first nine months of 2006. On April 27, 2006, 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 2008. In addition, 500,000 additional shares were authorized for repurchase bringing the total to 1,086,000 shares that remain authorized for repurchase under terms of this program. 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, 2006, the Company repurchased approximately $0.9 million of treasury shares in connection with associate stock incentive programs. The Company repurchased no shares related to this program during the third quarter of 2006.

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, 2006, Midland had $7.7 million of commercial paper debt outstanding, $6.7 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 5.41% as of September 30, 2006, a rate that management considers to be competitive with the market rates offered for similar instruments. As of September 30, 2006, Midland also had $83.0 million of conventional short-term credit lines available at costs not exceeding prime borrowing rates, of which none was outstanding at September 30, 2006. These short-term borrowings decreased $14.0 million since December 31, 2005. Proceeds derived from the sale or maturity of marketable securities were used to reduce these short-term borrowings. These lines of credit contain minimally restrictive covenants and are typically drawn and repaid over periods ranging from two weeks to three months.

The Company also has a mortgage obligation related to the financing of our corporate headquarters building. As of September 30, 2006, the outstanding balance of this mortgage was $13.9 million. This mortgage obligation includes normal and customary debt covenants for instruments of this type. Monthly interest payments are required until maturity in December 2007. The effective interest rate on this obligation is based on LIBOR plus 1% and was 6.36% at September 30, 2006.

During the second quarter of 2004, Midland, through wholly owned trusts, issued $24.0 million of junior subordinated debt securities ($12.0 million on April 29 and $12.0 million on May 26). These transactions were part of the Company’s participation in pooled trust preferred offerings. The proceeds from these transactions were used to increase the capital of the insurance subsidiaries to fund future growth and for general corporate purposes. The debt issues have 30-year terms and are callable after five years. The interest related to the debt is variable in nature and was 8.9% at September 30, 2006. 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) increased 5.6% to $1.0 billion at September 30, 2006 from $947.1 million at December 31, 2005. This increase was due primarily to the investment of cash that was generated during the first nine months of 2006. This increase was also due partially to a $12.2 million increase in unrealized appreciation in the market value of securities held. The increase in the unrealized appreciation was due to a $12.8 million increase in unrealized appreciation related to the equity portfolio partially offset by a $0.6 million decrease in the unrealized appreciation related to the fixed income portfolio. Midland’s largest equity holding, 2.5 million shares of U.S. Bancorp, increased to $81.7 million in market value as of September 30, 2006 from $73.5 million as of December 31, 2005.

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, 2006

	Unrealized Gain (Loss)			Fair Value		# of Positions
Fixed Income Securities
Total held in a gain position	$	11,955		$	559,742	819
Held in a loss position for less than 3 months		(233	)		13,178	22
Held in a loss position for more than 3 months and less than 9 months		(908	)		62,519	92
Held in a loss position for more than 9 months and less than 18 months		(2,023	)		106,798	121
Held in a loss position for more than 18 months		(1,119	)		35,668	66
Fixed income total	$	7,672		$	777,905	1,120
	Unrealized Gain (Loss)			Fair Value		# of Positions
Equity Securities
Total held in a gain position	$	100,329		$	197,986	158
Held in a loss position for less than 3 months		(75	)		1,757	7
Held in a loss position for more than 3 months and less than 9 months		(715	)		6,516	15
Held in a loss position for more than 9 months and less than 18 months		(245	)		4,034	6
Held in a loss position for more than 18 months		(56	)		1,710	2
Equity total	$	99,238		$	212,003	188
Total per above	$	106,910		$	989,908	1,308
Accrued interest and dividends		—			10,125
Total per balance sheet	$	106,910		$	1,000,033

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, 2006. 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, 2006 was 5.0 years which management believes provides adequate asset/liability matching. The duration has increased to 5.0 years from 4.9 years as of September 30, 2005 as Midland has increased its investment in longer term municipal bonds.

Midland Consolidated

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 2006 and a total of $37.2 million from inception in 2000. The initiative is being designed, developed and implemented in periodic phases to ensure its cost effectiveness and functionality. This project may involve future cash expenditures in the range of $40 million to $45 million over the next four years, with additional spending thereafter to expand system compatibility and functionality. A portion of such expenditures will be capitalized and amortized over the useful life. However, actual costs may be more or less than what we estimate. The cost of the development and implementation is expected to be funded out of operating cash flow. Significant changes to the technology interface between American Modern and its distribution channel participants and policyholders, while unlikely, could significantly disrupt or alter its distribution channel relationships. If the new information systems are ultimately deemed ineffective, it could result in an impairment charge to our capitalized costs. The unamortized balance of modernLINK®’s software development costs was $25.5 million at September 30, 2006.

American Modern has a $72.0 million long-term credit facility available on a revolving basis at various rates. As of September 30, 2006, there was $36.0 million outstanding under these facilities.

At September 30, 2006, Midland’s accounts receivable increased 7.9% to $147.9 million compared to $137.1 million at December 31, 2005. The increase is due primarily to an increase in gross written premiums experienced in the second quarter of 2006. Accounts receivable are primarily comprised of premium due from both policyholders and agents. In the case of receivables due directly from policyholders, policies are cancelable in the event of non-payment and thus offer minimal credit exposure. Approximately 66% of American Modern’s accounts receivables relate to premium due directly from policyholders as of September 30, 2006. In the case of receivables due from agents, American Modern has provided 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 at September 30, 2006 and December 31, 2005 consisted of the following amounts (amounts in 000’s):

	September 30, 2006		December 31, 2005
Prepaid reinsurance premiums		64,956		49,549
Reinsurance recoverable – unpaid losses		51,854		62,241
Reinsurance recoverable – paid losses		7,186		20,947
Total	$	123,996	$	132,737

The decrease in reinsurance recoverables is due primarily to the recoveries related to claims associated with the hurricanes experienced in the second half of 2005. The increase in prepaid reinsurance premiums is due to the related increase in ceded written premiums during 2006.

Property, plant and equipment increased $12.8 million to $102.7 at September 30, 2006 from $89.9 million at December 31, 2005 due primarily to the capitalized costs incurred to date related to the expansion of the Company’s headquarters, which is scheduled for completion in September 2007, combined with the continuing investment in modernLINK®.

Unearned insurance premiums increased to $460.0 million at September 30, 2006 compared to $395.0 million at December 31, 2005. The increase is due primarily to the increase in gross written premiums experienced during the first nine months of 2006. See the Results of Operations section for further discussion surrounding the reasons for our growth in gross written premiums.

The $28.4 million decrease in insurance loss reserves at September 30, 2006 compared to December 31, 2005 is due primarily to the payment of claims in 2006 that were associated with the hurricanes experienced in the second half of 2005.

The following table provides additional detail surrounding the Company’s insurance policy loss reserves at September 30, 2006 and December 31, 2005 (amounts in 000’s):

	September 30, 2006		December 31, 2005
Gross case base loss reserves:
Residential property	$	43,881	$	57,845
Recreational casualty		28,655		34,742
Financial institutions		9,638		10,289
All other insurance		70,267		58,516
Gross loss reserves incurred but not reported		50,341		54,896
Outstanding checks and drafts		23,466		38,372
Total insurance loss reserves	$	226,248	$	254,660

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, 2006, the transportation subsidiaries had $17.0 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, which matured on December 1, 2005. For the nine and three month periods ended September 30, 2006 and 2005, 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,
	2006			2005			2006		2005
Changes in net unrealized capital gains:
Equity securities	$	8,332		$	(5,359	)	$	6,471	$	(268	)
Fixed income securities		(380	)		(9,355	)		10,416		(7,108	)
Changes in fair value of interest rate swap hedge		—			258			—		57
Total	$	7,952		$	(14,456	)	$	16,887	$	(7,319	)

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 were 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

One of the Company’s most significant estimates relates to our property and casualty loss and loss adjustment reserves. The vast majority of our insurance risks are personal lines property in nature. Personal lines property risks are prevalent in our residential property and financial institutions segments, which collectively accounted for approximately 70 percent of our 2005 gross written premiums. A smaller portion of our business relates to liability risks, at generally lower limits, which tend to experience loss payouts over longer periods of time, and are inherently less predictable as compared to the personal lines property risks. We limit our exposure on these risks through reinsurance. Our indemnity exposure on each individual liability risk is capped at $250,000. Our recreational casualty segment and our excess and surplus lines, which is included in the “all other” segment, tend to generate the bulk of this liability exposure. The company does not have long tail business such as asbestos, environmental remediation, product liability or other highly uncertain exposures.

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.

Due to the predominately short-tail property nature of our business, the most significant component of our loss reserves are case base loss reserves and outstanding checks and drafts. These types of loss reserves are based on information related to specific facts and circumstances related to reported claims. The short tail, personal lines bias of our business results in settling claims rather quickly. We estimate that 90 percent of our property claims are settled within 30 days of being reported to us. The majority of our claims are settled directly by company employee adjusters, who receive extensive training and average approximately five years of claims experience. At September 30, 2006 and December 31, 2005, case base loss reserves and outstanding checks and drafts comprised approximately 78% of our insurance loss reserves.

Our property and casualty net loss reserves, which includes the impact of reinsurance and does not consider outstanding checks and drafts were as follows (amounts in 000’s):

	September 30, 2006		December 31, 2005
Property and casualty net case base reserves	$	107,259	$	103,915
Property and casualty net incurred but not reported reserves		36,351		44,151
Property and casualty net loss reserves	$	143,610	$	148,066
Property and casualty net loss reserves	$	143,610	$	148,066
Property and casualty reinsurance recoverables		40,563		53,844
Property and casualty gross loss reserves		184,173		201,910
Life and other gross loss reserves		18,609		14,378
Outstanding checks and drafts		23,466		38,372
Consolidated gross loss reserves	$	226,248	$	254,660

Our net property and casualty loss reserves represented 40% and 49% percent of the statutory property and casualty surplus at December 31, 2005 and 2004, respectively. In comparison, the percentage of statutory loss reserves to statutory surplus for the property and casualty industry averages approximately 120%, which demonstrates the short-tail nature of our business.

A significant amount of judgment is used in establishing case base loss reserves, although generally, case base loss reserves tend to be less subjective and less volatile than incurred but not reported loss reserves. Case base loss reserves are based on the facts and circumstances of the claim reported. However, the following factors contribute to the variability in establishing case base loss reserves:

• The timing of information received. As more information becomes available, (i.e. through physical inspections, actual claim settlement, etc.) case reserves are adjusted appropriately to reflect the new information.

• The liability claims are generally more difficult to assess and reserve due to their complexity and generally take a longer period of time to settle. These types of claims are more likely to involve multiple parties, which adds to the claim complexity and lengthens the claim settlement process.

• The increase in demand for replacement materials and labor (demand surge), specifically after a large scale catastrophic event, which may contribute to inadequate case reserve.

Due to the short tail nature of our business, incurred but not reported loss reserves tend to be more stable as compared to other companies in the insurance industry. We believe the following represent the primary risks to our ability to estimate incurred but not reported loss reserves:

• Significant changes in reporting and payment patterns

• Changes in claim cost trends that are not reflected in the historical data used to estimate loss reserves

• Lack of historical data and company specific experience in newer lines of business, such as motorcycle and excess and surplus

• Court decisions and legislation expanding unanticipated coverage expansions on past and existing policies or third party assessments that deviate from historical patterns

Management periodically reviews the development of case base loss reserves by the exposure characteristics and by line of business. The review of case base loss reserve development assists Management in refining estimated losses on existing case base claims as well as reserving for future case base claims. Potential redundancy or deficiency in the case base loss reserves is considered in the incurred but not reported loss reserves. The incurred but not reported loss reserve is administered in total rather than by line of business, although Management considers various trends, reserve development, types of coverages and other factors by line of business to assess the total incurred but not reported reserve.

The recorded insurance loss reserves at the balance sheet date represent the Company’s best estimate, based on historical patterns and other assumptions, 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. Management also meets quarterly with an appointed external actuary and considers results of statistical procedures performed by the external actuary in refining the recorded loss reserves. Management compares the Company’s estimate of loss reserves to ranges prepared by its external consulting actuaries to ensure that such estimates are within the actuaries’ acceptable range. The external actuaries perform an extensive review of loss reserves at year end using generally accepted actuarial guidelines along with reviews throughout the year to ensure that the recorded loss reserves appear reasonable. The statistical procedures performed each quarter and at year-end are similar in nature, but the year-end procedures also encompasses additional statutory reporting procedures. In order to determine the incurred-but-not-reported loss reserve, an estimate of the ultimate liability is made and is then reduced by cumulative paid claims and case reserves. The external actuaries utilize a variety of actuarial and statistical methods in assessing incurred-but-not-reported loss reserves. These methods may include, but are not limited to:

• The Incurred Loss Development Method

• The Paid Loss Development Method

• The Hindsight Average Claim Cost Method

• Bornhuetter/Ferguson (Paid and Incurred) Methods

Multiple point estimates are not generated in determining incurred-but not reported loss reserves. The personal lines property lines rely more heavily on the incurred loss development method, due to the short-tail nature of these lines and case base reserves tend to be more accurate in these lines as compared to longer-tail lines. While the incurred loss development method is considered in the longer-tail liability lines, particularly in older accident years, all methods are considered in setting incurred-but-not-reported reserves.

In order to affirm the Company’s recorded reserve for loss and loss adjustment expense, which represents management’s best estimate, our external actuaries perform statistical work to determine an acceptable range for loss reserves on an annual basis. The actuaries apply a consistent methodology in computing the acceptable range. The actuaries utilize statistical models which require the use of assumptions. There were no significant changes in the underlying significant assumptions in calculating the incurred but not reported range in 2006 or 2005. Several of the key assumptions are included below.

• We utilize development factors, which are largely based on historical trends for reporting and payment patterns along with current practices and philosophies. We also make assumptions for factors such as loss adjustment expense and salvage and subrogation.

• The incurred-but-not-reported loss reserve will adequately address any deficiency or redundancy in our case base reserves.

• In newer lines of business, most notably motorcycle and excess and surplus, the company does not have a long history of loss development patterns, therefore we place higher reliance on industry loss development patterns for ultimate losses.

Management does not foresee any significant change in the manner in which it records its reserve for insurance losses.

At December 31, 2005, loss reserves, net of reinsurance recoverables, for our property and casualty companies totaled $148.1 million. The consulting actuary computes an acceptable range for property and casualty reserves, which affirms the recorded balance if the recorded amount is within the range. The Company’s estimate was affirmed by the actuaries’ estimated range for net loss reserves of $134.0 million to $153.0 million. The range is based on a “reasonable best case” and “reasonable worst case” with varying development patterns across our lines of business. We believe that recorded loss reserves at any point within this range would be a reasonable estimate. Thus, it appears reasonably likely that actual results may fall at any point within this range. If losses develop to the low end point of the range, our operating results would benefit by $14.1 million (pre-tax), whereas if actual losses develop to the high end point of the range, our operating results would be lowered by $4.9 million (pre-tax). If actual losses develop to the low-end or high-end of the range, we believe that the impact to our financial position or liquidity would not be material.

If ultimate pay outs significantly exceed the expected amounts, the Company has several potential options to utilize in order to satisfy the additional obligations. For example, the Company could liquidate a portion of its investment portfolio or draw on conventional short-term credit lines available, at costs not exceeding prime rates. The Company believes either of these options would be sufficient to meet any increases in required loss payments.

Slowness to recognize or respond to new or unexpected loss patterns, such as those caused by the risk factors listed herein as well as in the Company’s Safe Harbor Statement, could lead to a shortage in reserves, which would lead to a higher loss and loss expense ratio; each percentage point increase in the loss and loss expense ratio would reduce income before taxes by $6.3 million based on 2005 earned premiums.

Reinsurance Risks

American Modern participates in several reinsurance contracts with various reinsurers. The Company’s primary reasons for entering reinsurance contracts are to reduce its exposure on particular risks and classes of risks as well as to protect against large accumulated losses resulting from catastrophes. 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. Additional reasons for entering reinsurance agreements include the following:

1. To reduce total statutory liabilities to a level appropriate for American Modern’s capital and surplus.

2. To provide financial capacity to accept risks and policies involving amounts larger than could otherwise be accepted.

3. To facilitate relationships with business partners who want to participate in the insurance risk through their own reinsurance companies.

The Company utilizes excess of loss reinsurance programs in order to reduce its exposure on particular risks and classes of risks (excess of loss per risk) as well as to protect against large accumulated losses resulting from catastrophes (excess of loss per occurrence). Under excess reinsurance, the insurer limits its liability to all or a particular portion of a predetermined deductible or retention. Therefore, the reinsurer’s portion of the loss depends on the size of the loss.

Excess of Loss per occurrence reinsurance requires the insurer to pay all claims up to a stated amount or retention limit on all losses arising from a single occurrence. The reinsurer pays claims in excess of the retention limits. The primary purpose of this reinsurance for American Modern is to protect the Company from the accumulation of losses arising from hurricanes or any other widespread weather related disaster. This reinsurance is also known as catastrophe reinsurance.

The Company’s reinsurance treaties are prospective reinsurance agreements, contain no adjustable features, and do not include any profit sharing provisions. The costs associated with these reinsurance treaties are calculated and expensed based on the subject earned premium recorded in revenue multiplied by the corresponding rate. Any ceding commission is recorded according to the terms of the reinsurance treaty based on the percentage of the corresponding premiums. Ceded commissions are deferred and recognized as income over the life of the corresponding policies. The term is typically no more than twelve months due to the short-tail nature of our business. The costs associated with our catastrophe reinsurance program are generally amortized over the term of the coverage on a pro-rata basis.

Due to the nature of our non-catastrophe related reinsurance programs, the results of operations related to these programs did not significantly fluctuate during the three year period ended December 31, 2005.

However, our operating results were impacted to varying degrees by our catastrophe reinsurance program over the past three years. Catastrophe reinsurance costs, including reinstatements, totaled $31.9 million, $16.9 million and $12.2 million during 2005, 2004 and 2003, respectively. The Company’s

gross catastrophe losses for 2005, 2004 and 2003 were $232.1 million, $67.1 million and $46.6 million, respectively, of which $179.4 million, $21.1 million and $9.4 million, respectively, were recovered through our catastrophe reinsurers.

Based on our estimates as of September 30, 2006, Hurricane Katrina, the costliest storm in U.S history, exceeded the limits of the Company’s 2005 catastrophe reinsurance program by approximately $4.5 million which impacted after tax earnings by approximately $2.9 million.

Our 2006 catastrophe reinsurance structure is similar to the 2005 program with a $3.0 million increase in retention, from $7 million to $10 million, and the purchase of an additional $40 million of protection on top of our previous $110 million cover. Due to the volatile weather patterns of 2005, we will absorb a significant increase in our base reinsurance cost in 2006 which will nearly double the base cost of 2005. This increase, along with the additional cover, will adversely impact our 2006 pre-tax earnings by approximately $12.6 million, or $0.42 per share (diluted).

While the hurricane activity over the past couple of years has significantly increased the cost of obtaining reinsurance, our strong relationships with our reinsurers have allowed us to provide exposure management that is consistent with our overall risk management strategy. In addition, our strong relationships with our reinsurers and our disciplined overall exposure management philosophy, combined with the financial strength of these reinsurers (as of September 30, 2006, approximately 85% of the Company’s catastrophe reinsurers had an A.M. Best or S&P rating of “A-” or better), allow us to be confident that we will be able to effectively manage our exposures in the future.

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.

In addition, American Modern may, in some cases, require reinsurers to establish trust funds and maintain letters of credit to further minimize possible exposures. All reinsurance amounts owed to American Modern are current and management believes that no allowance for uncollectible accounts related to this recoverable is necessary. Management also believes there is no significant concentration of credit risk arising from any single reinsurer. The Company also assumes a limited amount of business on certain reinsurance contracts. Related premiums and loss reserves are recorded based on records supplied by the ceding companies.

Other-Than-Temporary Impairment of Investment Securities

The Company invests in various securities including U.S. Government securities, corporate debt securities, and corporate stocks. Investment securities in general are exposed to various risks such as interest rate, credit, and overall market volatility. Due to the level of risk associated with these securities, it is reasonably possible that changes in the value of investment securities will occur in the near term and that such changes could be material.

In order to identify other-than-temporary impairments, we conduct quarterly comprehensive reviews of individual portfolio holdings that have a market value less than their respective carrying value. As part of our review for other-than-temporary impairment, we track the respective carrying values and market values for all individual securities with an unrealized loss. We, with the assistance of our external professional money managers, apply both quantitative and qualitative criteria in our evaluation, including facts specific to each individual investment such as, but not limited to, the length of time the fair value has been below the carrying value, the extent of the decline, our intent to sell or hold the security, the expectation for each individual security’s performance, the credit worthiness and related liquidity of the issuer and the issuer’s business sector.

The evaluation for other-than-temporary impairment requires a significant amount of judgment. 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, 2006, 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 principal 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 judgment 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, 2006, 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 February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140,” which permits fair value remeasurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133; and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS No. 155 is effective for all financial instruments acquired or issued in a fiscal year beginning after September 15, 2006. The Company is currently assessing the impact that SFAS No. 155 will have on its consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related de-recognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. The interpretation is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact of this new pronouncement on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The Company is assessing the impact that FAS 157 will have on its consolidated financial statements.

Also in September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement No. 87, 88, 106 and 132(R)” (“FAS 158”). This Standard requires recognition of the funded status of a benefit plan in the statement of financial position. The Standard also requires recognition in other comprehensive income certain gains and losses that arise during the period but are deferred under pension accounting rules, as well as modifies the timing of reporting and adds certain disclosures. The recognition and disclosure elements of FAS 158 are effective for fiscal years ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company is still assessing the impact that FAS 158 will have on its consolidated financial statements. However, based on the Company’s year end 2005 position, shareholders’ equity would have been reduced by approximately 2%.

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.

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 5.0 year duration of the Company’s fixed income portfolio as of September 30, 2006, management estimates that a 100 basis point increase in interest rates would decrease the market value of its $787.0 million fixed income portfolio by 5.0%, or $39.4 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, 2006, the Company had $213.0 million in equity holdings, including $81.7 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 $8.2 million. As of September 30, 2006, the remainder of the Company’s portfolio of equity securities had a beta coefficient (a measure of stock price volatility) of 0.93. 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 9.3%.

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 as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter covered by this report 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, 2006, and the related condensed consolidated statements of income, changes in shareholders’ equity and cash flows for the three-month and nine-month periods ended September 30, 2006 and 2005. 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, 2005, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 3, 2006, 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. 123 (revised 2004), Share Based Payment, effective January 1, 2005). In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005 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, 2006

PART II. OTHER INFORMATION

THE MIDLAND COMPANY AND SUBSIDIARIES

SEPTEMBER 30, 2006

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in the registrant’s From 10-K.

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, 2006, the Company did not purchase any of its equity securities pursuant to a publicly announced plan or program. However, during the nine month period ended September 30, 2006, the Company acquired 26,693 shares 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. There were no shares acquired in private transactions from employees in connection with its stock incentive plans during the three month period ended September 30, 2006. Additionally, pursuant to the Company’s Salaried Employees’ 401(k) Savings Plan, the Company acquired 20,876 shares and 4,018 shares from the Plan during the nine and three month periods ended September 30, 2006, 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, 2006	/s/ W. Todd Gray
	W. Todd Gray, Executive Vice President and
	Chief Financial Officer