UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended_____________September 30, 1998___________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________________to__________________________
Commission file number______________________________1-6026______________________
_____________________________The Midland Company________________________________
(Exact name of registrant as specified in its charter)
________Incorporated in Ohio___________ _______________31-0742526_______________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
________________7000 Midland Boulevard, Amelia, Ohio 45102-2607_________________
(Address of principal executive offices)
(Zip Code)
________________________________(513) 943-7100__________________________________
(Registrant's telephone number, including area code)
____________________________________N/A_________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes___X___. No______.
The number of common shares outstanding as of September 30, 1998 was
9,322,391.
<PAGE>
PART I. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
Sept. 30, Dec. 31,
ASSETS 1998 1997
-------------- --------------
CASH $ 3,916,000 $ 5,277,000
MARKETABLE SECURITIES:
Fixed income (cost, $418,063,000 at September 30,
1998 and $397,033,000 at December 31, 1997) 432,926,000 404,038,000
Equity (cost, $36,597,000 at September 30, 1998
and $33,928,000 at December 31, 1997) 103,271,000 94,791,000
-------------- --------------
Total 536,197,000 498,829,000
-------------- --------------
RECEIVABLES:
Accounts receivable 65,060,000 59,492,000
Less allowance for losses 753,000 753,000
-------------- --------------
Net 64,307,000 58,739,000
-------------- --------------
REINSURANCE RECOVERABLES AND
PREPAID REINSURANCE PREMIUMS 38,649,000 49,016,000
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT - AT COST 114,589,000 111,418,000
Less accumulated depreciation and amortization 45,022,000 39,806,000
-------------- --------------
Property, Plant and Equipment - Net 69,567,000 71,612,000
-------------- --------------
OTHER INVESTMENTS IN REAL ESTATE 14,779,000 14,779,000
-------------- --------------
DEFERRED INSURANCE POLICY ACQUISITION COSTS 64,643,000 55,590,000
-------------- --------------
OTHER ASSETS 6,879,000 6,621,000
-------------- --------------
TOTAL $ 798,937,000 $ 760,463,000
============== ==============
See notes to the consolidated financial statements.
<PAGE>
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
Sept. 30, Dec. 31,
LIABILITIES & SHAREHOLDERS' EQUITY 1998 1997
-------------- --------------
NOTES PAYABLE WITHIN ONE YEAR:
Banks $ 4,000,000 $ 24,000,000
Commercial paper 7,514,000 5,791,000
-------------- --------------
Total 11,514,000 29,791,000
-------------- --------------
INSURANCE COMMISSIONS PAYABLE 18,681,000 19,033,000
-------------- --------------
OTHER PAYABLES AND ACCRUALS 46,691,000 49,998,000
-------------- --------------
FUNDS HELD UNDER REINSURANCE AGREEMENTS
AND REINSURANCE PAYABLES 14,572,000 15,443,000
-------------- --------------
UNEARNED INSURANCE PREMIUMS 261,954,000 240,340,000
-------------- --------------
INSURANCE LOSS RESERVES 133,894,000 120,134,000
-------------- --------------
DEFERRED FEDERAL INCOME TAX 30,851,000 26,180,000
-------------- --------------
LONG-TERM DEBT 59,591,000 62,518,000
-------------- --------------
SHAREHOLDERS' EQUITY:
Common stock (issued and outstanding:
9,322,000 shares at September 30, 1998
and 9,334,000 shares at December 31,
1997 after deducting treasury stock of
1,606,000 shares and 1,594,000 shares,
respectively - The December 31, 1997
amounts have been adjusted for the
three-for-one stock split - Note 2) 911,000 911,000
Additional paid-in capital 15,643,000 15,359,000
Retained earnings 169,027,000 153,797,000
Accumulated other comprehensive income
(net unrealized gain on marketable securities) 53,007,000 44,123,000
Treasury stock - at cost (15,566,000) (14,704,000)
Unvested restricted stock awards (1,833,000) (2,460,000)
-------------- --------------
Total 221,189,000 197,026,000
-------------- --------------
TOTAL $ 798,937,000 $ 760,463,000
============== ==============
See notes to the consolidated financial statements.
<PAGE>
THE MIDLAND COMPANY
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
FOR THE NINE AND THREE - MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Nine-Mos. Ended Sept. 30, Three-Mos. Ended Sept. 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
REVENUES:
Insurance:
Premiums earned $280,600,000 $229,251,000 $ 96,068,000 $ 75,570,000
Net investment
income 17,779,000 15,646,000 5,995,000 5,447,000
Net realized
investment gains 4,935,000 3,774,000 1,667,000 2,364,000
Other insurance
income 1,979,000 1,129,000 915,000 302,000
Transportation 24,315,000 24,504,000 7,790,000 8,616,000
Other 598,000 243,000 103,000 126,000
------------- ------------- ------------- -------------
Total 330,206,000 274,547,000 112,538,000 92,425,000
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Insurance:
Losses and loss
adjustment expenses 162,555,000 127,746,000 54,759,000 44,409,000
Commissions and
other policy
acquisition costs 76,245,000 60,267,000 25,184,000 17,296,000
Operating and
administrative
expenses 40,879,000 36,703,000 13,221,000 13,108,000
Transportation
operating expenses 20,928,000 21,288,000 7,055,000 7,077,000
Interest expense 3,759,000 3,612,000 1,238,000 1,202,000
Other operating and
administrative
expenses 2,510,000 3,195,000 813,000 626,000
------------- ------------- ------------- -------------
Total 306,876,000 252,811,000 102,270,000 83,718,000
------------- ------------- ------------- -------------
INCOME FROM CONTINUING
OPERATIONS BEFORE
FEDERAL INCOME TAX 23,330,000 21,736,000 10,268,000 8,707,000
PROVISION FOR FEDERAL
INCOME TAX 6,353,000 6,312,000 2,969,000 2,595,000
------------- ------------- ------------- -------------
INCOME FROM CONTINUING
OPERATIONS 16,977,000 15,424,000 7,299,000 6,112,000
------------- ------------- ------------- -------------
DISCONTINUED OPERATIONS:
Loss from discontinued
operations less related
income tax credits of
$1,881,000 and $685,000,
respectively - (3,492,000) - (1,250,000)
Loss on disposal of
assets less related
income tax credit
of $1,790,000 - (3,325,000) - (3,325,000)
------------- ------------- ------------- -------------
LOSS FROM DISCONTINUED
OPERATIONS - (6,817,000) - (4,575,000)
------------- ------------- ------------- -------------
NET INCOME $ 16,977,000 $ 8,607,000 $ 7,299,000 $ 1,537,000
============= ============= ============= =============
BASIC EARNINGS (LOSS)
PER SHARE OF COMMON STOCK:
Continuing operations $ 1.88 $ 1.72 $ 0.81 $ 0.68
Discontinued
operations - (0.76) - (0.51)
------------- ------------- ------------- -------------
Total $ 1.88 $ .96 $ 0.81 $ 0.17
============= ============= ============= =============
DILUTED EARNINGS (LOSS)
PER SHARE OF COMMON STOCK:
Continuing operations $ 1.80 $ 1.67 $ 0.77 $ 0.66
Discontinued
operations - (0.74) - (0.50)
------------- ------------- ------------- -------------
Total $ 1.80 $ 0.93 $ 0.77 $ 0.16
============= ============= ============= =============
CASH DIVIDENDS PER SHARE
OF COMMON STOCK $ .1875 $ .175 $ .0625 $ .0583
============= ============= ============= =============
See notes to the consolidated financial statements. All prior period per share
amounts have been adjusted for the three-for-one stock split (Note 2).
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited)
Amounts in 000's
Accumulated Unvested
Additional Other Com- Restricted Compre-
Common Paid-In Retained prehensive Treasury Stock hensive
Stock Capital Earnings Income Stock Awards Total Income
-----------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 911 $ 14,846 $ 138,423 $ 23,587 $ (16,621) $ (1,458) $ 159,688
Comprehensive income:
Net income 8,607 8,607 $ 8,607
Changes in unrealized gain
on marketable securities,
net of tax 13,185 13,185 13,185
--------
Total comprehensive income $21,792
Issuance of treasury stock, ========
net 63 104 167
Cash dividends declared (1,632) (1,632)
Exercise of stock options (25) 135 110
Restricted stock awards 626 1,808 (2,434)
Amortization and cancellation
of unvested restricted stock
awards (155) (296) 1,105 654
------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 $ 911 $ 15,355 $ 145,398 $ 36,772 $ (14,870) $ (2,787) $ 180,779
==========================================================================================
BALANCE, DECEMBER 31, 1997 $ 911 $ 15,359 $ 153,797 $ 44,123 $ (14,704) $ (2,460) $ 197,026
Comprehensive income:
Net income 16,977 16,977 $16,977
Changes in unrealized gain
on marketable securities,
net of tax 8,884 8,884 8,884
--------
Total comprehensive income $25,861
Purchase of treasury stock, ========
net 258 (1,092) (834)
Cash dividends declared (1,747) (1,747)
Exercise of stock options 58 286 344
Amortization and cancellation
of unvested restricted stock
awards (32) (56) 627 539
------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 $ 911 $ 15,643 $ 169,027 $ 53,007 $ (15,566) $ (1,833) $ 221,189
==========================================================================================
See notes to the consolidated financial statements.
</TABLE>
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,977,000 $ 8,607,000
Loss from discontinued operations - 6,817,000
-------------- --------------
Income from continuing operations 16,977,000 15,424,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,524,000 8,252,000
Increase in unearned insurance premiums 21,614,000 16,989,000
Increase in insurance loss reserves 13,760,000 15,623,000
Decrease (increase) in reinsurance recoverables
and prepaid reinsurance premiums 10,367,000 (3,863,000)
Increase in deferred insurance policy
acquisition costs (9,053,000) (462,000)
Increase in net accounts receivable (5,568,000) (15,104,000)
Increase (decrease) in other accounts payable
and accruals (3,890,000) 6,848,000
Increase in funds held under reinsurance
agreements and reinsurance payables (871,000) (328,000)
Increase (decrease) in insurance
commissions payable (352,000) 2,547,000
Decrease (increase) in other assets (258,000) 107,000
Decrease in deferred federal income tax (113,000) (260,000)
Other-net 1,005,000 13,000
-------------- --------------
Net cash provided by continuing operations 50,142,000 45,786,000
Net cash used in discontinued operations - (3,629,000)
-------------- --------------
Net cash provided by operating activities 50,142,000 42,157,000
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (198,242,000) (144,948,000)
Sale of marketable securities 119,188,000 66,197,000
Maturity of marketable securities 30,274,000 32,023,000
Decrease in cash equivalent marketable securities 23,886,000 25,434,000
Acquisition of property, plant and equipment (4,216,000) (17,198,000)
Sale of property, plant and equipment 522,000 1,034,000
Proceeds from sale of discontinued operations - 13,330,000
-------------- --------------
Net cash used in investing activities (28,588,000) (24,128,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in net short-term borrowings (18,277,000) (14,188,000)
Repayment of long-term debt (2,621,000) (2,293,000)
Dividends paid (1,163,000) (1,589,000)
Net issuance (purchase) of treasury stock (548,000) 302,000
Payment of capitalized lease obligations (306,000) (278,000)
Issuance of long-term debt - 2,300,000
-------------- --------------
Net cash used in financing activities (22,915,000) (15,746,000)
-------------- --------------
NET INCREASE (DECREASE) IN CASH (1,361,000) 2,283,000
CASH AT BEGINNING OF PERIOD 5,277,000 3,342,000
-------------- --------------
CASH AT END OF PERIOD $ 3,916,000 $ 5,625,000
============== ==============
See Notes to the Consolidated Financial Statements.
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Midland
Company and subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete annual financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Financial information as of December 31, 1997 has been derived from
the audited consolidated financial statements of the Company. Revenue and
operating results for the three and nine-month periods ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the audited
consolidated financial statements and footnotes thereto for the year ended
December 31, 1997 included in the Company's Annual Report on Form 10-K.
Certain reclassifications (minor in nature) have been made to the 1997 amounts
to conform to 1998 classifications.
2. THREE-FOR-ONE STOCK SPLIT
On April 9, 1998, the Company approved a three-for-one stock split effective
May 21, 1998 for holders of record on April 30, 1998. Accordingly, data
related to the Company's common stock (number of shares, average shares
outstanding, earnings per share and dividends per share) have been adjusted for
the prior periods to reflect the impact of this stock split.
3. EARNINGS PER SHARE
Earnings per share (EPS) of common stock amounts are computed by dividing net
income by the weighted average number of shares outstanding during the period
for basic EPS, plus the dilutive share equivalents for stock options and
restricted stock awards for diluted EPS. Shares used for EPS calculations were
as follows:
For Basic EPS For Diluted EPS
Nine months ended September 30: ------------- ---------------
1998 9,011,000 9,410,000
========= =========
1997 8,949,000 9,256,000
========= =========
4. INCOME TAXES
The federal income tax provisions for the three and nine-month periods ended
September 30, 1998 and 1997 are different from amounts derived by applying the
statutory tax rates to income before federal income tax as follows:
Nine-Mos. Ended Sept. 30, Three-Mos. Ended Sept. 30,
------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
Federal income tax at
statutory rate $8,166,000 $3,937,000 $3,594,000 $ 580,000
Add (deduct) the tax
effect of:
Tax exempt interest and
excludable dividend
income (1,654,000) (1,167,000) (641,000) (402,000)
Investment tax credits (126,000) (274,000) (42,000) (92,000)
Other - net (33,000) 145,000 58,000 34,000
----------- ----------- ---------- -----------
Provision for federal
income tax $6,353,000 $2,641,000 $2,969,000 $ 120,000
=========== =========== =========== ===========
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest of $3,675,000 and $4,800,000 in the first nine months
of 1998 and 1997, respectively. The Company paid income taxes of $4,423,000
and $4,449,000 during the first nine months of 1998 and 1997, respectively. In
January, 1997, the Company issued 196,050 shares (on a post-split basis) of
treasury stock under a restricted stock award program that decreased treasury
stock by approximately $1,808,000 and also increased paid-in capital by
approximately $626,000.
6. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130 requires the
reporting of comprehensive income, and the Company adopted SFAS No. 130
beginning in 1998. Comprehensive income for the Company consists of net income
and the after-tax effect of changes in the market values of the Company's
marketable securities. Comprehensive income is disclosed in the "Consolidated
Statements of Changes in Shareholders' Equity".
7. SEGMENT DISCLOSURES
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", will be adopted by the Company for its annual financial statements
for 1998. Adoption will not impact the reported results of operations of the
Company but will require additional disclosures.
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
The Midland Company:
We have reviewed the accompanying consolidated balance sheet of The Midland
Company and subsidiaries as of September 30, 1998, and the related consolidated
statements of income for the three-month and nine-month periods ended
September 30, 1998 and 1997 and of cash flows and changes in shareholders'
equity for the nine-month periods ended September 30, 1998 and 1997. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of The Midland Company and
subsidiaries as of December 31, 1997, and the related consolidated statements
of income and of cash flows for the year then ended (not presented herein); and
in our report dated February 12, 1998, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the consolidated
financial statements from which it has been derived.
s/Deloitte & Touche LLP
- -----------------------
Deloitte & Touche LLP
Cincinnati, Ohio
October 15, 1998
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A detailed discussion of the Company's liquidity and capital resources
is included in the 1997 Annual Report on Form 10-K. Except as discussed below,
no material changes have taken place since that date and, accordingly, the
discussion is not repeated herein.
RESULTS OF OPERATIONS
Insurance
Property and Casualty Premiums
For the Company's insurance subsidiary, American Modern Insurance Group,
Inc. (AMIG), direct and assumed written premiums increased 7.2% in the third
quarter to $122.4 million from $114.2 million for the same quarter of 1997. Net
earned premiums for the third quarter increased 27.1% to $94.2 million from
$74.1 million for the comparable quarter in 1997. The primary factor
contributing to the growth in direct and assumed written premiums was continued
volume increases in manufactured home insurance premium. Manufactured home
direct and assumed written premium increased 13.1% to $81.2 million from $71.8
million for the same quarter of 1997. On a year-to-date basis, direct and
assumed written premium increased 7.8% to $344.9 million from $319.9 million for
the same nine-month period in 1997. Year-to-date net earned premiums increased
22.4% to $275.3 million from $224.9 million for the same period in 1997.
Manufactured home direct and assumed written premium increased 16.0% to
$229.2 million from $197.6 million for the same nine-month period of 1997.
Volume decreases in the production of certain other specialty insurance lines
and discontinued programs for the three and nine-month periods ended
September 30, 1998 partially offset the volume increases of the manufactured
home premium. A large portion of the difference in growth rates between the
direct and assumed written premium and net earned premiums for the periods
presented is due to changes in AMIG's quota share reinsurance agreement in 1998
compared to 1997.
Investment Income and Realized Capital Gains
AMIG's net investment income (before taxes and excluding capital gains)
increased by approximately 10.1% to $6.0 million in the third quarter of 1998
from $5.4 million for the third quarter of 1997. On a year-to-date basis,
AMIG's net investment income (before taxes and excluding capital gains)
increased 13.6% to $17.8 million in 1998 from $15.6 million for the same period
in 1997. The increases in investment income were primarily the result of the
positive cash flow generated by underwriting activities coupled with the
continued growth of AMIG's investment portfolio.
AMIG's net realized capital gains (after-tax) decreased to $1.1 million,
$0.11 per share (diluted), for the third quarter of 1998 from $1.5 million,
$0.17 per share (diluted), for the same quarter in 1997. On a year-to-date
basis, net realized capital gains (after-tax) increased to $3.2 million, $0.34
per share (diluted), from $2.5 million, $0.27 per share (diluted), for the same
nine-month period in 1997.
Losses and Loss Adjustment Expenses (LAE)
Losses and LAE in the third quarter of 1998 increased 23.3% to
$54.8 million from $44.4 million for the third quarter of 1997. This increase
is primarily the result of an increase in the level of weather-related
catastrophe losses for the quarter. Such losses resulted primarily from
Hurricanes Bonnie and Georges that made landfall in July and September of 1998,
respectively. AMIG's total weather-related catastrophe losses for the third
quarter were $9.8 million on a pre-tax basis compared with $2.8 million for the
same period in 1997. These losses had an after-tax impact of approximately
$0.68 per share (diluted) in this year's third quarter compared with $0.20 per
share (diluted) last year. Excluding catastrophe losses, the property and
casualty combined ratio for the third quarter was 86.2% vs. 94.5% for the third
quarter of 1997.
On a year-to-date basis, losses and LAE increased 27.2% to
$162.6 million from $127.7 million in the first nine months of 1997. This
increase is due primarily to an increase in the level of weather-related
catastrophe losses that occurred during the first nine months of 1998 compared
to the prior year. AMIG's total weather-related catastrophe losses were
$28 million on a pre-tax basis compared with $14 million during the first nine
months of 1997. Those losses had an after-tax impact of approximately $1.94 per
share (diluted) in this year's nine months compared with $0.98 per share
(diluted) last year. Also contributing to the increase in losses and LAE is the
fact that the Company's absorbing more losses and LAE (as well as retaining more
premiums) as a result of the aforementioned changes in quota share reinsurance
agreements. Excluding catastrophe losses, the property and casualty combined
ratio for the nine-month period was 88.4% vs. 90.9% for the same period in 1997.
<PAGE>
Commissions, Other Policy Acquisition Costs and Other Operating and
Administration Expenses
Commissions, other policy acquisitions costs and other operating and
administrative expenses for the third quarter increased 26.4% to $38.4 million
from $30.4 million for the third quarter of 1997. On a year-to-date basis,
commissions, other policy acquisitions costs and other operating and
administrative expenses increased 20.8% to $117.1 million from $97.0 million for
the same period in 1997. These increases are due primarily to the continued
growth in earned premium. Despite the dollar increases in expenses, the
year-to-date underwriting expense ratio (ratio of underwriting expenses to
earned premium) decreased to 41.7% in 1998 from 42.3% in 1997. This decrease
was due to expenses increasing at a slower pace than earned premium.
Overall Underwriting Results
AMIG's property and casualty operations generated a pre-tax underwriting
income of $3.2 million for the third quarter of 1998 compared to a pre-tax
underwriting income of $1.3 million for the same quarter in 1997. For the
quarter, AMIG's combined ratio (ratio of losses and expenses as a percent of
earned premium) for its property and casualty business was 96.6% vs. 98.3% a
year ago.
On a year-to-date basis, AMIG's property and casualty operations
generated a pre-tax underwriting income of $3.9 million in 1998 compared to
$6.6 million in the first nine months of the prior year. For the nine months,
the combined ratio for AMIG's property and casualty operations was 98.6% vs.
97.1% in the comparable prior period. The decrease in underwriting profit from
the prior year is due primarily to the larger amount of weather related
catastrophe losses occurring in the first nine months of 1998 compared to the
prior year.
Transportation
For the three and nine-month periods, the Company's transportation
subsidiary, M/G Transport Services Group, (M/G) reported operating profits and
revenues comparable with last year. Net income from M/G contributed $500,000,
or $0.05 per share (diluted), in the third quarter of 1998, compared with
$1.0 million, or $0.11 per share (diluted), in the third quarter of 1997. For
both the first nine months of 1998 and 1997, M/G's net income was $2.1 million,
or $0.22 per share (diluted).
Discontinued Operations
As previously reported, on September 29, 1997, the Company's sportswear
subsidiary, CS Crable Sportswear, Inc., sold the majority of its assets to
Brazos, Inc., a subsidiary of Brazos Sportswear, Inc. After-tax losses from the
discontinued operations for the third quarter and first nine months of 1997
amounted to $(4.6 million), $(0.50) per share (diluted), and $(6.8 million),
$(0.74) per share (diluted), respectively. There have been no material financial
results reported from this subsidiary since the date of sale.
FINANCIAL CONDITION
Cash flows from operations, were used to decrease the Company's
short-term borrowings from year-end 1997. Shareholders' equity increased 12.3%
to $221.2 million at September 30, 1998 from $197.0 million at year-end 1997.
This increase is due to the net income generated in 1998 coupled with the
increase in the net unrealized gain on marketable securities resulting from an
increase in the market value of the Company's investment portfolio. The
decreases in reinsurance recoverables, prepaid reinsurance premiums and funds
held under reinsurance agreements are due primarily to changes in the amount of
insurance premium ceded to reinsurers under certain reinsurance treaties. The
increase in unearned premiums and loss reserves are due primarily to the
continued growth in written premium. The increase in deferred acquisition costs
is due to changes in the amount of insurance premium ceded to reinsurers under
certain reinsurance treaties and the continued growth in written premium.
Management expects that cash and other liquid investments, coupled with
future operating cash flows, will be readily available to match the Company's
operating cash requirements for the next twelve months. The Company declared
$1.8 million in dividends to its shareholders during the first nine months of
1998.
<PAGE>
OTHER MATTERS
Comprehensive Income
For the Company, the only difference between net income and
comprehensive income is the net change in unrealized gain on marketable
securities. For the three-month and nine-month periods ended September 30, 1998
and 1997, such net unrealized gains increased (net of income tax effects) by the
following amounts (in thousands):
1998 1997
------ -------
Three months ended September 30 $2,027 $5,163
Nine months ended September 30 $8,884 $13,185
Changes in net unrealized gains result from both market conditions and
realized gains recognized in a reporting period. The Company recognized less
realized gains, as discussed above, and less of an increase in unrealized gains
in the third quarter of 1998 than in the second quarter of 1997. For the nine
months ended September 30, 1998, the combined total of realized and unrealized
gains (net of income taxes) amounted to $5 million less than for the same
period in 1997. This is a result of less unrealized appreciation in third
quarter 1998 than in third quarter 1997 as indicated above.
Year 2000 Compliance
Year 2000 Work Plan
The Company has developed a comprehensive Year 2000 work plan to deal
with the Year 2000 Issue. The Company's Year 2000 Work Plan consists of five
phases: 1.) awareness; 2.) assessment; 3.) remediation; 4.) testing; and
5.) implementation.
During the awareness phase, the Company formed a multi-disciplinary task
force to address the Year 2000 issue, defined the Year 2000 Issue, obtained
executive level support, and educated Company personnel concerning the Year 2000
Issue and its potential affects on the Company.
During the assessment phase, the Company collected a comprehensive list
of internal items (e.g., computer hardware and software systems, other
equipment with embedded chips, services and products provided by others to the
Company, etc.) that might be affected by Year 2000 Issues. The Company also
identified critical business relationships that might be affected by the Year
2000 Issue (e.g., customer, vendors, suppliers, etc.). The Company then
evaluated these items and business relationships to determine whether they faced
Year 2000 Issues and what effect they would have on the Company if they failed
due to Year 2000 Issues.
The remediation phase includes an analysis of the items that are
affected by Year 2000 Issues, identification of problem areas, and
recommendations concerning repair of critical non-Year 2000 compliant items.
Similarly, during the remediation phase, the Company is communicating and
working with its critical business relationships to help them understand and
remediate their Year 2000 Issues.
The testing phase follows the remediation phase and includes a thorough
testing of all proposed remediation. Testing includes present and forward date
testing which simulates dates in the Year 2000. The Company has tested, or will
test, all of its critical internal systems and will attempt to verify Year 2000
compliance of its critical business relationships.
The implementation phase consists of placing all items that have been
remediated and successfully tested into production.
Status of Year 2000 Work Plan
The Company's MIS professional staff began preparing for the Year 2000
Issue as early as 1992. Since that time, the Company has been upgrading and
replacing its computer hardware and software systems. These upgrades and
replacements have been driven by non-Year 2000 related business requirements.
However, all systems that have been upgraded and replaced since 1992 have been
certified by their suppliers as Year 2000 compliant. The Company's Year 2000
Work Plan calls for all mission-critical internal computer hardware and software
systems to be Year 2000 compliant by the end of 1998. The Company believes it
is currently on schedule to meet this deadline.
<PAGE>
As of September 30, 1998, the Company generally had met the schedule
established in its Year 2000 Work Plan. The awareness and assessment phases of
its Year 2000 Work Plan have been substantially completed.
Successful completion of the Company's Year 2000 Work Plan is expected
to significantly reduce the Company's level of uncertainty about Year 2000
Issues, and, in particular, about the Year 2000 compliance and readiness of its
material business relationships. The Company believes that with the
implementation of its new computer hardware and software systems and completion
of its Year 2000 Work Plan as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
Contingency Plans
The Company is preparing a Year 2000 specific contingency plan to deal
with business failures brought about by Year 2000 Issues. During the last few
months of 1998 and the first few months of 1999, the Company will document its
Year 2000 specific contingency plan as part of its company-wide disaster
planning process.
Cost of the Year 2000 Issue
Based upon currently available information, the Company estimates that
the total cost of implementing its Year 2000 Work Plan will be less than
$1 million. This estimate does not include costs associated with converting
the Company's mainframe operating system. As discussed above, this migration
to a new mainframe system was made, primarily, to address specific business
needs rather than to address the Year 2000 issue. The cost estimate, however,
does include all activities undertaken on Year 2000 related matters across the
Company including activities pursued as part of all five phases of the Company's
Year 2000 Work Plan. Through September 30, 1998, the Company had expended
approximately $600,000 on the Year 2000 Work Plan. The majority of the
remaining costs are expected to be directed primarily towards testing,
remediation and implementation activities. These costs have been, and will
continue to be, funded through operating cash flow and are expensed generally
in the period in which they are incurred.
Private Securities Reform Act of 1995 - Forward Looking Statements Disclosure
This Report may contain forward-looking statements. For purposes of
this Report, a "Forward Looking Statement", within the meaning of the
Securities Reform Act of 1995, is any statement concerning the remainder of the
year 1998 and beyond. The actions and performance of the Company and its
subsidiaries could deviate materially from what is contemplated by the
forward-looking statements contained in this Report. Factors which might cause
deviations from the forward looking statements include, without limitations,
the following: 1) changes in the laws or regulations affecting the operations
of the Company or any of its subsidiaries; 2) changes in the business tactics
or strategies of the Company or any of its subsidiaries; 3) acquisition(s) of
assets or of new or complementary operations, or divestiture of any segment of
the existing operations of the Company or any of its subsidiaries; 4) changing
market forces or litigation which necessitate, in Management's judgment, changes
in plans, strategy or tactics of the Company or its subsidiaries and 5) adverse
weather conditions, fluctuations in the investment markets, changes in the
retail marketplace or fluctuations in interest rates, any one of which might
materially affect the operations of the Company and/or its subsidiaries.
<PAGE>
PART II. OTHER INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
SEPTEMBER 30, 1998
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibit 15 - Letter re: Unaudited Interim Financial Information
b.) Exhibits 27 - Financial Data Schedules (4)
c.) Reports on Form 8-K - None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto dully authorized.
THE MIDLAND COMPANY
Date _______October 15, 1998_______ s/John I. Von Lehman__________________
John I. Von Lehman, Executive Vice
President and Chief Financial Officer
<PAGE>
EXHIBIT 15
LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
The Midland Company:
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited interim
financial information of The Midland Company and subsidiaries for the periods
ended September 30, 1998 and 1997, as indicated in our report dated
October 15, 1998; because we did not perform an audit, we expressed no opinion
on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, is
incorporated by reference in Registration Statements No. 33-64821 on Form S-3
and No. 33-48511 on Form S-8.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
s/Deloitte & Touche LLP
- -----------------------
Deloitte & Touche LLP
Cincinnati, Ohio
October 15, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 421,280,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 103,271,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 536,197,000
<CASH> 15,562,000
<RECOVER-REINSURE> 21,815,000
<DEFERRED-ACQUISITION> 64,643,000
<TOTAL-ASSETS> 798,937,000
<POLICY-LOSSES> 133,894,000
<UNEARNED-PREMIUMS> 261,954,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 33,253,000
<NOTES-PAYABLE> 71,105,000
0
0
<COMMON> 911,000
<OTHER-SE> 220,278,000
<TOTAL-LIABILITY-AND-EQUITY> 798,937,000
280,600,000
<INVESTMENT-INCOME> 17,779,000
<INVESTMENT-GAINS> 4,935,000
<OTHER-INCOME> 26,892,000
<BENEFITS> 162,555,000
<UNDERWRITING-AMORTIZATION> 76,245,000
<UNDERWRITING-OTHER> 40,879,000
<INCOME-PRETAX> 23,330,000
<INCOME-TAX> 6,353,000
<INCOME-CONTINUING> 16,977,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,977,000
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.80
<RESERVE-OPEN> 108,334,000
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 114,563,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The JUN-30-1998 Financial Data Schedule is being amended to correct the
"PERIOD-END" on the original filing to read JUN-30-1998.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 390,739,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 108,138,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 515,612,000
<CASH> 22,092,000
<RECOVER-REINSURE> 21,552,000
<DEFERRED-ACQUISITION> 60,786,000
<TOTAL-ASSETS> 779,217,000
<POLICY-LOSSES> 133,949,000
<UNEARNED-PREMIUMS> 249,900,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 31,259,000
<NOTES-PAYABLE> 75,803,000
0
0
<COMMON> 911,000
<OTHER-SE> 211,159,000
<TOTAL-LIABILITY-AND-EQUITY> 799,217,000
184,533,000
<INVESTMENT-INCOME> 11,784,000
<INVESTMENT-GAINS> 3,268,000
<OTHER-INCOME> 18,083,000
<BENEFITS> 107,796,000
<UNDERWRITING-AMORTIZATION> 51,061,000
<UNDERWRITING-OTHER> 27,658,000
<INCOME-PRETAX> 13,062,000
<INCOME-TAX> 3,384,000
<INCOME-CONTINUING> 9,678,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,678,000
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.03
<RESERVE-OPEN> 108,334,000
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 115,107,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
These Financial Data Schedules are being restated to present basic and diluted
earnings per share in connection with FAS 128.
</LEGEND>
<RESTATED>
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 6-MOS
9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996
SEP-30-1996
<CASH> 6,385,000 3,617,000 4,301,000 6,041,000
3,674,000
<SECURITIES> 367,054,000 400,462,000 352,390,000 354,944,000
362,336,000
<RECEIVABLES> 94,677,000 112,055,000 99,635,000 108,873,000
128,787,000
<ALLOWANCES> 1,362,000 1,301,000 1,364,000 1,345,000
1,332,000
<INVENTORY> 6,954,000 13,329,000 5,196,000 15,176,000
16,575,000
<CURRENT-ASSETS> 0 0 0 0
0
<PP&E> 131,616,000 124,672,000 128,219,000 128,549,000
127,000,000
<DEPRECIATION> 45,767,000 42,997,000 42,282,000 43,806,000
43,918,000
<TOTAL-ASSETS> 604,703,000 659,539,000 590,102,000 614,018,000
641,678,000
<CURRENT-LIABILITIES> 0 0 0 0
0
<BONDS> 62,470,000 62,470,000 61,702,000 60,938,000
60,169,000
0 0 0 0
0
0 0 0 0
0
<COMMON> 911,000 911,000 911,000 911,000
911,000
<OTHER-SE> 155,684,000 158,777,000 147,103,000 145,105,000
149,506,000
<TOTAL-LIABILITY-AND-EQUITY> 604,703,000 659,539,000 590,102,000 614,018,000
641,678,000
<SALES> 37,732,000 32,754,000 5,732,000 7,577,000
19,631,000
<TOTAL-REVENUES> 350,960,000 370,492,000 86,062,000 172,932,000
270,332,000
<CGS> 35,215,000 27,179,000 5,761,000 7,708,000
16,685,000
<TOTAL-COSTS> 330,080,000 362,348,000 92,127,000 168,606,000
256,133,000
<OTHER-EXPENSES> 3,462,000 3,115,000 1,187,000 1,979,000
2,503,000
<LOSS-PROVISION> 468,000 (75,000) (10,000) (10,000)
(10,000)
<INTEREST-EXPENSE> 4,434,000 5,873,000 1,426,000 2,918,000
4,480,000
<INCOME-PRETAX> 12,516,000 (769,000) (8,668,000) (8,269,000)
(9,459,000)
<INCOME-TAX> 2,964,000 (1,837,000) (3,424,000) (3,679,000)
(4,475,000)
<INCOME-CONTINUING> 9,552,000 1,068,000 (5,244,000) (4,590,000)
(4,984,000)
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 9,552,000 1,068,000 (5,244,000) (4,590,000)
(4,984,000)
<EPS-PRIMARY> 3.24 .36 (1.78) (1.56)
(1.69)
<EPS-DILUTED> 3.11 .35 (1.78) (1.57)
(1.70)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
These Financial Data Schedules are being restated to present basic and diluted
earnings per share in connection with FAS 128.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 4,644,000 5,249,000 5,625,000
<SECURITIES> 394,367,000 410,873,000 441,931,000
<RECEIVABLES> 107,113,000 120,515,000 126,446,000
<ALLOWANCES> 1,301,000 1,301,000 (799,000)
<INVENTORY> 13,898,000 15,101,000 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 137,593,000 137,446,000 131,144,000
<DEPRECIATION> 43,183,000 45,559,000 (43,183,000)
<TOTAL-ASSETS> 662,877,000 689,472,000 711,174,000
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 63,859,000 63,094,000 62,199,000
0 0 0
0 0 0
<COMMON> 911,000 911,000 911,000
<OTHER-SE> 162,948,000 173,480,000 179,868,000
<TOTAL-LIABILITY-AND-EQUITY> 662,877,000 689,472,000 711,174,000
<SALES> 5,058,000 10,221,000 0
<TOTAL-REVENUES> 95,087,000 193,035,000 275,759,000
<CGS> 4,993,000 9,663,000 0
<TOTAL-COSTS> 83,792,000 168,316,000 247,216,000
<OTHER-EXPENSES> 785,000 2,567,000 3,195,000
<LOSS-PROVISION> 0 (28,000) 0
<INTEREST-EXPENSE> 1,391,000 2,925,000 3,612,000
<INCOME-PRETAX> 4,126,000 9,592,000 21,736,000
<INCOME-TAX> 1,035,000 2,521,000 6,312,000
<INCOME-CONTINUING> 3,091,000 7,071,000 15,424,000
<DISCONTINUED> 0 0 (6,817,000)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,091,000 7,071,000 8,607,000
<EPS-PRIMARY> 1.04 2.38 2.89
<EPS-DILUTED> 1.01 2.30 2.79
</TABLE>
