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_________________June 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 June 30, 1998 was
9,314,631.
PART 1. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
June 30, Dec. 31,
ASSETS 1998 1997
-------------- --------------
CASH $ 5,357,000 $ 5,277,000
-------------- --------------
MARKETABLE SECURITIES:
Fixed income (cost, $400,403,000 at June 30,
1998 and $397,033,000 at December 31, 1997) 407,474,000 404,038,000
Equity (cost, $36,771,000 at June 30, 1998 and
$33,928,000 at December 31, 1997) 108,138,000 94,791,000
-------------- --------------
Total 515,612,000 498,829,000
-------------- --------------
RECEIVABLES:
Accounts receivable 65,269,000 59,492,000
Less allowance for losses 753,000 753,000
-------------- --------------
Net 64,516,000 58,739,000
-------------- --------------
REINSURANCE RECOVERABLES AND
PREPAID REINSURANCE PREMIUMS 40,489,000 49,016,000
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT - AT COST 114,048,000 111,418,000
Less accumulated depreciation and amortization 43,334,000 39,806,000
-------------- --------------
Property, Plant and Equipment - Net 70,714,000 71,612,000
-------------- --------------
OTHER INVESTMENTS IN REAL ESTATE 14,779,000 14,779,000
-------------- --------------
DEFERRED INSURANCE POLICY ACQUISITION COSTS 60,786,000 55,590,000
-------------- --------------
OTHER ASSETS 6,964,000 6,621,000
-------------- --------------
TOTAL $ 779,217,000 $ 760,463,000
============== ==============
See notes to the consolidated financial statements.
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
June 30, Dec. 31,
LIABILITIES & SHAREHOLDERS' EQUITY 1998 1997
-------------- --------------
NOTES PAYABLE WITHIN ONE YEAR:
Banks $ 9,000,000 $ 24,000,000
Commercial paper 6,232,000 5,791,000
-------------- --------------
Total 15,232,000 29,791,000
-------------- --------------
INSURANCE COMMISSIONS PAYABLE 17,641,000 19,033,000
-------------- --------------
OTHER PAYABLES AND ACCRUALS 46,449,000 49,998,000
-------------- --------------
FUNDS HELD UNDER REINSURANCE AGREEMENTS
AND REINSURANCE PAYABLES 13,618,000 15,443,000
-------------- --------------
UNEARNED INSURANCE PREMIUMS 249,900,000 240,340,000
-------------- --------------
INSURANCE LOSS RESERVES 133,949,000 120,134,000
-------------- --------------
DEFERRED FEDERAL INCOME TAX 29,787,000 26,180,000
-------------- --------------
LONG-TERM DEBT 60,571,000 62,518,000
-------------- --------------
SHAREHOLDERS' EQUITY:
Common stock (issued and outstanding:
9,315,000 shares at June 30, 1998 and
9,334,000 shares at December 31, 1997
after deducting treasury stock of
1,613,000 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 15,530,000 15,359,000
Retained earnings 162,311,000 153,797,000
Accumulated other comprehensive income
(net unrealized gain on marketable securities) 50,980,000 44,123,000
Treasury stock - at cost (15,627,000) (14,704,000)
Unvested restricted stock awards (2,035,000) (2,460,000)
-------------- --------------
Total 212,070,000 197,026,000
-------------- --------------
TOTAL $ 779,217,000 $ 760,463,000
============== ==============
See notes to the consolidated financial statements.
THE MIDLAND COMPANY
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Six-Mos. Ended June 30, Three-Mos. Ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
REVENUES: ------------- ------------- ------------- -------------
Insurance:
Premiums earned $184,533,000 $153,682,000 $ 94,054,000 $ 78,412,000
Net investment
income 11,784,000 10,199,000 5,942,000 5,166,000
Net realized
investment gains 3,268,000 1,409,000 2,229,000 31,000
Other insurance
income 1,063,000 1,515,000 578,000 794,000
Transportation 16,525,000 15,888,000 7,288,000 8,319,000
Other 495,000 117,000 340,000 61,000
------------- ------------- ------------- -------------
Total 217,668,000 182,810,000 110,431,000 92,783,000
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Insurance:
Losses and loss
adjustment expenses 107,796,000 83,337,000 59,675,000 41,738,000
Commissions and
other policy
acquisition costs 51,061,000 43,660,000 25,548,000 21,777,000
Operating and
administrative
expenses 27,658,000 23,596,000 12,803,000 11,962,000
Transportation
operating expenses 13,873,000 14,211,000 5,960,000 7,166,000
Interest expense 2,521,000 2,410,000 1,264,000 1,255,000
Other operating and
administrative
expenses 1,697,000 2,568,000 703,000 1,782,000
------------- ------------- ------------- -------------
Total 204,606,000 169,782,000 105,953,000 85,680,000
------------- ------------- ------------- -------------
INCOME FROM CONTINUING
OPERATIONS BEFORE
FEDERAL INCOME TAX 13,062,000 13,028,000 4,478,000 7,103,000
PROVISION FOR FEDERAL
INCOME TAX 3,384,000 3,716,000 840,000 2,056,000
------------- ------------- ------------- -------------
INCOME FROM CONTINUING
OPERATIONS 9,678,000 9,312,000 3,638,000 5,047,000
------------- ------------- ------------- -------------
LOSS FROM DISCONTINUED
OPERATIONS LESS RELATED
INCOME TAX CREDITS OF
$1,196,000 AND $571,000,
RESPECTIVELY - (2,242,000) - (1,067,000)
------------- ------------- ------------- -------------
NET INCOME $ 9,678,000 $ 7,070,000 $ 3,638,000 $ 3,980,000
============= ============= ============= =============
BASIC EARNINGS (LOSS)
PER SHARE OF COMMON STOCK:
Continuing operations $ 1.07 $ 1.04 $ .40 $ .56
Discontinued
operations - (.25) - (.12)
------------- ------------- ------------- -------------
Total $ 1.07 $ .79 $ .40 $ .44
============= ============= ============= =============
DILUTED EARNINGS (LOSS)
PER SHARE OF COMMON STOCK:
Continuing operations $ 1.03 $ 1.01 $ .39 $ .55
Discontinued
operations - (.24) - (.12)
------------- ------------- ------------- -------------
Total $ 1.03 $ .77 $ .39 $ .43
============= ============= ============= =============
CASH DIVIDENDS PER SHARE
OF COMMON STOCK $ .125 $ .1167 $ .0625 $ .0583
============= ============= ============= =============
See notes to the consolidated financial statements. All prior period per share
amounts have been adjusted for the three-for-one stock split (Note 2).
THE MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (Unaudited)
Amounts in 000's
Accumulated Unvested
Additional Other Com- Restricted Compre-
Common Paid-In Retained prehensive Treasury Stock hensive
Stock Capital Earnings Income Stock Awards Total Income
------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1996 $ 911 $ 14,846 $138,423 $ 23,587 $(16,621) $ (1,458) $159,688
Comprehensive income:
Net income 7,070 7,070 $ 7,070
Changes in unrealized gain
on marketable securities,
net of tax 8,022 8,022 8,022
---------
Total comprehensive income $ 15,092
Issuance of treasury stock, =========
net 35 71 106
Cash dividends declared (1,088) (1,088)
Exercise of stock options (20) 67 47
Restricted stock awards 626 1,808 (2,434) -
Amortization and cancellation
of unvested restricted stock
awards (15) (21) 582 546
------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 $ 911 $ 15,472 $144,405 $ 31,609 $(14,696) $ (3,310) $174,391
==========================================================================================
BALANCE,
DECEMBER 31, 1997 $ 911 $ 15,359 $153,797 $ 44,123 $(14,704) $ (2,460) $197,026
Comprehensive income:
Net income 9,678 9,678 $ 9,678
Changes in unrealized gain
on marketable securities,
net of tax 6,857 6,857 6,857
---------
Total comprehensive income $ 16,535
Purchase of treasury stock, =========
net 142 (1,151) (1,009)
Cash dividends declared (1,164) (1,164)
Exercise of stock options 59 279 338
Amortization and cancellation
of unvested restricted stock
awards (30) (51) 425 344
------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 $ 911 $ 15,530 $162,311 $ 50,980 $(15,627) $ (2,035) $212,070
==========================================================================================
See notes to the consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
1998 1997
Cash Flows from Operating Activities: -------------- --------------
Net income $ 9,678,000 $ 7,070,000
Loss from discontinued operations - 2,242,000
--------------------------------
Income from continuing operations 9,678,000 9,312,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,312,000 5,405,000
Increase in insurance loss reserves 13,815,000 8,236,000
Increase in unearned insurance premiums 9,560,000 7,172,000
Decrease (increase) in reinsurance
recoverables and prepaid reinsurance
premiums 8,527,000 (1,006,000)
Increase in net accounts receivable (5,777,000) (9,080,000)
Decrease (increase) in deferred insurance
policy acquisition costs (5,196,000) 2,685,000
Increase (decrease) in other accounts
payable and accruals (4,131,000) 1,139,000
Increase (decrease) in funds held under
reinsurance agreements and reinsurance
payables (1,825,000) 2,891,000
Increase (decrease) in insurance
commissions payable (1,392,000) 1,310,000
Decrease (increase) in other assets (343,000) 61,000
Decrease in deferred federal income tax (85,000) (173,000)
Other-net 26,000 (109,000)
--------------------------------
Net cash provided by continuing operations 27,169,000 27,843,000
Net cash used in discontinued operations - (3,500,000)
--------------------------------
Net cash provided by operating activities 27,169,000 24,343,000
--------------------------------
Cash Flows from Investing Activities:
Purchase of marketable securities (106,332,000) (101,943,000)
Sale of marketable securities 61,268,000 54,174,000
Maturity of marketable securities 19,779,000 13,861,000
Decrease in cash equivalent marketable
securities 18,796,000 35,854,000
Acquisition of property, plant and equipment (3,183,000) (16,213,000)
Sale of property, plant and equipment 400,000 873,000
--------------------------------
Net cash used in investing activities (9,272,000) (13,394,000)
--------------------------------
Cash Flows from Financing Activities:
Decrease in net short-term borrowings (14,559,000) (8,794,000)
Repayment of long-term debt (1,746,000) (1,493,000)
Net issuance (purchase) of treasury stock (730,000) 173,000
Dividends paid (581,000) (1,045,000)
Payment of capitalized lease obligations (201,000) (183,000)
Issuance of long-term debt - 2,300,000
--------------------------------
Net cash used in financing activities (17,817,000) (9,042,000)
--------------------------------
Net Increase in Cash 80,000 1,907,000
Cash at Beginning of Period 5,277,000 3,342,000
--------------------------------
Cash at End of Period $ 5,357,000 $ 5,249,000
================================
See notes to the consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six-month periods ended June 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.
Reclassifications have been made to the 1997 amounts related to the previously
reported sale in 1997 by the Company's sportswear subsidiary of substantially
all of its assets. Amounts related to this business are reported in the
financial statements as discontinued operations. Certain other
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
------------- ---------------
Six months ended June 30:
1998 9,004,000 9,403,000
========= =========
1997 8,916,000 9,217,000
========= =========
4. INCOME TAXES
The federal income tax provisions for the three and six-month periods ended
June 30, 1998 and 1997 are different from amounts derived by applying the
statutory tax rates to income before federal income tax as follows:
Six-Mos. Ended June 30, Three-Mos. Ended June 30,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Federal income tax at
statutory rate $4,572,000 $3,357,000 $1,567,000 $1,913,000
Add (deduct) the tax
effect of:
Tax exempt interest and
excludable dividend
income (1,013,000) (765,000) (562,000) (387,000)
Investment tax credits (84,000) (182,000) (42,000) (91,000)
Other - net (91,000) 110,000 (123,000) 50,000
----------- ----------- ----------- -----------
Provision for federal
income tax $3,384,000 $2,520,000 $ 840,000 $1,485,000
=========== =========== =========== ===========
THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest of $2,421,000 and $3,296,000 in the first six months
of 1998 and 1997, respectively. The Company paid income taxes of $3,223,000 and
$955,000 during the first six months of 1998 and 1997, respectively. In
January, 1997, the Company issued 196,050 shares (on a post-split basis) of
treasury stock under a restricted stock award program that decreased treasury
stock by approximately $1,808,000 and also increased paid-in capital by
approximately $626,000.
6. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130 requires the
reporting of comprehensive income, and the Company adopted SFAS No. 130
beginning in 1998. Comprehensive income for the Company consists of net income
and the after-tax effect of changes in the market values of the Company's
marketable securities. Comprehensive income is disclosed in the "Consolidated
Statements of Changes in Shareholders' Equity".
7. SEGMENT DISCLOSURES
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", will be adopted by the Company for its annual financial statements
for 1998. Adoption will not impact the reported results of operations of the
Company but will require additional disclosures.
INDEPENDENT ACCOUNTANTS' REPORT
The Midland Company:
We have reviewed the accompanying consolidated balance sheet of The Midland
Company and subsidiaries as of June 30, 1998, and the related consolidated
statements of income for the three-month and six-month periods ended June 30,
1998 and 1997 and of cash flows and changes in shareholders' equity for the
six-month periods ended June 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
July 16, 1998
THE MIDLAND COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A detailed discussion of the Company's liquidity and capital resources
is included in the 1997 Annual Report on Form 10-K. Except as discussed below,
no material changes have taken place since that date and, accordingly, the
discussion is not repeated herein.
RESULTS OF OPERATIONS
Insurance
Property and Casualty Premiums
Direct and assumed written premiums generated from American Modern
Insurance Group, Inc.'s ("AMIG") property and casualty insurance subsidiaries
increased 8.6% for the second quarter of 1998 to $122.1 million from $112.4
million for the comparable quarter of 1997. On a year-to-date basis, direct and
assumed written premiums increased 8.1% to $222.9 million from $206.1 million
for the same period in 1997. Net earned premiums for the second quarter
increased 19.8% to $92.4 million from $77.1 million for the comparable quarter
in 1997. Year-to-date net earned premiums increased 20.1% to $181.3 million
from $151.0 million for the same period in 1997. The disparity in growth rates
between the direct and assumed written premiums and net earned premiums for the
periods presented is due primarily to changes in a quota-share reinsurance
agreement in 1998 compared to 1997.
The growth in direct and assumed written premiums is primarily the
result of volume increases in manufactured home and related coverages insurance
premium. On a year-to-date basis, manufactured home and related coverages
direct and assumed written premium increased 17.6% to $147.9 million from $125.8
million for the same six-month period of 1997. Direct and assumed written
premiums of all other specialty insurance products collectively decreased, on a
year-to-date basis, by 6.6% to $75.0 million from $80.3 million for the first
six months of 1997.
Investment Income and Realized Capital Gains
AMIG's net investment income (before taxes and excluding capital gains)
increased by approximately 15.0% to $5.9 million in the second quarter of 1998
from $5.2 million for the second quarter of 1997. On a year-to-date basis,
AMIG's net investment income (before taxes and excluding capital gains)
increased 15.5% to $11.8 million in 1998 from $10.2 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) increased to $1.4 million,
$0.16 per share (diluted), for the second quarter of 1998 from $20,000, less
than $0.01 per share (diluted), for the second quarter of 1997. On a
year-to-date basis, after-tax realized capital gains increased to $2.1 million,
$0.23 per share (diluted), from $0.9 million, $0.10 per share (diluted), for the
same period in 1997. The increase in the realized capital gains is a result
of the active management of the investment portfolio by the various portfolio
managers.
Losses and Loss Adjustment Expenses (LAE)
Losses and LAE in the second quarter of 1998 increased 43.0% to $59.7
million from $41.7 million for the second quarter of 1997. This increase is
primarily the result of weather-related catastrophe losses for the quarter.
Weather-related catastrophe losses amounted to $10.7 million on a pre-tax
basis, representing approximately 11.6 percentage points of the 103.8% quarterly
combined ratio for the property and casualty operations during the second
quarter. This compares to weather-related catastrophe losses in the second
quarter of 1997 that totaled $2.7 million (pre-tax), representing approximately
3.5 percentage points of the 94.7% quarterly combined ratio for the property and
casualty operations. Such losses had an after-tax impact of approximately
$0.74 per share (diluted) and $0.19 per share (diluted) on the second quarter
results of 1998 and 1997, respectively. The current year's quarterly weather-
related losses are primarily the result of a series of storm systems that caused
an unusually large amount of wind, hail and water damage throughout the United
States during the second quarter.
On a year-to-date basis, losses and LAE increased 29.3% to $107.8
million from $83.3 million in the first six months of 1997. This increase is
due primarily to an increase in the level of weather-related catastrophe losses
that occurred during the first six months of 1998 compared to the prior year.
Weather-related catastrophe losses amounted to $18.2 million on a pre-tax basis
representing approximately 10.1 percentage points of the 99.6% year-to-date
combined ratio for the property and casualty operations in the first six months
of 1998. This compares to weather-related catastrophe losses in the first six
months of 1997 which totaled $10.5 million (pre-tax) representing approximately
7.0 percentage points of the 96.4% combined ratio for the property and casualty
operations. Such losses had an after-tax impact of approximately $1.26 per
share (diluted) and $0.74 per share (diluted) for the first six months of 1998
and 1997, respectively.
Commissions, Other Policy Acquisition Costs and Other Operating and
Administration Expenses
Commissions, other policy acquisitions costs and other operating and
administrative expenses for the second quarter increased 13.7% to $38.4 million
from $33.7 million for the second quarter of 1997. On a year-to-date basis,
commissions, other policy acquisition costs and other operating and
administrative expenses increased 17.0% to $78.7 million from $67.3 million for
the same period in 1997. These increases are due primarily to the continued
growth in net earned premiums. Despite the dollar increases in expenses, the
year-to-date underwriting expense ratio (ratio of underwriting expenses to net
earned premium) decreased to 41% in 1998 from 42.1% in 1997. This decrease is
due primarily to expenses increasing at a slower pace than net earned premiums.
Overall Underwriting Results
AMIG's property and casualty operations generated a pre-tax underwriting
loss of $(3.5) million for the second quarter of 1998 compared to a pre-tax
underwriting income of $4.1 million for the second quarter of 1997. For the
quarter, the property and casualty companies' ratio of losses and expenses to
net earned premiums (combined ratio) was 103.8% in 1998 compared to 94.7% in
the prior year. As discussed in "Losses and LAE" above, this change in
underwriting results was the direct result of the unfavorable weather patterns
during the second quarter.
On a year-to-date basis, AMIG's property and casualty operations
generated a pre-tax underwriting income of $0.7 million in 1998 compared to $5.3
million in the first six months of the prior year. This equates to a year-to-
date combined ratio of 99.6% in 1998 compared to 96.4% in 1997.
Transportation
Transportation revenues for the second quarter decreased 12.4% to $7.3
million from $8.3 million for the second quarter of 1997. On a year-to-date
basis, transportation revenues increased 4.0% to $16.5 million from $15.9
million for the same period in 1997. These fluctuations were due primarily to
fluctuations in total ton-miles (a ratio that reflects both significant revenue
factors: tonnage and mileage) for the periods presented. Transportation's
pre-tax profits for the quarter improved 25.5% to $1.2 million from $0.9 million
for the second quarter of 1997. On a year-to-date basis, transportation's pre-
tax profits increased 72.3% to $2.4 million from $1.4 million for the same
period in 1997. This year-to-date growth on profits is due primarily to an
overall increase in the amount of tonnage hauled for the first six months of
1998 compared to the prior year.
Discontinued Operations
As previously reported, on September 29, 1997, the Company's sportswear
subsidiary sold the majority of its assets to Brazos, Inc., a subsidiary of
Brazos Sportswear, Inc. After-tax operating losses from the discontinued
operations for the second quarter and first six months of 1997 amounted to
$(1,067,000), $(0.12) per share (diluted), and $(2,242,000), $(0.24) 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, coupled with sales and maturities of
marketable securities, were used to reduce the Company's short-term borrowings
from the year-end 1997 balances. Shareholders' Equity increased 7.6% to $212.0
million at June 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 and reinsurance payables are due primarily to a change in the amount
of insurance premium ceded to reinsurers under certain reinsurance treaties.
The increase in deferred acquisition costs, unearned premiums and loss reserves
are due primarily to the continued growth in direct and assumed written premium.
Capital expenditures for the first six months of 1998 and 1997 amounted to $3.2
million and $16.2 million, respectively. The majority of the capital expedition
in 1997 related to the acquisition of 41 barges by M/G Transport.
Management expects that the cash and other liquid investments coupled
with the future collection of receivables will be readily available to match the
Company's operating cash requirements for the next twelve months. The Company
declared $1.2 million in dividends to its shareholders during the first six
months of 1998.
OTHER MATTERS
Comprehensive Income
For the Company, the only difference between net income and
comprehensive income is the next change in unrealized gain on marketable
securities. For the three-month and six-month periods ended June 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 June 30 $2,820 $6,750
Six months ended June 30 $6,857 $8,022
Changes in net unrealized gains result from both market conditions and realized
gains recognized in a reporting period. The Company recognized more realized
gains, as discussed above, and less of an increase in unrealized gains in the
second quarter of 1998 than in the second quarter of 1997. For the six months
ended June 30, 1998, the combined total of realized and unrealized gains (net of
income taxes) approximated the same amount as for the same period in 1997.
Private Securities Reform Act of 1995 - Forward Looking Statements Disclosure
This Report may contain forward-looking statements. For purposes of
this Report, a "Forward Looking Statement", within the meaning of the Securities
Reform Act of 1995, is any statement concerning the remainder of the year 1998
and beyond. The actions and performance of the Company and its subsidiaries
could deviate materially from what is contemplated by the forward-looking
statements contained in this Report. Factors which might cause deviations from
the forward looking statements include, without limitations, the following:
1) changes in the laws or regulations affecting the operations of the Company or
any of its subsidiaries; 2) changes in the business tactics or strategies of the
Company or any of its subsidiaries; 3) acquisition(s) of assets or of new or
complementary operations, or divestiture of any segment of the existing
operations of the Company or any of its subsidiaries; 4) changing market forces
or litigation which necessitate, in Management's judgment, changes in plans,
strategy or tactics of the Company or its subsidiaries and 5) adverse weather
conditions, fluctuations in the investment markets, changes in the retail
marketplace or fluctuations in interest rates, any one of which might materially
affect the operations of the Company and/or its subsidiaries.
PART II. OTHER INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
JUNE 30, 1998
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On April 9, 1998, the Company amended its Articles of Incorporation
to increase the number of authorized shares of common stock from
5,000,000 to 20,000,000.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Results of the Company's 1998 annual meeting of shareholders held on
April 9, 1998, were reported in the Form 10-Q Quarterly Report dated
April 9, 1998. Among the actions taken at that meeting, the
shareholders approved amendments to the Company's Articles of
Incorporation and Code of Regulations, which amendments are attached
hereto as Exhibit 3(i) and 3(ii).
Item 5. Other Information
The form of proxy for the annual meeting of shareholders grants
discretionary authority to the designated proxies to vote on: (i) any
matters that come before the meeting, other than those set forth in
the Company's proxy statement; or (ii) matters as to which adequate
notice has not been received by the Company. In order for a notice
to be deemed adequate for the Company's 1999 annual shareholder's
meeting, it must be received at the Company's executive offices on or
before January 20, 1999.
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibit 3(i) - Articles of Incorporation (Consolidated to include
all amendments through June 30, 1998)
b.) Exhibit 3(ii) - Code of Regulations (Consolidated to include
all amendments through June 30, 1998)
c.) Exhibit 15 - Letter re: Unaudited Interim Financial Information
d.) Exhibit 27 - Financial Data Schedule
e.) 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 ___July 16, 1998__________ s/John I. Von Lehman_________________
John I. Von Lehman, Executive Vice
President and Chief Financial Officer