The Midland Co. Reports Q3 Profit

October 21, 2004

Cincinnati-based The Midland Company, a provider of specialty insurance products and services, reported results for the third quarter ended Sept. 30, 2004.

Net income per share was 12 cents, which included 1 cent in realized capital gains. For last year’s third quarter, net income per share was 23 cents, which included 4 cents in realized capital gains. Revenue for the quarter increased 4.7 percent to a record $192.9 million, compared with $184.2 million in last year’s third quarter. All per share amounts are on an after- tax, diluted basis.

John Hayden, Midland president and CEO, said, “We are gratified to report a profitable third quarter, given the volatile weather conditions that we experienced. In essence, the higher-than-normal catastrophe losses masked an extremely solid underwriting performance in our core lines of business.”

Catastrophe losses totaled 98 cents per share in the third quarter, 93 cents of which emanated from hurricanes Charley, Frances, Ivan and Jeanne. This compares to catastrophe losses of 29 cents per share last year.

“Catastrophe losses were unusually high in this year’s third quarter, largely due to the widespread damage caused by these four hurricanes. Based on our current premium volume and our historic experience, we would expect normal third quarter catastrophe losses in the range of 25 cents to 30 cents per share. If we had experienced a normal level of catastrophe losses during the quarter, we estimate that we were on track for earnings per share in the range of 80 to 85 cents, including 1 cent in realized capital gains,” Hayden said.

Hayden noted, “We know that many people in Florida and nearby states, including many of our policyholders, have suffered damage to their homes and property. Our hearts go out to them and we are eager to assist them in getting their lives back to normal as soon as possible. We have received approximately 9,300 claims from the four major storms that hit Florida and the southeast in August and September. We are extremely proud of the dedication displayed by our field claims staff in their prompt response to this unprecedented sequence of events. In fact, we are on track to close over 90 percent of the claims from these four storms within 30 days of the date the claims were reported to us, a standard of performance we believe is among the best in the industry.

“Specialty product claims expertise and proactive risk management are two of our key operating strategies that served us well in dealing with the four hurricanes. Our disciplined underwriting approach, comprehensive reinsurance program and strong non-catastrophe results from our core lines all contributed to our third quarter profitability. We believe that these same elements, along with our other key operating principles, position us well to achieve our long-term objective of bringing value to our shareholders,” Hayden said.

Midland’s wholly owned insurance subsidiary, American Modern Insurance Group, specializes in providing insurance products and services for niche markets such as manufactured housing, site-built dwelling, motorcycle, watercraft, snowmobile, recreational vehicle and credit life and related products. American Modern’s products and services are offered through diverse distribution channels.

For the third quarter, American Modern’s property and casualty gross written premiums grew 2.9 percent to $189.6 million from $184.3 million in last year’s third quarter. American Modern’s core manufactured housing gross written premium increased nearly 1 percent to $89.3 million in the third quarter. “The manufactured housing industry continues to be sluggish, yet American Modern continues to expand its manufactured housing premium base,” Hayden noted.

“During the quarter, we also saw the benefit of our specialty product offering and our multiple distribution channel strategies. Gross written premium from our other property and casualty specialty lines – which includes site-built dwelling, motorcycle, excess and surplus lines, collateral protection, mortgage fire, recreational vehicle and collector automobile products – collectively grew 4.9 percent in the third quarter to $100.3 million. As expected, motorcycle gross written premium decreased 25.5% to $11.1 million for the quarter as the necessary underwriting enhancements and rate increases were implemented.

“Our site-built dwelling and collateral protection lines achieved notable growth. Site-built dwelling premiums increased 8.5% to $23.0 million. Collateral protection volume benefited from a book of business we acquired in the second quarter and increased 51.1% to $13.5 million. Our diversification strategy continues to yield very positive results as we continue to strive to be a market leader in the niches where we choose to compete.”

“American Modern’s premium growth has a track record of outpacing the industry. With our market positioning, diverse distribution channels and specialty product offerings, we remain confident in our ability to grow our top line revenues,” Hayden said.

American Modern’s property and casualty combined ratio (losses and expenses as a percent of earned premium) was 105.9 percent in the third quarter, compared with 104.7 percent a year ago. The increase in the combined ratio was attributable to a high level of catastrophe losses during the quarter. Excluding catastrophe losses, American Modern’s third quarter combined ratio improved more than 11 points to 88.6 percent, compared with 99.8 percent in the same period of 2003.

“Our non-catastrophe underwriting results suggest that the actions that we have taken over the last several years, including tightened underwriting criteria and rate increases, are paying dividends. Looking at some of our core lines, the non-catastrophe loss ratios for manufactured housing and site- built dwelling decreased over 9 percentage points and motorcycle decreased by 39 percentage points, compared the to the third quarter last year,” Hayden said.

Hayden also noted that, “We continue to see considerable progress in the motorcycle line. The net loss in this line improved by 24 cents, on a quarter-over- quarter basis, coming in at 4 cents per share for the quarter as compared to 28 cents per share in the third quarter of 2003. We typically expect the motorcycle losses to be higher in the second and third quarters as these time periods represent the peak motorcycle riding season. We have made tremendous progress toward improving our motorcycle results and are well ahead of plan. As we move into the fourth quarter with the peak riding season nearly complete, we are very optimistic that we will beat our previously announced full year 2004 expected combined ratio objective of 115.9 percent by at least 5 percentage points.”

For the nine months ended Sept. 30, 2004, net income was a record of $30.6 million, or $1.60 per share, which includes 19 cents from net realized capital gains. That compares with net income of $13.3 million, or 74 cents per share, which included 8 cents per share in net capital gains, last year. Revenue increased 8.8 percent to a record $579.1 million compared with $532.2 million in the same period last year.

American Modern’s property and casualty gross written premiums grew 8.9 percent to $555.7 million for the nine months ended Sept. 30, 2004. Manufactured housing premium increased 4.4 percent over the prior year level to $257.7 million.

American Modern’s property and casualty combined ratio was 98.9 percent compared to 104.1 percent last year. Excluding the impact of catastrophe losses, American Modern’s combined ratio for the first nine months of 2004 was 90.8 percent, compared to 97.3 percent last year.

“In terms of guidance for the full year, we anticipate a combined ratio, assuming normal weather, in the range of 97.0 percent to 98.0 percent for 2004. We also expect investment income to increase moderately given the larger base of invested assets,” Hayden said. “This level of underwriting profit and investment income should put us at the low end of our previously reported full-year earnings per share guidance, in the range of $2.41 to $2.61 per share, which includes the 19 cents of capital gains realized through September 30, 2004. This would truly be a terrific performance considering that we have incurred higher than normal catastrophe losses.”

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