Bancinsurance Corp. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2005


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

For the transition period from to

Commission file number 0-8738

BANCINSURANCE CORPORATION

(Exact name of registrant as specified in its charter)


Ohio		31-0790882

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


250 East Broad Street, Columbus, Ohio		43215

(Address of principal executive offices)		(Zip Code)

(614) 220-5200

(Registrant’s telephone number, including area code)

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES o NO þ

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. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

YES o NO þ

The number of outstanding common shares, without par value, of the registrant as of December 20, 2005 was 4,972,700.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended
	March 31,
	2005			2004
Revenues:
Net premiums earned	$	12,647,136		$	10,971,647
Net investment income		634,195			410,835
Net realized gains on investments		374,298			343,872
Codification and subscription fees		837,622			993,461
Management fees		—			32,997
Other income		62,954			53,876

Total revenues		14,556,205			12,806,688


Expenses:
Losses and loss adjustment expenses (“LAE”)		5,537,980			6,225,285
Discontinued bond program losses and LAE		3,653,507			90,341
Commission expense		2,817,014			2,112,529
Other insurance operating expenses		2,577,313			1,335,783
Codification and subscription expenses		656,134			990,837
General and administrative expenses		(5,605	)		221,872
Interest expense		254,583			226,603

Total expenses		15,490,926			11,203,250


Income (loss) before federal income taxes		(934,721	)		1,603,438

Federal income tax expense (benefit)		(473,338	)		444,845


Net income (loss)	$	(461,383	)	$	1,158,593


Net income (loss) per common share:
Basic	$	(.09	)	$	.24

Diluted	$	(.09	)	$	.22

See accompanying notes to consolidated financial statements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)


	March 31,		December 31,
	2005		2004
Assets
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value $4,954,065 in 2005 and $5,034,173 in 2004)	$	4,900,637	$	4,909,873
Available for sale:
Fixed maturities, at fair value (amortized cost $46,354,382 in 2005 and $53,406,973 in 2004)		46,815,657		54,139,496
Equity securities, at fair value (cost $10,169,697 in 2005 and $8,545,757 in 2004)		11,490,630		10,312,382
Short-term investments, at cost which approximates fair value		14,774,789		12,712,577
Other invested assets		715,000		715,000


Total investments		78,696,713		82,789,328


Cash		2,464,561		3,791,267
Premiums receivable		9,164,025		7,911,379
Accounts receivable, net		587,124		710,525
Reinsurance recoverables		1,138,029		1,943,602
Prepaid reinsurance premiums		2,949,163		2,859,710
Deferred policy acquisition costs		8,922,898		7,223,995
Estimated earnings in excess of billings on uncompleted codification contracts		198,205		182,441
Loans to affiliates		834,007		836,022
Intangible assets, net		826,901		845,531
Accrued investment income		737,095		887,467
Current federal income taxes		3,629,386		3,688,228
Deferred federal income taxes		2,354,912		1,637,813
Taxes, licenses and fees receivable		206,555		72,520
Other assets		1,821,315		1,680,644


Total assets	$	114,530,889	$	117,060,472

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Consolidated Balance Sheets, Continued
(Unaudited)


	March 31,			December 31,
	2005			2004
Liabilities and Shareholders’ Equity
Reserve for unpaid losses and LAE	$	8,950,609		$	11,563,111
Discontinued bond program reserve for unpaid losses and LAE		22,855,416			19,203,356
Unearned premiums		31,188,798			27,719,148
Ceded reinsurance premiums payable		783,844			493,963
Experience rating adjustments payable		323,657			1,456,403
Retrospective premium adjustments payable		2,051,190			7,276,225
Funds held under reinsurance treaties		1,157,854			1,253,796
Contract funds on deposit		886,302			811,358
Deferred ceded commissions		1,015,289			1,034,931
Commissions payable		3,079,606			4,022,811
Billings in excess of estimated earnings on uncompleted codification contracts		62,816			60,227
Notes payable		40,678			540,198
Other liabilities		2,760,942			1,313,657
Trust preferred debt issued to affiliates		15,465,000			15,465,000


Total liabilities		90,622,001			92,214,184


Commitments and contingencies

Shareholders’ equity:

Non-voting preferred shares:
Class A Serial Preference Shares without par value; authorized 100,000 shares; no shares issued or outstanding		—			—
Class B Serial Preference Shares without par value; authorized 98,646 shares; no shares issued or outstanding		—			—
Common shares without par value; authorized 20,000,000 shares; 6,170,341 shares issued at March 31, 2005 and December 31, 2004, 4,972,700 shares outstanding at March 31, 2005 and December 31, 2004		1,794,141			1,794,141
Additional paid-in capital		1,336,073			1,336,073
Accumulated other comprehensive income		1,173,422			1,649,439
Retained earnings		25,377,329			25,838,712


		29,680,965			30,618,365
Less: Treasury shares, at cost (1,197,641 common shares at March 31, 2005 and December 31, 2004)		(5,772,077	)		(5,772,077	)


Total shareholders’ equity		23,908,888			24,846,288


Total liabilities and shareholders’ equity	$	114,530,889		$	117,060,472

See accompanying notes to consolidated financial statements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended
	March 31,
	2005			2004
Cash flows from operating activities:
Net income (loss)	$	(461,383	)	$	1,158,593
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Net realized gains on investments		(374,298	)		(343,872	)
Depreciation and amortization		152,332			76,867
Deferred federal income tax (benefit) expense		(473,338	)		9,945
Change in assets and liabilities:
Premiums receivable		(1,252,646	)		2,191,306
Accounts receivable, net		123,401			165,482
Reinsurance recoverables		805,573			1,236,991
Prepaid reinsurance premiums		(89,453	)		2,080,031
Deferred policy acquisition costs		(1,698,903	)		(316,234	)
Other assets, net		(85,088	)		152,701
Reserve for unpaid losses and LAE		1,039,558			(2,568,997	)
Unearned premiums		3,469,650			(678,273	)
Ceded reinsurance premiums payable		289,881			(1,721,963	)
Experience rating adjustments payable		(1,132,746	)		1,700,330
Retrospective premium adjustments payable		(5,225,035	)		(3,592,791	)
Funds held under reinsurance treaties		(95,942	)		(942,923	)
Contract funds on deposit		74,944			1,053,904
Deferred ceded commissions		(19,642	)		(248,031	)
Other liabilities, net		507,148			(1,346,532	)

Net cash used in operating activities		(4,445,987	)		(1,933,466	)

Cash flows from investing activities:
Proceeds from held to maturity fixed maturities due to redemption or maturity		5,000			10,000
Proceeds from available for sale fixed maturities sold, redeemed or matured		15,719,094			3,264,762
Proceeds from available for sale equity securities sold		6,088,556			7,117,269
Cost of investments purchased:
Available for sale fixed maturities		(8,772,939	)		(4,454,875	)
Equity securities		(7,326,538	)		(2,006,721	)
Net change in short-term investments and other invested assets		(2,062,212	)		(2,547,705	)
Purchase of land, property and leasehold improvements		(31,680	)		—

Net cash provided by investing activities		3,619,281			1,382,730

Cash flows from financing activities:
Proceeds from note payable to bank		—			3,000,000
Repayments of note payable to bank		(500,000	)		(2,400,000	)

Net cash provided by (used in) financing activities		(500,000	)		600,000

Net increase (decrease) in cash		(1,326,706	)		49,264
Cash at December 31		3,791,267			2,949,627

Cash at March 31	$	2,464,561		$	2,998,891


Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	253,995		$	225,590

Federal income taxes	$	—		$	455,000

See accompanying notes to consolidated financial statements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Basis of Presentation

We prepared the consolidated balance sheet as of March 31, 2005, the consolidated statements of operations for the three months ended March 31, 2005 and 2004 and the consolidated statements of cash flows for three months ended March 31, 2005 and 2004, without an audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to fairly present the financial position, results of operations and cash flows of Bancinsurance Corporation and its subsidiaries as of March 31, 2005 and for all periods presented have been made.

We prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted. We recommend that you read these unaudited consolidated financial statements together with the Company’s amended Quarterly Reports on Form 10-Q/A for the quarterly periods ended June 30, 2004 and September 30, 2004, Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2005 and September 30, 2005, which are being filed contemporaneously with the filing of this Form 10-Q. The results of operations for the period ended March 31, 2005 are not necessarily indicative of the results of operations for the full 2005 year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In accordance with Statements of Financial Accounting Standards (“SFAS”) No. 60, Accounting and Reporting by Insurance Enterprises, the statements of operations reflect experience rating adjustments as part of net premiums earned rather than as a separate expense item, as was previously reported in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004. Certain other prior year amounts have been reclassified in order to conform to the 2005 presentation.

This Form 10-Q reflects corrections to the Company’s stock option disclosure as previously reported for the three month period ended March 31, 2004 (the “stock option disclosure correction”). This stock option disclosure correction was the result of errors in the Company’s disclosure pursuant to SFAS No. 123, Accounting for Stock-Based Compensation. It should be noted that this stock option disclosure correction did not have any impact to net income as previously reported.

Trust Preferred Debt Issued to Affiliates

In December 2002, we organized BIC Statutory Trust I (“BIC Trust I”), a Connecticut special purpose business trust, which issued $8,000,000 of floating rate trust preferred capital securities in an exempt private placement transaction. In September 2003, we organized BIC Statutory Trust II (“BIC Trust II”), a Delaware special purpose business trust, which issued $7,000,000 of floating rate trust preferred capital securities in an exempt private placement transaction. BIC Trust I and BIC Trust II (collectively, the “Trusts”) were formed for the sole purpose of issuing and selling the floating rate trust preferred capital securities and investing the proceeds from such securities in junior subordinated debentures of the Company. In connection with the issuance of the trust preferred capital securities, the Company issued junior subordinated debentures of $8,248,000 and $7,217,000 to BIC Trust I and BIC Trust II, respectively. The floating rate trust preferred capital securities and the junior subordinated debentures have substantially the same terms and conditions. The Company has fully and unconditionally guaranteed the obligations of the Trusts with respect to the floating rate trust preferred capital securities. The Trusts distribute the interest received from the Company on the junior subordinated debentures to the holders of their floating rate trust preferred capital securities to fulfill their dividend obligations with respect to such trust preferred securities. BIC Trust I’s floating rate trust preferred capital securities, and the junior subordinated debentures issued in connection therewith, pay dividends and interest, as applicable, on a quarterly basis at a rate equal to three month LIBOR plus four hundred basis points (6.94% and 5.12% at March 31, 2005 and 2004, respectively), are redeemable at par on or after December 4, 2007 and mature on December 4, 2032. BIC Trust II’s floating rate trust preferred capital securities, and the junior subordinated debentures issued in connection therewith, pay dividends and interest, as applicable, on a quarterly basis at a rate equal to three month LIBOR plus four hundred and five basis points (7.14% and 5.16% at March 31, 2005 and 2004, respectively), are redeemable at par on or after September 30, 2008 and mature on September 30, 2033. Interest on the junior subordinated debentures is charged to income as it accrues. Interest expense related to the junior subordinated debentures for the three months ended March 31, 2005 and 2004 was $252,109 and

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

$202,694, respectively. The terms of the junior subordinated debentures contain various restrictive covenants. The Company was in compliance with all provisions of its debt covenants at March 31, 2005.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, which requires the consolidation of certain entities considered to be variable interest entities (“VIEs”). An entity is considered to be a VIE when it has equity investors who lack the characteristics of having a controlling financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majority of the VIE’s expected losses if they occur, receive a majority of the VIE’s expected residual returns if they occur, or both. In accordance with FIN 46, BIC Trust I and II are not included in the Company’s consolidated financial statements as they do not qualify as VIEs.

Stock Option Accounting

We use the “intrinsic value method” under Accounting Principles Board Opinion No. 25 (“APB No. 25”), Accounting for Stock Issued to Employees, and related interpretations in accounting for stock options issued to employees, officers and directors under our equity compensation plans. SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended, was issued by the FASB in 1995 and requires the “fair value method” for recognition of cost on equity compensation plans similar to those used by the Company. Adoption of SFAS No. 123 is optional; however, pro forma disclosures as if we had adopted the fair value method under SFAS No. 123 for the three months ended March 31, 2005 and 2004 are presented below.


	Three Months Ended
	March 31,
	2005			2004
Net income (loss), as reported	$	(461,383	)	$	1,158,593
Deduct: Total stock-based employee compensation expense determined under “fair value” based method for all awards, net of related tax effects		(29,314	)		(28,777	)

Pro forma net income (loss)	$	(490,697	)	$	1,129,816


Net income (loss) per common share:
Basic, as reported	$	(0.09	)	$	0.24
Basic, pro forma	$	(0.10	)	$	0.23
Diluted, as reported	$	(0.09	)	$	0.22
Diluted, pro forma	$	(0.10	)	$	0.22

The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. Additional awards in future years are anticipated.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on fair value of the equity instrument issued on the grant-date. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123R replaces SFAS No. 123 and supersedes APB No. 25, the principles that the Company currently employs to account and report its employee stock option awards. SFAS No. 123R is effective at the beginning of the entity’s first fiscal year that begins after December 15, 2005. The Company will implement this standard in the first quarter of 2006. The Company cannot estimate the impact of implementing this standard on future net income (loss), but the standard would have decreased recent net income (loss) by approximately $0.01 per diluted share as shown above.

Other Comprehensive Income

The related federal income tax effects of each component of other comprehensive income (loss) are as follows:

BANCINSURANCE CORPORATION
AND SUBSIDIARIES


	Three Months Ended March 31, 2005
	Before-tax			Income			Net-of-tax
	amount			tax effect			amount
Net unrealized holding gains (losses) on securities:
Unrealized holding losses arising during 2005	$	(346,940	)	$	(117,960	)	$	(228,980	)
Less: reclassification adjustments for gains realized in net income		374,298			127,261			247,037

Net unrealized holding losses		(721,238	)		(245,221	)		(476,017	)

Other comprehensive loss	$	(721,238	)	$	(245,221	)	$	(476,017	)


	Three Months Ended March 31, 2004
	Before-tax			Income			Net-of-tax
	amount			tax effect			amount
Net unrealized holding gains (losses) on securities:
Unrealized holding gains arising during 2004	$	90,791		$	30,868		$	59,923
Less: reclassification adjustments for gains realized in net income		343,872			116,916			226,956

Net unrealized holding losses		(253,081	)		(86,048	)		(167,033	)

Other comprehensive loss	$	(253,081	)	$	(86,048	)	$	(167,033	)

Reinsurance

The Company assumes and cedes reinsurance with other insurers and reinsurers. Such arrangements serve to enhance the Company’s capacity to write business, provide greater diversification, align business partners with the Company’s interests, and/or limit the Company’s maximum loss arising from certain risks. Although reinsurance does not discharge the original insurer from its primary liability to its policyholders, it is the practice of insurers for accounting purposes to treat reinsured risks as risks of the reinsurer. The primary insurer would reassume liability in those situations where the reinsurer is unable to meet the obligations it assumed under the reinsurance agreement. The ability to collect reinsurance is subject to the solvency of the reinsurers and/or collateral provided under the contract.

Several of our lender/dealer insurance producers have formed sister reinsurance companies, commonly referred to as a producer-owned reinsurance company (“PORC”). The primary reason for an insurance producer to form a PORC is to realize the underwriting profits and investment income from the insurance premiums generated by that producer. In return for ceding business to the PORC, the Company receives a ceding commission, which is based on a percentage of the premiums ceded. Such arrangements align business partners with the Company’s interests while preserving valued customer relationships. All of the Company’s lender/dealer ceded reinsurance transactions are PORC arrangements.

Effective January 1, 2005, the Company entered into a producer-owned reinsurance arrangement with a new GAP agent whereby 100% of that agent’s premiums (along with the associated risk) were ceded to its PORC.

Beginning in the second quarter of 2004, the Company entered into a quota share reinsurance arrangement with a waste surety bond underwriter whereby the Company assumed and ceded 50% of the applicable business. Effective January 1, 2005, the reinsurance arrangement was amended whereby the Company assumes 25% and cedes 75% of the applicable business.

See below for a description of the Company’s discontinued bond program.

A reconciliation of direct to net premiums, on both a written and earned basis, for the three months ended March 31, 2005 and 2004 is as follows:


	Three Months Ended
	March 31,						March 31,
	2005						2004
	Premiums						Premiums
	Written			Earned			Written			Earned
Direct	$	9,765,332		$	12,619,773		$	10,721,323		$	14,410,301
Assumed		1,062,189			1,095,920			40,686			86,850
Ceded		(1,158,010	)		(1,068,557	)		(281,063	)		(3,525,504	)

Total	$	9,669,511		$	12,647,136		$	10,480,946		$	10,971,647

The amounts of recoveries pertaining to reinsurance that were deducted from losses and LAE incurred during the first quarter 2005 and 2004 were $107,198 and 930,998, respectively. During the first quarter 2005 and 2004, ceded reinsurance decreased commission expense incurred by $204,590 and $241,874, respectively.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Discontinued Bond Program

Beginning in 2001 and continuing into the second quarter of 2004, the Company participated as a reinsurer in a program covering bail and immigration bonds issued by four insurance carriers and produced by a bail bond agency (collectively, the “discontinued bond program” or the “program”). The liability of the insurance carriers was reinsured to a group of reinsurers, including the Company. The Company assumed 15% of the business from 2001 through 2003 and 5% of the business during the first half of 2004. This program was discontinued in the second quarter of 2004 and no new bonds were issued after June 23, 2004.

Based on the design of the program, the bail bond agency was to obtain and maintain collateral and other security and to provide funding for bond losses. The bail bond agency and its principals were responsible for all losses as part of their program administration. The insurance carriers and, in turn, the reinsurers were not required to pay losses unless there was a failure of the bail bond agency. As the bonds were to be 100% collateralized, any losses paid by the reinsurers were to be recoverable through liquidation of the collateral and collections from third party indemnitors.

In the second quarter of 2004, the Company came to believe that the discontinued bond program was not being operated as it had been represented to the Company by agents of the insurance carriers who had solicited the Company’s participation in the program, and the Company began disputing certain issues with respect to the program, including but not limited to: 1) inaccurate/incomplete disclosures relating to the program; 2) improper supervision by the insurance carriers of the bail bond agency in administering the program; 3) improper disclosures by the insurance carriers through the bail bond agency and the reinsurance intermediaries during life of the program; and 4) improper premium and claims administration. Consequently, during the second quarter of 2004, the Company ceased paying claims on the program and retained outside legal counsel to review and defend its rights under the program.

Arbitrations. During the second half of 2004, the Company entered into arbitrations with three of the four insurance carriers participating in the discontinued bond program. The arbitration proceedings are described in more detail below:

Aegis Arbitration. On August 23, 2004, the Company instituted arbitration against Aegis Security Insurance Company (“Aegis”), one of the insurance carriers. On August 25, 2004, Aegis made a counter-demand for arbitration whereby a request was made that the Company join an arbitration that was already pending between Aegis and Lloyds Syndicate 1245, one of the other reinsurers participating in the discontinued bond program. On October 15, 2004, the Company agreed to consolidate arbitrations with Aegis and Lloyds Syndicate 1245. During April 2005, Lloyds Syndicate 0183, Lloyds Syndicate 0205 and Lloyds Syndicate 0727 were added to the consolidated arbitration. On August 11, 2005, another reinsurer participating in the program referred to as The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire (“Contributionship”) was ordered to participate in the consolidated arbitration. Through this arbitration, the Company is seeking rescission of the reinsurance agreements, monetary damages for claims that were paid by the Company under the agreements and other appropriate relief. Aegis is seeking to recover certain of its losses from the Company under the reinsurance agreements. This arbitration is proceeding and a hearing is currently scheduled to begin in January 2006.

Sirius Arbitration. On September 21, 2004, Sirius America Insurance Company (“Sirius”), one of the insurance carriers, instituted arbitration against the Company. At the time, Sirius was also in arbitration with Lloyds Syndicate 1245 and subsequently demanded arbitration with Contributionship. The Company and Contributionship advised Sirius that their two arbitrations should be consolidated. Sirius agreed to such consolidation. On June 1, 2005, Contributionship was dismissed from the arbitration based on resolution by settlement between Sirius and Contributionship. Through this arbitration, the Company is seeking rescission of the reinsurance agreement, monetary damages for claims that were paid by the Company under the agreement and other appropriate relief. Sirius is seeking to recover certain of its losses from the Company under the reinsurance agreement. This arbitration is proceeding and a hearing is currently scheduled to begin in August 2006.

Harco Arbitration. On November 3, 2004, Rosemont Reinsurance Ltd., one of the reinsurers participating in the discontinued bond program, instituted arbitration against Harco National Insurance Company (“Harco”), one of the insurance carriers. On December 2, 2004, Harco made a request that the Company and Contributionship join in this arbitration. On December 22, 2004, the Company agreed to consolidate arbitrations with Rosemont Reinsurance Ltd. and Harco. The Contributionship also agreed to participate in the consolidated arbitration. Through this arbitration, the Company is seeking rescission of the reinsurance agreement and other appropriate relief. Harco is seeking to recover certain of its losses from the Company under the reinsurance agreement. This arbitration is proceeding and a hearing is currently scheduled to begin in June 2006.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

The fourth insurance carrier, Highlands Insurance Company (“Highlands”), was placed in receivership during 2003. As of March 31, 2005, no arbitrations have been instituted between the Company and Highlands. If Highlands makes a payment to any bond holder and seeks reimbursement from the Company under the reinsurance agreement, the Company currently intends to assert all of its rights and defenses under the reinsurance agreement including without limitation the right to contest payment and its right to rescission.

2005 Reserve Development. In April 2005, the Company was advised of a settlement agreement entered into on April 15, 2005 between the U.S. Department of Homeland Security (“DHS”) and Aegis. The agreement has an effective date of January 14, 2005 and covers past and future losses for immigration bonds issued by Aegis. As of December 31, 2004, the Company recorded loss and LAE reserves for immigration bonds in the amount of $3.6 million. Based on this settlement agreement, the Company’s estimated loss and LAE reserves for immigration bonds was $7.5 million at March 31, 2005. In accordance with SFAS No. 60, management recorded the increase in loss and LAE reserves of $3.9 million in the first quarter of 2005 as a change in estimate.

Loss and LAE Reserves. The following compares our loss and LAE reserves on the discontinued bond program at March 31, 2005 and December 31, 2004 (dollars in millions):


	March 31,		December 31,
	2005		2004
Bail Bonds:
Case reserves	$	9.3	$	6.9
Incurred but not reported (“IBNR”) reserves		6.1		8.7

Total bail bond reserves		15.4		15.6

Immigration Bonds:
Case reserves		4.2		—
IBNR reserves		3.3		3.6

Total immigration bond reserves		7.5		3.6

Total reserves	$	22.9	$	19.2

As of March 31, 2005, the Company believed Highlands was in settlement negotiations with DHS for its immigration bond obligations and the New Jersey Attorney General (“NJAG”) for its bail bond obligations. The Company believes negotiated settlements are not uncommon for this type of program. The Company’s loss and LAE reserves at March 31, 2005 takes into consideration estimated settlement amounts with these parties as provided by Highlands.

It should be noted that there is potential for the Company to mitigate its ultimate liability on the program through the arbitrations with the insurance carriers and/or potential settlements with the insurance carriers; however, because of the subjective nature inherent in assessing the outcome of these matters, management can not estimate the probability of an adverse or favorable outcome as of March 31, 2005. In addition, while outside counsel believes we have legal defenses under the reinsurance agreements, they are unable to assess whether an adverse outcome is probable or remote in the arbitrations as of March 31, 2005. As a result, in accordance with SFAS No. 5, the Company is reserving to its best estimate of the ultimate liability on the program at March 31, 2005 without any adjustment for positive arbitration outcomes or potential settlement amounts.

The Company is recording its ultimate loss and LAE reserves for the discontinued bond program based primarily on loss reports received by the Company from the insurance carriers. The Company relies heavily on the insurance carriers’ estimates of ultimate incurred losses included in these reports. As of March 31, 2005, these reported ultimate incurred losses do not include any adjustment for positive arbitration outcomes or potential settlement amounts. The Company does not intend to pay for any of the losses on the discontinued bond program unless and until the arbitrations are settled on a mutually agreeable basis and/or a final binding judgment is made as to the Company’s liability. Given the uncertainties of the outcome of the arbitrations, potential settlements with the insurance carriers or other potential recoveries, uncertainties as to the prospective settlement amounts between Highlands and DHS and NJAG, uncertainties in the future loss information provided by the insurance carriers, and the inherent volatility in assumed reinsurance, actual losses incurred for the discontinued bond program could be materially different from our estimated reserves. As a result, future loss development on the discontinued bond program could have a material effect on the Company’s results of operations and/or financial condition.

See Note 8 to the Consolidated Financial Statements for subsequent events related to the discontinued bond program.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Supplemental Disclosure For Earnings Per Share


	Three Months Ended
	March 31,
	2005			2004
Net income (loss)	$	(461,383	)	$	1,158,593

Income (loss) available to common shareholders, assuming dilution		(461,383	)		1,158,593


Weighted average common shares outstanding		4,972,700			4,920,050
Adjustments for dilutive securities:
Dilutive effect of outstanding options		—			233,467

Diluted common shares	$	4,972,700		$	5,153,517


Net income (loss) per common share:
Basic	$	(.09	)	$	.24
Diluted	$	(.09	)	$	.22

Segment Information

We have three reportable business segments: (1) property/casualty insurance; (2) municipal code publishing; and (3) insurance agency. The following provides financial information regarding our reportable business segments. There are intersegment management, commission fees and other expenses. The allocations of certain general expenses within segments are based on a number of assumptions, and the reported operating results would change if different assumptions were applied. Depreciation and capital expenditures are not considered material.


	Three Months Ended
	March 31, 2005
				Municipal				Reportable
	Property/Casualty			Code		Insurance		Segment
	Insurance			Publishing		Agency		Total

Revenues from external customers	$	12,940,235		$	837,622	$	13,634	$	13,791,491
Intersegment revenues		1,470			—		311,765		313,235
Interest revenue		678,046			—		53		678,099
Interest expense		126			480		—		606
Depreciation and amortization		98,119			22,088		—		120,207
Segment profit (loss)		(1,394,473	)		194,149		316,421		(883,903	)
Federal income tax expense (benefit)		(624,350	)		68,297		107,357		(448,696	)
Segment assets		110,135,251			2,747,440		937,483		113,820,174


	Three Months Ended
	March 31, 2004
			Municipal				Reportable
	Property/Casualty		Code		Insurance		Segment
	Insurance		Publishing		Agency		Total

Revenues from external customers	$	11,382,057	$	993,461	$	41,851	$	12,417,369
Intersegment revenues		1,470		—		71,025		72,495
Interest revenue		424,523		—		33		424,556
Interest expense		82		480		—		562
Depreciation and amortization		55,418		34,109		—		89,527
Segment profit		1,873,762		2,143		93,553		1,969,458
Federal income tax expense		534,322		2,832		31,472		568,626
Segment assets		98,089,378		2,611,379		555,886		101,256,643

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

The following is a reconciliation of the segment results to the consolidated amounts reported in the consolidated financial statements.


	Three Months Ended
	March 31,
	2005			2004
Revenues
Total revenues for reportable segments	$	14,782,825		$	12,914,420
Parent company revenues (loss)		86,615			(35,237	)
Elimination of intersegment revenues		(313,235	)		(72,495	)

Total consolidated revenues	$	14,556,205		$	12,806,688


Profit
Total profit (loss) for reportable segments	$	(883,903	)	$	1,969,458
Parent company loss		(50,818	)		(366,020	)

Income (loss) before federal income taxes	$	(934,721	)	$	1,603,438


Assets
Total assets for reportable segments	$	113,820,174		$	101,256,643
Parent company assets		7,223,730			8,180,733
Elimination of intersegment receivables		(6,513,015	)		(397,458	)

Total consolidated assets	$	114,530,889		$	109,039,918

Subsequent Events

On August 30, 2005, the Company received notice from the Highlands’ Receiver of a global settlement with the NJAG on its remaining bail bond obligations. At March 31, 2005, the Company recorded loss and LAE reserves of $.6 million for Highlands’ bail bonds based on estimated settlement amounts provided by Highlands. Based on the actual settlement between Highlands and the NJAG, the Company’s recorded loss and LAE reserves were $3.4 million at September 30, 2005 for Highlands’ bail bonds. In accordance with SFAS No. 60, management recorded the increase in loss and LAE reserves of $2.8 million in the third quarter of 2005 as a change in estimate. The Company is currently disputing these losses in the Highlands arbitration. The Company does not intend to pay for any of these losses unless and until the arbitration is settled on a mutually agreeable basis and/or a final binding judgment is made as to the Company’s liability, if any.

On August 31, 2005, Highlands’ Receiver demanded arbitration against the Company and other reinsurers. In November 2005, the Company responded to this demand seeking rescission of the reinsurance agreement, monetary damages for claims that were paid by the Company under the agreement and other appropriate relief. Highlands is seeking to recover certain of its losses from the Company under the reinsurance agreement. A hearing date has not yet been scheduled.

Based on information received during the third quarter of 2005, management believes that certain insurance carriers would settle with the Company for less than their respective estimates of ultimate incurred losses as set forth in their loss reports. As a result, at September 30, 2005, management adjusted its loss and LAE reserves for the discontinued bond program based on the estimated settlement values. This resulted in a reduction of $3.1 million to our loss and LAE reserves at September 30, 2005 when compared to the applicable insurance carriers’ respective estimates of ultimate incurred losses at that date. In accordance with SFAS No. 60, management recorded this change in reserves during the third quarter of 2005 as a change in estimate. If the Company obtains information to revise its estimate of potential settlement values or determine an estimate of final arbitration values, the Company will record such reserve changes, if any, in the period that the revised estimate is made in accordance with SFAS No. 60.

In connection with the Aegis arbitration discussed in Note 5 to the Consolidated Financial Statements, on December 8, 2005, the Company filed a motion for partial summary judgment with the Aegis Arbitration Panel (the “Panel”) requesting that the Panel limit the Company’s immigration bond obligation to Aegis to the Company’s proportionate share (15%) of the amount Aegis is obligated to pay to DHS under the Aegis and DHS settlement agreement entered into on April 15, 2005 ($4.0 million). On December 23, 2005, the Panel granted the Company’s motion. As a result, the Company reduced its loss and LAE reserves for the discontinued bond program by $5.5 million during the fourth quarter of 2005. In accordance with SFAS No. 60, management recorded this change in reserves during the fourth quarter of 2005 as a change in estimate.

In addition, on January 18, 2005, the Company entered into a settlement agreement with Aegis resolving all disputes between the

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Bancinsurance is a specialty property insurance holding company incorporated in the State of Ohio in 1970. The Company has three reportable business segments: (1) property/casualty insurance; (2) municipal code publishing; and (3) insurance agency. These segments are described in more detail below.

This Form 10-Q should be read together with the Company’s amended Quarterly Reports on Form 10-Q/A for the quarterly periods ended June 30, 2004 and September 30, 2004, Annual Report on Form 10-K for the year ended December 31, 2004, and Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2005 and September 30, 2005, which are being filed contemporaneously with the filing of this Form 10-Q.

Products and Services

Property/Casualty Insurance. Our wholly-owned subsidiary, Ohio Indemnity Company (“Ohio Indemnity”), is a specialty property insurance company. Our principal sources of revenue are premiums for insurance policies written by and income generated from our investment portfolio. Ohio Indemnity, an Ohio corporation, is licensed in 48 states and the District of Columbia. As such, Ohio Indemnity is subject to the regulations of the Ohio Department of Insurance (the “Department”) and the regulations of each state in which it operates. The majority of Ohio Indemnity’s premiums are derived from three distinct lines of business: (1) products designed for automobile lenders/dealers; (2) unemployment compensation products; and (3) other specialty products.

Our automobile lender/dealer line offers three types of products. First, ULTIMATE LOSS INSURANCE^® (“ULI”), a blanket vendor single interest coverage, is the primary product we offer to financial institutions nationwide. This product insures banks and financial institutions against damage to pledged collateral in cases where the collateral is not otherwise insured. A ULI policy is generally written to cover a lender’s complete portfolio of collateralized personal property loans, typically automobiles. Second, creditor placed insurance (“CPI”) is an alternative to our traditional blanket vendor single interest product. While both products cover the risk of damage to uninsured collateral in a lender’s automobile loan portfolio, CPI covers the portfolio through tracking individual borrowers’ insurance coverage. The lender purchases physical damage coverage for loan collateral after a borrower’s insurance has lapsed. Third, our guaranteed auto protection insurance (“GAP”) pays the difference or “gap” between the amount owed by the customer on a loan or lease and the amount of primary insurance company coverage in the event a vehicle is damaged beyond repair or stolen and never recovered. The GAP product is sold to auto dealers, lenders and lessors and provides coverage on either an individual or portfolio basis.

Our unemployment compensation (“UC”) products are utilized by qualified entities that elect not to pay the unemployment compensation taxes and instead reimburse state unemployment agencies for benefits paid by the agencies to the entities’ former employees. Through our UCassure^® and excess of loss products, we indemnify the qualified entity for liability associated with their reimbursing obligations. In addition, we underwrite surety bonds that certain states require employers to post in order to obtain reimbursing status for their unemployment compensation obligations.

Other specialty products consist primarily of our waste surety bond program (“WSB”). In the second quarter of 2004, the Company entered into a quota share reinsurance arrangement with a waste surety bond underwriter whereby the Company assumed and ceded 50% of the applicable business. Effective January 1, 2005, the reinsurance arrangement was amended whereby the assumed participation was reduced from 50% to 25%. The majority of these surety bonds satisfy the closure/post-closure financial responsibility imposed on hazardous and solid waste treatment, storage and disposal facilities pursuant to Subtitles C and D of the Federal Resource Conservation and Recovery Act (“RCRA”). Closure/post-closure bonds cover future costs to close and monitor a regulated site such as a landfill. All of the surety bonds are indemnified by the principal and collateral is maintained on the majority of the bonds. The indemnifications and collateralization of this program reduces the risk of loss.

In addition to the above product lines, from 2001 until the end of the second quarter of 2004, the Company participated in the discontinued bond program. This program was discontinued in the second quarter of 2004 and no new bonds were issued after June 23, 2004. For a more detailed description of this program, see “Overview-Discontinued Bond Program” below and Note 5 to the Consolidated Financial Statements.

The Company sells its insurance products through a network of distribution channels, including three managing general agents, approximately thirty independent agents and direct sales.

Municipal Code Publishing. Our wholly-owned subsidiary, American Legal Publishing Corporation (“ALPC”), codifies, publishes, supplements and distributes ordinances for over 1,800 municipalities and counties nationwide in addition to state governments. Ordinance codification is the process of collecting, organizing and publishing legislation for state and local governments. ALPC also

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

provides information management services which include electronic publishing, document imaging and internet hosting services.

Insurance Agency. In July 2002, we formed Ultimate Services Agency, LLC (“USA”), a wholly-owned subsidiary. We formed USA to act as an agency for placing property/casualty insurance policies offered and underwritten by Ohio Indemnity and by other property/casualty insurance companies.

Discontinued Bond Program

Beginning in 2001 and continuing into the second quarter of 2004, the Company participated as a reinsurer in the discontinued bond program which covered bail and immigration bonds issued by four insurance carriers and produced by a bail bond agency. The liability of the insurance carriers was reinsured to a group of reinsurers, including the Company. The Company assumed 15% of the business from 2001 through 2003 and 5% of the business during the first half of 2004. The program was discontinued in the second quarter of 2004 and no new bonds were issued after June 23, 2004.

The Company has received reports from the insurance carriers regarding potential future liabilities on the program. Based on these reports and claims received by the Company through March 31, 2005, the Company recorded estimated loss and LAE reserves of $22.9 million for the program at March 31, 2005. The following compares our loss and LAE reserves on the program at March 31, 2005 and December 31, 2004 (dollars in millions):


	March 31,		December 31,
	2005		2004
Bail Bonds:
Case reserves	$	9.3	$	6.9
IBNR reserves		6.1		8.7

Total bail bond reserves		15.4		15.6

Immigration Bonds:
Case reserves		4.2		—
IBNR reserves		3.3		3.6

Total immigration bond reserves		7.5		3.6

Total reserves	$	22.9	$	19.2

During the first quarter of 2005, the Company recorded discontinued bond program losses and LAE of $3.7 million primarily due to an increase in loss and LAE reserves related to the Aegis global settlement with DHS for its immigration bond exposure. This increase was partially offset by a $.2 million decrease in bail bond loss and LAE reserves due primarily to revised estimates of potential future liabilities provided by certain insurance carriers.

The Company is disputing the losses on the discontinued bond program through the ongoing arbitrations. See Note 5 to the Consolidated Financial Statements for a discussion of these arbitrations.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

whether an adverse outcome is probable or remote in the arbitrations as of March 31, 2005. As a result, in accordance with SFAS No. 5, the Company is reserving to its best estimate of the ultimate liability on the program at March 31, 2005 without any adjustment for positive arbitration outcomes or potential settlement amounts.

See Notes 5 and 8 to the Consolidated Financial Statements for additional discussion of the discontinued bond program.

Ongoing SEC Investigation

As previously reported, on February 14, 2005, the Company received notification from the U.S. Securities and Exchange Commission (“SEC”) that it was conducting an informal, non-public inquiry regarding the Company. The inquiry generally concerned the chronology, events and announcements relating to Ernst & Young LLP (“E&Y”) withdrawing its audit reports for the years 2001 through 2003 for the Company. On March 29, 2005, the Company was notified by the SEC that the informal, non-public inquiry initiated in February 2005 was converted to a formal order of private investigation. The SEC stated in its notification letter that this confidential inquiry should not be construed as an indication by the SEC or its staff that any violation of law has occurred nor should it be considered a reflection upon any person, entity or security. The investigation is ongoing and the Company continues to cooperate fully with the SEC.

The Company cannot predict the outcome of the SEC investigation. There can be no assurance that the scope of the SEC investigation will not expand. The outcome of and costs associated with the SEC investigation could have a material adverse effect on the Company’s business, financial condition and/or operating results, and the investigation could divert the efforts and attention of management from the Company’s ordinary business operations.

Economic Factors, Opportunities, Challenges and Risks

The Company’s results of operations have historically varied from quarter to quarter principally due to fluctuations in underwriting results and timing of investment sales. The Company’s primary source of revenue and cash is derived from premiums collected and investment activity. The majority of our premium revenues are dependent on the demand for our customers’ automobile financing programs. Increased automobile sales generally cause increased demand for automobile financing and, in turn, our lender/dealer products. Our ULI and CPI claims experience is impacted by the rate of loan defaults, bankruptcies and automobile repossessions among our customers. As delinquency dollars rise, our claims experience is expected to increase. In addition, the state of the used car market has a direct impact on our GAP claims. As used car prices decline, there is a larger gap between the balance of the loan/lease and the actual cash value of the automobile, which results in higher severity of GAP claims. Our unemployment compensation products are directly impacted by the nation’s unemployment levels. As unemployment levels rise, we would anticipate an increase in the frequency of claims. In addition, the interest rate and market rate environment can have an impact on the yields and valuation of our investment portfolio.

The Company is focused on opportunities in specialty insurance to extend our product offerings with appropriate levels of risk that will enhance the Company’s operating performance. Our strategy emphasizes long-term growth through increased market penetration, product line extensions, and providing our customers and agents with superior service and innovative technology.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

SUMMARY RESULTS

The following table sets forth period-to-period changes in selected financial data:


	Period-to-Period Increase (Decrease)
	Three Months Ended March 31,
	2004-2005
	Amount			% Change
Net premiums earned	$	1,675,489			15.3	%
Net realized gains on investments		30,426			8.8	%
Total revenues		1,749,517			13.7	%
Losses and loss adjustment expenses		2,875,861			45.5	%
Commissions and other insurance expenses		1,946,015			56.4	%
Income (loss) before federal income taxes		(2,538,159	)		(158.3	)%
Net income (loss)		(1,619,976	)		(139.8	)%

The Company posted a net loss of $(461,383), or $(0.09) per diluted share, for the first quarter 2005, compared to net income of $1,158,593, or $0.22 per diluted share, for the first quarter 2004. The results for the first quarter 2005 included additional losses on the discontinued bond program and an increase in legal and audit expenses compared to a year ago. These losses and expenses were partially offset by an increase in profitability for our ULI, GAP and WSB product lines, an increase in investment income and a decrease in federal income taxes when compared to a year ago.

The combined ratio, which is the sum of the loss ratio and the expense ratio, is the traditional measure of underwriting experience for insurance companies. The statutory combined ratio is the sum of the ratio of losses to premiums earned plus the ratio of statutory underwriting expenses to premiums written after reducing both premium amounts by dividends to policyholders. Statutory accounting principles differ in certain respects from GAAP. Under statutory accounting principles, policy acquisition costs and other underwriting expenses are recognized immediately, not at the same time premiums are earned. To convert underwriting expenses to a GAAP basis, policy acquisition expenses are deferred and recognized over the period in which the related premiums are earned. Therefore, the GAAP combined ratio is the sum of the ratio of losses to premiums earned plus the ratio of underwriting expenses to premiums earned. The Company’s specialty insurance products are underwritten by Ohio Indemnity, whose results represent the Company’s combined ratio. The following table reflects Ohio Indemnity’s loss, expense and combined ratios on both a statutory and a GAAP basis for the three months ended March 31:


	Three Months Ended
	2005			2004
GAAP:
Loss ratio		73.5	%		58.2	%
Expense ratio		45.1	%		32.4	%

Combined ratio		118.6	%		90.6	%

Statutory:
Loss ratio		73.5	%		58.2	%
Expense ratio		76.9	%		35.9	%

Combined ratio		150.4	%		94.1	%

RESULTS OF OPERATIONS

March 31, 2005 Compared to March 31, 2004

Net Premiums Earned. Net premiums earned increased 15.3% to $12,647,136 for the first quarter 2005 from $10,971,647 for the first quarter 2004. Net premiums earned benefited from growth in our ULI, GAP, UC, and WSB products, which were offset by decreases in net premiums earned for our CPI product and discontinued bond program.

ULI net premiums earned increased 6.6% to $7,483,613 in the first quarter 2005 from $7,020,238 in the first quarter 2004. This increase was primarily due to a decrease in experience rating adjustments. The experience rating adjustment is primarily influenced by ULI policy experience-to-date and premium growth. A decrease in experience rating adjustments results in a positive impact to net

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

premiums earned whereas an increase in experience rating adjustments results in a decrease to net premiums earned. Experience rating adjustments decreased during the first quarter 2005 when compared to the same period last year primarily due to a decline in lending volume for several of our financial institution customers combined with an increase in losses and LAE incurred. Management anticipates that experience rating adjustments will fluctuate in future periods based upon loss experience and premium growth.

Net premiums earned for GAP rose 93.3% to $2,059,064 in the first quarter 2005 from $1,065,360 in the first quarter 2004. Net premiums earned for GAP increased due to rate increases, volume increases with existing customers and new customers added.

Net premiums earned for WSB were $1,173,376 in the first quarter 2005 compared to zero in the first quarter 2004 as we began participating in this program in the second quarter of 2004.

Net premiums earned for UC products increased 10.0% to $1,301,790 in the first quarter 2005 from $1,183,416 in the first quarter 2004 due to growth in the Company’s UCassure^® product and rate increases.

CPI net premiums earned decreased 63.5% to $576,314 in the first quarter 2005 from $1,579,663 in the first quarter 2004 due to the cancellation of a poor performing book of business in the second quarter of 2004.

Discontinued bond program net premiums earned declined 81.5% to $16,051 in the first quarter 2005 from $86,850 in the first quarter 2004 due to the discontinuation of this program in the second quarter of 2004. See “Overview-Discontinued Bond Program” above and Note 5 to the Consolidated Financial Statements for additional information concerning the discontinued bond program.

Investment Income. We seek to invest in investment-grade obligations of states and political subdivisions because the majority of the interest income from such investments is tax-exempt and such investments have generally resulted in more favorable net yields. Net investment income increased 54.4% to $634,195 in the first quarter 2005 from $410,835 in the first quarter 2004. This improvement was due to growth in fixed income investments combined with a higher after-tax yield. Higher yields resulted from the Company’s reallocation of a portion of its portfolio from short-term investments to fixed maturities during the second and third quarters of 2004, which provided a better matching of the Company’s invested assets to its product liability duration and enhanced the Company’s investment return.

We recorded net realized gains on investments of $374,298 in the first quarter 2005 compared to $343,872 in the first quarter 2004. This increase was a combination of the timing of sales of individual securities and other-than-temporary impairments on investments. We generally decide whether to sell securities based upon investment opportunities and tax consequences. We regularly evaluate the quality of our investment portfolio. When we believe that a specific security has suffered an other-than-temporary decline in value, the difference between cost and estimated fair value is charged to income as a realized loss on investments. There were no impairment charges included in net realized gains on investments during the first quarter 2005 compared to $86,696 in the first quarter 2004. For more information concerning impairment charges, see “Critical Accounting Policies-Other-Than-Temporary Impairment of Investments” below.

Codification and Subscription Fees. ALPC’s codification and subscription fees decreased 15.7% to $837,622 in the first quarter 2005 from $993,461 in the first quarter 2004. In the first quarter 2004, the Company engaged in a one-time project which generated additional fees that were not received in the first quarter 2005.

Losses and Loss Adjustment Expenses. Losses and LAE represent claims associated with insured loss events and expenses associated with adjusting and recording policy claims, respectively. Total losses and LAE increased 45.5% to $9,191,487 in the first quarter 2005 from $6,315,626 in the first quarter 2004 principally due to losses and LAE of $3,653,507 on the discontinued bond program. See “Overview-Discontinued Bond Program” above and Note 5 to the Consolidated Financial Statements for a discussion of the discontinued bond program losses. Excluding the discontinued bond program, losses and LAE declined 11.0% to $5,537,980 in the first quarter 2005 from $6,225,285 in the first quarter 2004 primarily due to decreases in our ULI, CPI and UC products which were partially offset by an increase in losses and LAE for our GAP product.

ULI losses and LAE declined 5.4% to $4,073,709 in the first quarter 2005 from $4,304,437 in the first quarter 2004 due to favorable loss development when compared to a year ago as a result of fewer loan defaults, bankruptcies and automobile repossessions among our ULI customers.

CPI losses and LAE decreased 79.5% to $211,067 in the first quarter 2005 from $1,030,036 in the first quarter 2004. This decrease is principally due to a decrease in paid losses resulting from the cancellation of a poor performing book of business in the second quarter of 2004.

UC losses and LAE decreased $87,881 in the first quarter 2005 when compared to the first quarter 2004.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

GAP losses and LAE increased 39.9% to $1,181,079 in the first quarter 2005 from $849,491 for the same period last year principally due to growth in the business.

For more information concerning losses and LAE, see “Critical Accounting Policies-Loss and Loss Adjustment Expense Reserves” below.

Commissions and Other Insurance Operating Expenses. Commission expense rose 33.3% to $2,817,014 in the first quarter 2005 compared to $2,112,529 in the first quarter 2004. The increase was principally due to the growth in our GAP and WSB products. Other insurance operating expenses increased 92.9% to $2,577,313 in the first quarter 2005 from $1,335,783 in the first quarter 2004 as a result of legal fees related to the Audit Committee’s independent investigation of E&Y’s withdrawal of its audit reports and the discontinued bond program arbitrations, as well as an increase in external and regulatory audit fees. A substantial portion of this increase represents one- time expenses.

Codification and Subscription Expenses. Codification and subscription expenses incurred by ALPC decreased 33.8% to $656,134 in the first quarter 2005 from $990,837 in the first quarter 2004. The decrease was primarily due to additional expenses in the first quarter 2004 related to a one-time project that were not incurred in 2005.

General and Administrative Expenses. General and administrative expenses declined $227,477 from the first quarter 2004 due primarily to a decrease in bonuses paid to employees compared to a year ago.

Interest Expense. Interest expense increased to $254,583 in the first quarter 2005 from $226,603 in the first quarter 2004 principally due rising interest rates. See “Liquidity and Capital Resources” for discussion of the Company’s trust preferred debt issued to affiliates, which makes up the majority of the Company’s interest expense.

Federal Income Taxes. The Company had an income tax (benefit) of $(473,338) in the first quarter 2005 compared to income tax expense of $444,845 in the first quarter 2004. The benefit in 2005 was primarily caused by a decline in pre-tax income due to the discontinued bond program losses and an increase in tax-exempt income during the first quarter 2005.

GAAP Combined Ratio. For the first quarter 2005, the combined ratio increased to 118.6% from 90.6% in the first quarter 2004. The loss ratio increased to 73.5% in the first quarter 2005 from 58.2% a year ago principally due to the increase in losses and LAE on the discontinued bond program. Excluding the discontinued bond program losses and LAE, the Company’s loss ratio was 44.6% for the first quarter 2005 compared to 57.5% for the same period last year. The improvement in the loss ratio (excluding the discontinued bond program) was attributable to our ULI, CPI, GAP and WSB product lines. The expense ratio increased to 45.1% in the first quarter 2005 from 32.4% in the first quarter 2004 primarily due to an increase in other insurance operating expenses as described above.

BUSINESS OUTLOOK

For information regarding the Company’s financial condition, results of operations and business outlook for fiscal year 2005, see the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended June 30 and September 30, 2005, which are being filed contemporaneously with the filing of this Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and capital resources demonstrate the Company’s ability to generate sufficient cash flows from its operations and borrow funds at competitive rates to meet operating and growth needs. As of March 31, 2005 and December 31, 2004, the Company’s capital structure consisted of trust preferred debt issued to affiliates, borrowings from our revolving line of credit and shareholders’ equity and is summarized in the following table:


	March 31,			December 31,
	2005			2004
Trust preferred debt issued to BIC Statutory Trust I	$	8,248,000		$	8,248,000
Trust preferred debt issued to BIC Statutory Trust II		7,217,000			7,217,000
Bank note payable		—			500,000

Total debt obligations		15,465,000			15,965,000

Total shareholders’ equity		23,908,888			24,846,288

Total capitalization	$	39,373,888		$	40,811,288

Ratio of total debt obligations to total capitalization		39.3	%		39.1	%

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

In December 2002, we organized BIC Statutory Trust I (“BIC Trust I”), a Connecticut special purpose business trust, which issued $8,000,000 of floating rate trust preferred capital securities in an exempt private placement transaction. In September 2003, we organized BIC Statutory Trust II (“BIC Trust II”), a Delaware special purpose business trust, which issued $7,000,000 of floating rate trust preferred capital securities in an exempt private placement transaction. BIC Trust I and BIC Trust II (collectively, the “Trusts”) were formed for the sole purpose of issuing and selling the floating rate trust preferred capital securities and investing the proceeds from such securities in junior subordinated debentures of the Company. In connection with the issuance of the trust preferred capital securities, the Company issued junior subordinated debentures of $8,248,000 and $7,217,000 to BIC Trust I and BIC Trust II, respectively. The floating rate trust preferred capital securities and the junior subordinated debentures have substantially the same terms and conditions. The Company has fully and unconditionally guaranteed the obligations of the Trusts with respect to the floating rate trust preferred capital securities. The Trusts distribute the interest received from the Company on the junior subordinated debentures to the holders of their floating rate trust preferred capital securities to fulfill their dividend obligations with respect to such trust preferred securities. BIC Trust I’s floating rate trust preferred capital securities, and the junior subordinated debentures issued in connection therewith, pay dividends and interest, as applicable, on a quarterly basis at a rate equal to three month LIBOR plus four hundred basis points (6.94% and 5.12% at March 31, 2005 and 2004, respectively), are redeemable at par on or after December 4, 2007 and mature on December 4, 2032. BIC Trust II’s floating rate trust preferred capital securities, and the junior subordinated debentures issued in connection therewith, pay dividends and interest, as applicable, on a quarterly basis at a rate equal to three month LIBOR plus four hundred and five basis points (7.14% and 5.16% at March 31, 2005 and 2004, respectively), are redeemable at par on or after September 30, 2008 and mature on September 30, 2033. The proceeds from the junior subordinated debentures were used for general corporate purposes and provided additional financial flexibility for the Company. The terms of the junior subordinated debentures contain various restrictive covenants. As of March 31, 2005, the Company was in compliance with all such covenants.

We also have a $10,000,000 unsecured revolving line of credit with a maturity date of June 30, 2007 with no outstanding balance at March 31, 2005 ($500,000 at December 31, 2004). The revolving line of credit provides for interest payable quarterly at an annual rate equal to the prime rate less 75 basis points. Under the terms of the revolving credit agreement, our consolidated shareholders’ equity must not fall below $20,000,000 and Ohio Indemnity’s ratio of net premiums written to policyholders surplus cannot exceed three to one. As of March 31, 2005, we were in compliance with each of these requirements.

The short-term cash requirements of our property/casualty business primarily consist of paying losses and LAE, reinsurance premiums and day-to-day operating expenses. Historically, we have met those requirements through cash receipts from operations, which consist primarily of insurance premiums collected, reinsurance recoveries and investment income. Our investment portfolio is a source of additional liquidity through the sale of readily marketable fixed maturities, equity securities and short-term investments. After satisfying our cash requirements, excess cash flows from these underwriting and investment activities are used to build the investment portfolio and thereby increase future investment income.

Because of the nature of the risks we insure on a direct basis, losses and LAE emanating from the insurance policies that we issue are generally characterized by relatively short settlement periods and quick development of ultimate losses compared to claims emanating from other types of insurance products. Therefore, we believe we can estimate our cash needs to meet our policy obligations and utilize cash flows from operations and cash and short-term investments to meet these obligations. The Company considers the relationship between the duration of our policy obligations and our expected cash flows from operations in determining our cash and short-term investment position. We maintain a level of cash and liquid short-term investments which we believe will be adequate to meet our anticipated cash needs without being required to liquidate intermediate-term and long-term investments. At March 31, 2005, total cash and short-term investments were approximately $17.2 million and net loss and LAE reserves, excluding the discontinued bond program, were approximately $8.2 million.

As discussed in “Overview-Discontinued Bond Program” above and in Note 5 to the Consolidated Financial Statements, the Company recorded $22.9 million in loss and LAE reserves for the discontinued bond program at March 31, 2005. The Company is currently disputing these losses in ongoing arbitration proceedings. The Company does not intend to pay for any of the losses on the discontinued bond program unless and until the arbitrations are settled on a mutually agreeable basis and/or a final binding judgment is made as to the Company’s liability. Given the uncertainties of the outcome of the arbitrations, potential settlements with the insurance carriers or other potential recoveries, uncertainties as to the prospective settlement amounts between Highlands and DHS and NJAG, uncertainties in the future loss information provided by the insurance carriers, and the inherent volatility in assumed reinsurance, actual losses incurred for the discontinued bond program could be materially different from our estimated reserves. Ultimate payment on the discontinued bond program may result in an increase in cash outflows from operations when compared to trends of prior periods and may impact our

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

financial condition by reducing our invested assets. We consider the discontinued bond program liabilities and related arbitrations as we manage our assets and liabilities. In selecting the maturity of securities in which we invest, we consider the relationship between the duration of our fixed-income investments with the expected payout of our liabilities for the discontinued bond program. There are no significant variations between the maturity of our investments and the expected payout of our loss reserves for the discontinued bond program.

We believe that both liquidity and interest rate risk can be minimized by the asset/liability management described above. With this strategy, management believes we can pay our policy liabilities as they become due without being required to use our credit facilities or liquidate intermediate-term and long-term investments; however, in the event that such action is required, it is not anticipated to have a material impact on our results of operations or future liquidity.

ALPC derives its funds principally from codification and subscription fees which are currently sufficient to meet its operating expenses. USA derives its funds principally from commission fees which are currently sufficient to meet its operating expenses.

Cash flows used in operating activities totaled $(4,445,987) and $(1,933,466) for the three months ended March 31, 2005 and 2004, respectively. The decrease was primarily the result of a decline in net premiums collected and an increase in commissions and other insurance operating expenses paid. The decrease in net premiums collected was principally due to an increase in retrospective premium adjustments paid in the first quarter 2005 compared to a year ago based on premium growth and loss development for one of our large ULI customers. These decreases were partially offset by an increase in investment income collected, a decrease in paid losses and a decrease in federal income taxes paid when compared to a year ago.

Ohio Indemnity is restricted by the insurance laws of the State of Ohio as to amounts that can be transferred to Bancinsurance in the form of dividends without the approval of the Ohio Department of Insurance (the “Department”). During 2005, the maximum amount of dividends that may be paid to Bancinsurance by Ohio Indemnity without prior approval is limited to $3,087,967.

Ohio Indemnity is subject to a Risk Based Capital test applicable to property/casualty insurers. The Risk Based Capital test serves as a benchmark of an insurance enterprise’s solvency by state insurance regulators by establishing statutory surplus targets which will require certain company level or regulatory level actions. Ohio Indemnity’s total adjusted capital is in excess of all required action levels as of March 31, 2005.

Given the Company’s historic cash flows and current financial condition, management believes that the cash flows from operating and investing activities over the next year will provide sufficient liquidity for the operations of the Company.

DISCLOSURES ABOUT MARKET RISK

During the three months ended March 31, 2005, there were no material changes in our primary market risk exposures or in how those exposures were managed compared to the year ended December 31, 2004. We do not anticipate material changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based upon what is known or expected to be in effect during future reporting periods. For a description of our primary market risk exposures, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 which is being filed contemporaneously with the filing of this Form 10-Q.

CRITICAL ACCOUNTING POLICIES

The preparation of the consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, revenues, liabilities and expenses and related disclosures of contingent assets and liabilities. We regularly evaluate these estimates, assumptions and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates, assumptions and judgments under different assumptions or conditions. Set forth below are the critical accounting policies that we believe require significant estimates, assumptions and judgments and are critical to an understanding of our consolidated financial statements.

Other-Than-Temporary Impairment of Investments

We continually monitor the difference between the cost and the estimated fair value of our investments, which involves uncertainty as to whether declines in value are temporary in nature. If we believe a decline in the value of a particular available for sale investment is temporary, we record the decline as an unrealized loss in our shareholders’ equity. If we believe the decline in any investment is “other-than-temporarily impaired,” we write down the carrying value of the investment and record a realized loss. Our assessment of a decline in value includes our current judgment as to the financial position and future prospects of the entity that issued the investment security. If that judgment changes in the future, we may ultimately record a realized loss after having originally concluded that the decline in value was temporary.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

The following discussion summarizes our process of reviewing our investments for possible impairment.

Fixed Maturities. On a monthly basis, we review our fixed maturity securities for impairment. We consider the following factors when evaluating potential impairment:

	•		the length of time and extent to which the estimated fair value has been less than book value;

	•		the degree to which any appearance of impairment is attributable to an overall change in market conditions (e.g., interest rates);

	•		the degree to which an issuer is current or in arrears in making principal and interest/dividend payments on the securities in question;

	•		the financial condition and future prospects of the issuer, including any specific events that may influence the issuer’s operations and its ability to make future scheduled principal and interest payments on a timely basis;

	•		the independent auditor’s report on the issuer’s most recent financial statements;

	•		buy/hold/sell recommendations of investment advisors and analysts;

	•		relevant rating history, analysis and guidance provided by rating agencies and analysts; and

	•		our ability and intent to hold the security for a period of time sufficient to allow for recovery in the estimated fair value.

Equity Securities. On a monthly basis, we review our equity securities for impairment. We consider the following factors when evaluating potential impairment:

	•		the length of time and extent to which the estimated fair value has been less than book value;

	•		whether the decline appears to be related to general market or industry conditions or is issuer-specific;

	•		the financial condition and future prospects of the issuer, including any specific events that may influence the issuer’s operations;

	•		the recent income or loss of the issuer;

	•		the independent auditor’s report on the issuer’s most recent financial statements;

	•		buy/hold/sell recommendations of investment advisors and analysts;

	•		relevant rating history, analysis and guidance provided by rating agencies and analysts; and

	•		our ability and intent to hold the security for a period of time sufficient to allow for recovery in the estimated fair value.

In addition to the monthly valuation procedures described above, we continually monitor developments affecting our invested assets, paying particular attention to events that might give rise to impairment write-downs. There were no impairment charges included in net realized gains on investments during the first quarter 2005 compared to $86,696 in the first quarter 2004. Impairments within the portfolio during 2005 are possible if current economic and financial conditions worsen.

The following table summarizes, for all securities in an unrealized loss position at March 31, 2005, the estimated fair value and gross unrealized losses (pre-tax) by length of time those securities have been continuously in an unrealized loss position.


			Gross
	Estimated		unrealized
	fair value		losses
Fixed maturities:
6 months or less	$	12,702,893	$	98,255
7-12 months		2,309,852		31,149
Greater than 12 months		1,752,184		42,654

Total fixed maturities		16,764,929		172,058


Equities:
6 months or less		5,039,556		251,110
7-12 months		9,350		2,890
Greater than 12 months		128,250		12,380

Total equities		5,177,156		266,380

Total	$	21,942,085	$	438,438

As of March 31, 2005, the Company had unrealized losses on 62 fixed maturity securities totaling $172,058, including 48, 7, and 7 fixed maturity securities that maintained an unrealized loss position for 6 months or less, 7-12 months and greater than 12 months, respectively. Out of the 62 fixed maturity securities, 61 securities had a fair value to cost ratio equal to or greater than 96%, and 1 security had a fair value to cost ratio equal to 93% as of March 31, 2005.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

As of March 31, 2005, the Company had unrealized losses on 17 equity securities totaling $266,380, including 15, 1 and 1 equity securities that maintained an unrealized loss position for 6 months or less, 7-12 months and greater than 12 months, respectively. Out of the 17 equity securities, 14 securities had a fair value to cost ratio equal to or greater than 90%, 2 securities had a fair value to cost ratio between 88% and 89%, and 1 security had a fair value to cost ratio equal to 76% as of March 31, 2005.

Loss and Loss Adjustment Expense Reserves

The Company utilizes its internal staff, reports from ceding insurers under assumed reinsurance and an independent consulting actuary in establishing its loss and LAE reserves. The Company’s independent consulting actuary reviews the Company’s reserves for losses and LAE on a quarterly basis. The Company considers this review in establishing the amount of its reserves for losses and LAE.

Our projection of ultimate loss and LAE reserves are estimates of future events, the outcomes of which are unknown to us at the time the projection is made. Considerable uncertainty and variability are inherent in the estimation of loss and LAE reserves. As a result, it is possible that actual experience may be materially different than the estimates reported. The Company continually refines reserve estimates as experience develops and further claims are reported and resolved. The Company reflects adjustments to reserves in the results of the periods in which such adjustments are made.

Assumed Business. Assumed reinsurance is a line of business with inherent volatility. Since the length of time required for the losses to be reported through the reinsurance system can be quite long, unexpected events are more difficult to predict. Ultimate loss reserve estimates for assumed reinsurance are based primarily on reports received by the Company from the underlying ceding insurers. The Company relies heavily on the insurance carriers’ estimates of ultimate incurred losses included in these reports.

As disclosed in “Overview-Discontinued Bond Program” above and in Note 5 to the Consolidated Financial Statements, the Company is disputing the discontinued bond program losses in ongoing arbitration proceedings. The discontinued bond program loss and LAE reserves of $22.9 million at March 31, 2005 do not include any adjustment for positive arbitration outcomes or potential settlement amounts. The Company does not intend to pay for any of the losses on the discontinued bond program unless and until the arbitrations are settled on a mutually agreeable basis and/or a final binding judgment is made as to the Company’s liability. Given the uncertainties of the outcome of the arbitrations, potential settlements with the insurance carriers or other potential recoveries, uncertainties as to the prospective settlement amounts between Highlands and DHS and NJAG, uncertainties in the future loss information provided by the insurance carriers, and the inherent volatility in assumed reinsurance, actual losses incurred for the discontinued bond program could be materially different from our estimated reserves. As a result, future loss development on the discontinued bond program could have a material effect on the Company’s results of operations and/or financial condition.

For the WSB program, the Company is recording loss and LAE reserves using a loss ratio reserving methodology. The loss ratio method calculates a reserve based on expected losses in relation to premiums earned. The expected loss ratio for the program was selected using loss information provided by the ceding insurer.

Direct Business. For our direct business, estimates of ultimate loss and LAE reserves are based on our historical loss development experience. In using this historical information, we assume that past loss development is predictive of future development. Our assumptions allow for changes in claims and underwriting operations, as now known or anticipated, which may impact the level of required reserves or the emergence of losses. However, we do not anticipate any extraordinary changes in the legal, social or economic environments that could affect the ultimate outcome of claims or the emergence of claims from causes not currently recognized in our historical data. Such extraordinary changes or claims emergence may impact the level of required reserves in ways that are not presently quantifiable. Thus, while we believe our reserve estimates are reasonable given the information currently available, actual emergence of losses could deviate materially from our estimates and from amounts recorded by us.

We conducted a reserve study using historical losses and LAE by product line or coverage within product line. We prepared our estimates of the gross and net loss and LAE liabilities using annual accident year loss development triangles for the following products:

	•		ULI — limited liability

	•		ULI — non-limited liability

	•		CPI

	•		GAP

Historical “age-to-age” loss development factors (“LDF”) were calculated to measure the relative development for each accident year from one maturity point to the next. Based on the historical LDF, we selected age-to-age LDF that we believe are appropriate to

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

estimate the remaining future development for each accident year. These selected factors are used to project the ultimate expected losses for each accident year. The validity of the results from using a loss development approach can be affected by many conditions, such as claim department processing changes, a shift between single and multiple payments per claim, legal changes or variations in our mix of business from year to year. Also, because the percentage of losses paid for immature years is often low, development factors are volatile. A small variation on the number of claims paid can have a leveraging effect that can lead to significant changes in estimated ultimate losses. Therefore, ultimate values for immature accident years may be based on alternative estimation techniques, such as expected loss ratio method, or some combination of acceptable actuarial methods.

For our UC and other product lines, the Company prepared estimates of loss and LAE reserves based on certain actuarial and other assumptions related to the ultimate cost expected to settle such claims.

We record reserves on an undiscounted basis. Our reserves reflect anticipated salvage and subrogation included as a reduction to loss and LAE reserves. We do not provide coverage that could reasonably be expected to produce asbestos and/or environmental liability claims activity or material levels of exposure to claims-made extended reporting options.

In establishing our reserves, we tested our data for reasonableness, such as ensuring there are no case outstanding reserves on closed claims, and consistency with data used in our previous estimates. We found no material discrepancies or inconsistencies in our data. We did not experience any significant change in the number of claims paid (other than for growth in our business), average claim paid or average claim reserve that would be inconsistent with the types of risks we insured in the respective years.

The Company calculates a reserve range for its lender/dealer product lines (ULI, CPI and GAP) and calculates point estimates for UC and other product lines. As of March 31, 2005, our indicated gross loss and LAE reserve range for lender/dealer products was $7.0 million to $7.5 million and our recorded loss and LAE reserves were $7.3 million.

Codification and Subscription Revenue and Expense Recognition

Revenue from municipal code contracts is recognized on the percentage-of-completion method: completion is measured based on the percentage of direct labor costs incurred to date compared to estimated direct labor costs for each contract. While we use available information to estimate total direct labor costs on each contract, actual experience may vary from estimated amounts. Under this method, the costs incurred and the related revenues are included in the income statement as work progresses. Adjustments to contract cost estimates are made in the periods in which the facts that require such adjustments become known. If a revised estimate indicates a loss, such loss is provided for in its entirety. The amount by which revenues are earned in advance of contractual collection dates is an unbilled receivable and the amount by which contractual billings exceed earned revenues is deferred revenue which is carried as a liability.

OFF-BALANCE SHEET TRANSACTIONS

We do not have any off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are considered material.

FORWARD-LOOKING INFORMATION

Certain statements made in this Quarterly Report on Form 10-Q are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements convey our current expectations or forecast future events. All statements contained in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “may,” “continue,” “estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,” “anticipate” and similar expressions generally identify forward-looking statements but the absence of these words does not necessarily mean that a statement is not forward-looking. The forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause actual results to differ materially from those statements. Factors that might cause actual results to differ from those statements include, without limitation, 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, changes in the business tactics or strategies of the Company, the financial condition of the Company’s business partners, changes in market forces, litigation, developments in the discontinued bond program and related arbitrations, the ongoing SEC investigation, the concentrations of ownership of the Company’s common shares by members of the Sokol family, and the other risk factors identified in the Company’s filings with the SEC, any one of which might materially affect the operations of the Company. 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Disclosures About Market Risk.”

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Item 4. Controls and Procedures

With the participation of our principal executive officer and principal financial officer, our management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, including the events described below in this Item 4, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures are effective as of the end of the period covered by this report.

In addition, there were no changes during the period covered by this report in our internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As previously reported, the Company was advised on February 4, 2005 by its then current independent registered public accounting firm, Ernst & Young LLP (“E&Y”), that because of developments related to the Company’s discontinued bond program (1) E&Y was withdrawing its audit reports for the years 2001 through 2003 for the Company and its wholly-owned subsidiaries, Ohio Indemnity and ALPC, (2) those audit reports and the completed interim reviews of the Company’s 2004 quarterly filings on Form 10-Q should no longer be relied upon, (3) E&Y was unable to complete the audit of the Company’s 2004 financial statements at that time, and (4) the Company’s appointed actuary, who was employed by E&Y, was withdrawing his certification of Ohio Indemnity’s statutory reserves for the years 2001 through 2003.

In subsequent correspondence to the Company, E&Y informed the Company of the following:

(1) E&Y believed that the Company had a material weakness in its system of internal controls related to the discontinued bond program claim reserves;

(2) E&Y believed that the Company did not have the internal controls related to the discontinued bond program necessary for the Company to develop reliable financial statements;

(3) E&Y believed that at the time the Company filed its 2003 Form 10-K in March 2004, management was aware that there had been significant adverse claims development in the discontinued bond program. E&Y believed this information was not provided to E&Y on a timely basis in connection with E&Y’s audit of the Company’s 2003 financial statements. As a result, E&Y did not believe it could rely on the representations of management. Furthermore, E&Y believed this adverse claims development information would have a significant material effect on the discontinued bond program reserve levels recognized by the Company in its previously filed financial statements and material adjustments needed to be recorded in such previously filed financial statements; and

(4) E&Y did not believe sufficient information existed to enable management or consulting actuaries to estimate a liability for IBNR claims on the discontinued bond program at December 31, 2004.

As previously reported, following E&Y’s withdrawal of its audit reports, the Audit Committee of the Company (the “Audit Committee”) engaged Kirkpatrick & Lockhart Nicholson Graham LLP (“Kirkpatrick & Lockhart”) to conduct an independent investigation of the concerns raised by E&Y. In its investigation, Kirkpatrick & Lockhart concluded that (1) there was no evidence that management intentionally withheld information from E&Y regarding the discontinued bond program or committed any intentional misconduct and (2) internal control deficiencies existed in the discontinued bond program.

As previously reported, on July 12, 2005, the Audit Committee dismissed E&Y as the Company’s independent registered public accounting firm and engaged Daszkal Bolton LLP (“Daszkal”) as the Company’s independent registered public accounting firm for fiscal years 2001 through 2005.

The Company believes that the internal control deficiencies identified by Kirkpatrick & Lockhart do not constitute material weaknesses in the Company’s system of internal controls. In response to Kirkpatrick & Lockhart’s findings related to the Company’s internal controls over the discontinued bond program, the Audit Committee engaged Skoda, Minotti & Co. (“Skoda”), an independent accounting firm, to conduct an assessment of the Company’s internal controls over its reinsurance and managing general agent operations (collectively referred to as “third party operations”) and recommend any appropriate changes. On November 11, 2005, Skoda issued its independent accountant’s report on the Company’s internal controls over its third party operations as of June 30,

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

2005. Skoda concluded that the Company maintained, in all material respects, effective internal controls over its third party operations as of June 30, 2005. As part of its engagement, Skoda made certain recommendations for further enhancements to the Company’s internal controls over its third party operations. The Company expects to implement all recommendations.

In addition, Daszkal issued an unqualified audit report on the Company’s financial statements included as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, which is being filed contemporaneously with the filing of this Form 10-Q. Prior to issuing its audit report on the Company’s financial statements, Daszkal received a report of Kirkpatrick & Lockhart’s findings. Daszkal concluded that the internal control deficiencies identified by Kirkpatrick & Lockhart do not constitute material weaknesses in the Company’s system of internal controls.

Appearing as exhibits to this report are the certifications of the Company’s principal executive officer and the principal financial officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. The disclosures set forth in this Item 4 contain information concerning the evaluation of the Company’s disclosure controls and procedures, and changes in internal control over financial reporting, referred to in paragraphs 4(b) and (c) of the certifications. This Item 4 should be read in conjunction with the certifications for a more complete understanding of the topics presented.


	Page No.
PART I — FINANCIAL INFORMATION:

Item 1. Financial Statements

Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004 (unaudited)		4

Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 (unaudited)		5

Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (unaudited)		7

Notes to Consolidated Financial Statements (unaudited)		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosures About Market Risk		26

Item 4. Controls and Procedures		27

PART II — OTHER INFORMATION AND SIGNATURES:

Item 1. Legal Proceedings		29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		29

Item 3. Defaults Upon Senior Securities Not Applicable		Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders Not Applicable		Not Applicable

Item 5. Other Information Not Applicable		Not Applicable

Item 6. Exhibits		29

Signatures		30
EX-31.1
EX-31.2
EX-32.1


31.1*		Certification of Principal Executive Officer Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Principal Financial Officer Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


		BANCINSURANCE CORPORATION

	(Registrant)


Date: January 25, 2006	By:	/s/ Si Sokol

		Si Sokol
		Chairman and Chief Executive Officer
		(Principal Executive Officer)


Date: January 25, 2006	By:	/s/ Matthew C. Nolan

		Matthew C. Nolan
		Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer and
		Principal Accounting Officer)

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