BANCINSURANCE CORPORATION FORM 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 September 30, 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 þ NO o

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					Nine Months Ended
	September 30,					September 30,
	2005		2004*			2005		2004*
Revenues:
Net premiums earned	$	13,771,082	$	12,731,441		$	39,497,536	$	37,994,545
Net investment income		895,603		626,304			2,342,545		1,526,152
Net realized gains on investments		26,140		106,450			1,283,589		1,072,752
Codification and subscription fees		776,950		868,842			2,502,998		2,841,183
Management fees		231,399		4,896			511,685		33,710
Other income		18,158		6,518			90,896		33,519

Total revenues		15,719,332		14,344,451			46,229,249		43,501,861


Expenses:
Losses and loss adjustment expenses (“LAE”)		6,177,129		7,553,280			16,534,986		21,608,530
Discontinued bond program losses and LAE		103,415		6,141,691			3,763,591		15,557,806
Commission expense		3,652,612		2,973,981			10,398,203		7,272,310
Other insurance operating expenses		2,356,173		1,550,849			7,831,927		4,436,273
Codification and subscription expenses		682,057		802,400			2,111,446		2,702,329
General and administrative expenses		490,023		338,183			763,094		919,963
Interest expense		297,698		220,220			833,594		651,702

Total expenses		13,759,107		19,580,604			42,236,841		53,148,913


Income (loss) before federal income taxes		1,960,225		(5,236,153	)		3,992,408		(9,647,052	)

Federal income tax expense (benefit)		458,594		(1,915,324	)		812,068		(3,638,750	)


Net income (loss)	$	1,501,631	$	(3,320,829	)	$	3,180,340	$	(6,008,302	)


Net income (loss) per common share:
Basic	$	.30	$	(.67	)	$	.64	$	(1.22	)

Diluted	$	.30	$	(.67	)	$	.63	$	(1.22	)

* Restated, See Note 1 to the Consolidated Financial Statements.

See accompanying notes to consolidated financial statements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)


	September 30,		December 31,
	2005		2004
Assets
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value $4,928,524 in 2005 and $5,034,173 in 2004)	$	4,877,155	$	4,909,873
Available for sale:
Fixed maturities, at fair value (amortized cost $62,298,539 in 2005 and $53,406,973 in 2004)		62,809,698		54,139,496
Equity securities, at fair value (cost $7,595,990 in 2005 and $8,545,757 in 2004)		8,183,242		10,312,382
Short-term investments, at cost which approximates fair value		14,698,804		12,712,577
Other invested assets		715,000		715,000


Total investments		91,283,899		82,789,328


Cash		2,146,520		3,791,267
Premiums receivable		7,648,082		7,911,379
Accounts receivable, net		553,757		710,525
Reinsurance recoverables		1,017,669		1,943,602
Prepaid reinsurance premiums		5,060,116		2,859,710
Deferred policy acquisition costs		9,689,988		7,223,995
Estimated earnings in excess of billings on uncompleted codification contracts		216,751		182,441
Loans to affiliates		902,287		836,022
Intangible assets, net		789,642		845,531
Accrued investment income		951,934		887,467
Current federal income taxes		3,576,823		3,688,228
Deferred federal income taxes		1,354,561		1,637,813
Taxes, licenses and fees receivable		—		72,520
Other assets		1,770,919		1,680,644


Total assets	$	126,962,948	$	117,060,472

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Consolidated Balance Sheets, Continued
(Unaudited)


	September 30,			December 31,
	2005			2004
Liabilities and Shareholders’ Equity
Reserve for unpaid losses and LAE	$	8,053,056		$	11,563,111
Discontinued bond program reserve for unpaid losses and LAE		22,966,987			19,203,356
Unearned premiums		34,656,156			27,719,148
Ceded reinsurance premiums payable		2,847,048			493,963
Experience rating adjustments payable		2,641,946			1,456,403
Retrospective premium adjustments payable		3,617,239			7,276,225
Funds held under reinsurance treaties		866,088			1,253,796
Contract funds on deposit		1,330,501			811,358
Taxes, licenses and fees payable		294,518			—
Deferred ceded commissions		1,187,624			1,034,931
Commissions payable		3,042,061			4,022,811
Billings in excess of estimated earnings on uncompleted codification contracts		83,919			60,227
Notes payable		26,639			540,198
Other liabilities		2,784,861			1,313,657
Trust preferred debt issued to affiliates		15,465,000			15,465,000


Total liabilities		99,863,643			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 September 30, 2005 and December 31, 2004,
4,972,700 shares outstanding at September 30, 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		722,116			1,649,439
Retained earnings		29,019,052			25,838,712

		32,871,982			30,618,365

Less: Treasury shares, at cost (1,197,641 common shares at September 30, 2005 and December 31, 2004)		(5,772,077	)		(5,772,077	)


Total shareholders’ equity		27,099,305			24,846,288


Total liabilities and shareholders’ equity	$	126,962,948		$	117,060,472

See accompanying notes to consolidated financial statements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended
	September 30,
	2005			2004*
Cash flows from operating activities:
Net income (loss)	$	3,180,340		$	(6,008,302	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net realized gains on investments		(1,283,589	)		(1,072,752	)
Net realized gains on disposal of property and equipment		(350	)		—
Depreciation and amortization		438,201			309,582
Deferred federal income tax (benefit) expense		759,505			(1,017,377	)
Change in assets and liabilities:
Premiums receivable		263,297			2,767,631
Accounts receivable, net		156,768			458,582
Reinsurance recoverables		925,933			2,019,048
Prepaid reinsurance premiums		(2,200,406	)		4,030,862
Deferred policy acquisition costs		(2,465,993	)		(1,345,351	)
Other assets, net		(87,892	)		(4,077,876	)
Reserve for unpaid losses and LAE		253,576			13,879,498
Unearned premiums		6,937,008			580,198
Ceded reinsurance premiums payable		2,353,085			(1,325,745	)
Experience rating adjustments payable		1,185,543			473,717
Retrospective premium adjustments payable		(3,658,986	)		130,325
Funds held under reinsurance treaties		(387,708	)		(1,334,505	)
Contract funds on deposit		519,143			(924,887	)
Deferred ceded commissions		152,693			(410,508	)
Other liabilities, net		795,057			(2,997,844	)

Net cash provided by operating activities		7,835,225			4,134,296

Cash flows from investing activities:
Proceeds from held to maturity fixed maturities due to redemption or maturity		20,000			195,000
Proceeds from available for sale fixed maturities sold, redeemed or matured		21,097,529			13,632,156
Proceeds from available for sale equity securities sold		17,862,722			8,955,645
Cost of investments purchased:
Held to maturity fixed maturities		—			(250,410	)
Available for sale fixed maturities		(30,228,282	)		(29,689,189	)
Equity securities		(15,644,181	)		(7,427,459	)
Net change in short-term investments and other invested assets		(1,986,227	)		11,509,444
Purchase of land, property and leasehold improvements		(101,533	)		—

Net cash used in investing activities		(8,979,972	)		(3,074,813	)

Cash flows from financing activities:
Proceeds from note payable to bank		—			3,000,000
Repayments of note payable to bank		(500,000	)		(3,000,000	)
Proceeds from stock options exercised		—			238,609

Net cash provided by (used in) financing activities		(500,000	)		238,609


Net increase (decrease) in cash		(1,644,747	)		1,298,092
Cash at December 31		3,791,267			2,949,627

Cash at September 30	$	2,146,520		$	4,247,719


Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	824,567		$	654,933

Federal income taxes	$	—		$	1,730,000

* Restated, See Note 1 to the Consolidated Financial Statements.

See accompanying notes to consolidated financial statements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

1.		Basis of Presentation

		We prepared the consolidated balance sheet as of September 30, 2005, the consolidated statements of operations for the three and nine months ended September 30, 2005 and 2004 and the consolidated statements of cash flows for the nine months ended September 30, 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 September 30, 2005 and for all periods presented have been made.

		The comparative 2004 financial information has been restated to correct balance sheet reserves and accrual adjustments for the Company’s discontinued bond program.

		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 March 31, 2005 and June 30, 2005, which are being filed contemporaneously with the filing of this Form 10-Q. The results of operations for the period ended September 30, 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.

		Certain prior year amounts have been reclassified in order to conform to the 2005 presentation.

2.		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 (7.86% and 5.81% at September 30, 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 (8.07% and 6.03% at September 30, 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 September 30, 2005 and 2004 was $297,219 and $214,170, respectively, and $830,161 and $619,202 for the nine months ended September 30, 2005 and 2004, 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 September 30, 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.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

3.		Stock Option Plans

		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 and nine months ended September 30, 2005 and 2004 are presented below.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Net income (loss), as reported	$	1,501,631		$	(3,320,829	)	$	3,180,340		$	(6,008,302	)
Deduct: Total stock-based employee compensation expense determined under “fair value” based method for all awards, net of related tax effects		(14,297	)		(11,169	)		(57,222	)		(67,607	)

Pro forma net income (loss)	$	1,487,334		$	(3,331,998	)	$	3,123,118		$	(6,075,909	)


Net income (loss) per common share:

Basic, as reported	$	0.30		$	(0.67	)	$	0.64		$	(1.22	)
Basic, pro forma	$	0.30		$	(0.67	)	$	0.63		$	(1.23	)
Diluted, as reported	$	0.30		$	(0.67	)	$	0.63		$	(1.22	)
Diluted, pro forma	$	0.30		$	(0.67	)	$	0.62		$	(1.23	)

		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 $0.00-$0.01 per diluted share as shown above.

4.		Other Comprehensive Income

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


	Three Months Ended September 30, 2005
	Before-tax			Income			Net-of-tax
	amount			tax effect			amount
Net unrealized holding gains (losses) on securities:
Unrealized holding losses arising during 2005	$	(478,733	)	$	(162,769	)	$	(315,964	)
Less: reclassification adjustments for gains realized in net income		26,140			8,888			17,252

Net unrealized holding losses		(504,873	)		(171,657	)		(333,216	)

Other comprehensive loss	$	(504,873	)	$	(171,657	)	$	(333,216	)

BANCINSURANCE CORPORATION
AND SUBSIDIARIES


	Three Months Ended September 30, 2004
	Before-tax		Income		Net-of-tax
	amount		tax effect		amount
Net unrealized holding gains (losses) on securities:
Unrealized holding gains arising during 2004	$	379,807	$	129,134	$	250,673
Less: reclassification adjustments for gains realized in net income		106,450		36,193		70,257

Net unrealized holding gains		273,357		92,941		180,416

Other comprehensive income	$	273,357	$	92,941	$	180,416


	Nine Months Ended September 30, 2005
	Before-tax			Income			Net-of-tax
	amount			tax effect			amount
Net unrealized holding gains (losses) on securities:
Unrealized holding losses arising during 2005	$	(121,446	)	$	(41,292	)	$	(80,154	)
Less: reclassification adjustments for gains realized in net income		1,283,589			436,420			847,169

Net unrealized holding losses		(1,405,035	)		(477,712	)		(927,323	)

Other comprehensive loss	$	(1,405,035	)	$	(477,712	)	$	(927,323	)


	Nine Months Ended September 30, 2004
	Before-tax			Income			Net-of-tax
	amount			tax effect			amount
Net unrealized holding gains (losses) on securities:
Unrealized holding losses arising during 2004	$	(14,324	)	$	(4,870	)	$	(9,454	)
Less: reclassification adjustments for gains realized in net income		1,406,888			478,342			928,546

Net unrealized holding losses		(1,421,212	)		(483,212	)		(938,000	)

Other comprehensive loss	$	(1,421,212	)	$	(483,212	)	$	(938,000	)

5.		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.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

A reconciliation of direct to net premiums, on both a written and earned basis, for the three months and nine months ended September 30, 2005 and 2004 is as follows:


	Three Months Ended												Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2005						2004						2005						2004
	Premiums						Premiums						Premiums						Premiums
	Written			Earned			Written			Earned			Written			Earned			Written			Earned
Direct	$	18,070,111		$	13,675,825		$	16,134,511		$	13,200,516		$	44,026,558		$	39,066,956		$	41,781,505		$	42,599,500
Assumed		967,267			1,043,234			1,147,393			530,987			2,869,937			3,365,775			2,968,751			1,683,771
Ceded		(1,947,983	)		(947,977	)		(615,887	)		(1,000,062	)		(5,135,600	)		(2,935,195	)		(1,540,610	)		(6,288,726	)

Total	$	17,089,395		$	13,771,082		$	16,666,017		$	12,731,441		$	41,760,895		$	39,497,536		$	43,209,646		$	37,994,545

The amounts of recoveries pertaining to reinsurance that were deducted from losses and LAE incurred during the three months ended September 30, 2005 and 2004 were $274,966 and $1,470,724, respectively, and $970,524 and $2,794,620 during the nine months ended September 30, 2005 and 2004, respectively. During the three months ended September 30, 2005 and 2004, ceded reinsurance decreased commission expense incurred by $138,895 and $170,100 respectively, and $745,519 and $615,993 during the nine months ended September 30, 2005 and 2004, respectively.

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. The Company has entered into arbitrations with all 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.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

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.

Highlands Arbitration. The fourth insurance carrier, Highlands Insurance Company (“Highlands”), was placed in receivership during 2003. 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.

2005 Reserve Developments. In April 2005, the Company was advised of a global 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. The Company’s estimated loss and LAE reserves for immigration bonds was $7.3 million at September 30, 2005. The increase in immigration bond loss and LAE reserves occurred primarily during the first quarter of 2005 due to the global settlement between Aegis and DHS.

On August 30, 2005, the Company received notice from the Highlands’ Receiver of a global settlement with the New Jersey Attorney General (“NJAG”) on its remaining bail bond obligations. At December 31, 2004, 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 recorded loss and LAE reserves of $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 records its 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. 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.

Loss and LAE Reserves. The following compares our loss and LAE reserves for the discontinued bond program at September 30, 2005 and December 31, 2004 (dollars in millions):

BANCINSURANCE CORPORATION
AND SUBSIDIARIES


	September 30,		December 31,
	2005		2004
Bail Bonds:
Case reserves	$	12.9	$	6.9
Incurred but not reported (“IBNR”) reserves		2.8		8.7

Total bail bond reserves		15.7		15.6

Immigration Bonds:
Case reserves		0.6		—
IBNR reserves		6.7		3.6

Total immigration bond reserves		7.3		3.6

Total reserves	$	23.0	$	19.2

		At September 30, 2005, the Company believed Highlands was in negotiations with DHS for global settlement of its immigration bond obligations. The Company believes negotiated settlements are not uncommon for this type of program. The Company’s immigration bond loss and LAE reserves at September 30, 2005 take into consideration Highlands’ estimated global settlement amount with DHS 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; however, because of the subjective nature inherent in assessing the final outcome of the arbitrations, management can not estimate the probability of an adverse or favorable outcome as of September 30, 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 September 30, 2005. In accordance with SFAS No. 5, the Company is reserving to its best estimate of the ultimate liability on the program at September 30, 2005 taking into account the estimated settlement values with certain insurance carriers (as described above) but not taking into account the final outcome of the arbitrations. 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. 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 amount between Highlands and DHS for Highlands’ immigration bond obligations, 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.

6.		Supplemental Disclosure For Earnings Per Share


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2005		2004			2005		2004
Net income (loss)	$	1,501,631	$	(3,320,829	)	$	3,180,340	$	(6,008,302	)

Income (loss) available to common shareholders, assuming dilution		1,501,631		(3,320,829	)		3,180,340		(6,008,302	)


Weighted average common shares outstanding		4,972,700		4,969,135			4,972,700		4,943,871
Adjustments for dilutive securities:
Dilutive effect of outstanding options		10,859		—			64,878		—

Diluted common shares		4,983,559		4,969,135			5,037,578		4,943,871


Net income (loss) per common share:
Basic	$	.30	$	(.67	)	$	.64	$	(1.22	)
Diluted	$	.30	$	(.67	)	$	.63	$	(1.22	)

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

7.		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
	September 30, 2005
			Municipal				Reportable
	Property/Casualty		Code		Insurance		Segment
	Insurance		Publishing		Agency		Total

Revenues from external customers	$	14,043,450	$	776,950	$	5,812	$	14,826,212
Intersegment revenues		1,470		—		280,836		282,306
Interest revenue		873,937		—		1,426		875,363
Interest expense		—		480		—		480
Depreciation and amortization		73,433		24,507		—		97,940
Segment profit		2,324,665		112,391		290,996		2,728,052
Federal income tax expense		565,367		40,522		98,939		704,828


	Three Months Ended
	September 30, 2004
				Municipal					Reportable
	Property/Casualty			Code		Insurance			Segment
	Insurance			Publishing		Agency			Total

Revenues from external customers	$	12,801,314		$	868,842	$	(52,563	)	$	13,617,593
Intersegment revenues		1,470			—		218,361			219,831
Interest revenue		612,892			—		165			613,057
Interest expense		47			480		—			527
Depreciation and amortization		113,791			22,087		—			135,878
Segment profit (loss)		(4,977,896	)		65,964		155,463			(4,756,469	)
Federal income tax expense (benefit)		(1,824,699	)		24,644		52,808			(1,747,247	)


	Nine Months Ended
	September 30, 2005
			Municipal				Reportable
	Property/Casualty		Code		Insurance		Segment
	Insurance		Publishing		Agency		Total

Revenues from external customers	$	41,166,538	$	2,502,998	$	22,387	$	43,691,923
Intersegment revenues		4,410		—		906,496		910,906
Interest revenue		2,293,729		—		1,952		2,295,681
Interest expense		126		1,441		—		1,567
Depreciation and amortization		265,826		69,830		—		335,656
Segment profit		3,970,267		431,670		919,710		5,321,647
Federal income tax expense		785,788		153,790		312,249		1,251,827
Segment assets		122,670,856		1,888,920		1,647,857		126,207,633

BANCINSURANCE CORPORATION
AND SUBSIDIARIES


	Nine Months Ended
	September 30, 2004
				Municipal				Reportable
	Property/Casualty			Code		Insurance		Segment
	Insurance			Publishing		Agency		Total

Revenues from external customers	$	39,067,313		$	2,841,183	$	55,679	$	41,964,175
Intersegment revenues		4,410			—		438,119		442,529
Interest revenue		1,571,706			—		273		1,571,979
Interest expense		511			1,441		—		1,952
Depreciation and amortization		248,839			166,361		—		415,200
Segment profit (loss)		(8,557,622	)		137,415		453,512		(7,966,695	)
Federal income tax expense (benefit)		(3,264,258	)		53,390		153,727		(3,057,141	)
Segment assets		106,811,536			2,524,134		769,388		110,105,058

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Revenues
Total revenues for reportable segments	$	15,983,881		$	14,450,481		$	46,898,510		$	43,978,683
Parent company revenues (loss)		17,757			113,801			241,645			(34,293	)
Elimination of intersegment revenues		(282,306	)		(219,831	)		(910,906	)		(442,529	)

Total consolidated revenues	$	15,719,332		$	14,344,451		$	46,229,249		$	43,501,861


Profit
Total profit (loss) for reportable segments	$	2,728,052		$	(4,756,469	)	$	5,321,647		$	(7,966,695	)
Parent company loss		(767,827	)		(479,684	)		(1,329,239	)		(1,680,357	)

Income (loss) before federal income taxes	$	1,960,225		$	(5,236,153	)	$	3,992,408		$	(9,647,052	)


Assets
Total assets for reportable segments							$	126,207,633		$	110,105,058
Parent company assets								3,904,591			7,574,086
Elimination of intersegment receivables								(3,149,276	)		(1,299,486	)

Total consolidated assets							$	126,962,948		$	116,379,658

8.		Subsequent Events

		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 Company and Aegis relating to the discontinued bond program. The settlement also relieves the Company from any potential future liabilities with respect to bail and immigration bonds issued by Aegis. As a result of this settlement agreement, the Company reduced its loss and LAE reserves for the discontinued bond program by $.2 million during the first quarter of 2006. In accordance with SFAS No. 60, management recorded this change in reserves during the first quarter of 2006 as a change in estimate.

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 March 31, 2005 and June 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. In addition, during the third quarter 2005, management obtained information regarding potential settlement values with certain insurance carriers participating in the discontinued bond program (see Note 5 to the Consolidated Financial Statements for a discussion of these estimated settlement values). Based on the reports and claims received by the Company through September 30, 2005 and taking into account the information regarding the estimated settlement values, the Company recorded estimated loss and LAE reserves of $23.0 million for the program at September 30, 2005. The following provides a comparison of our loss and LAE reserves on the program at September 30, 2005 and December 31, 2004 (dollars in millions):


	September 30,		December 31,
	2005		2004
Bail Bonds:
Case reserves	$	12.9	$	6.9
IBNR reserves		2.8		8.7

Total bail bond reserves		15.7		15.6

Immigration Bonds:
Case reserves		0.6		—
IBNR reserves		6.7		3.6

Total immigration bond reserves		7.3		3.6

Total reserves	$	23.0	$	19.2

During the third quarter 2005, discontinued bond program losses and LAE were $103,415. These losses and LAE were primarily due to the $2.8 million increase in loss and LAE reserves during the third quarter 2005 based on the global settlement between Highlands’ Receiver and NJAG for its bail bond obligations as described in Note 5 to the Consolidated Financial Statements. Loss and LAE reserves for the discontinued bond program also increased $.4 million based on revised estimates of potential future liabilities as provided by certain insurance carriers during the third quarter 2005. These increases in reserves were partially offset by the $3.1 million decrease in loss and LAE reserves during the third quarter 2005 based on management’s estimated settlement values with certain insurance carriers.

During the first nine months of 2005, the Company recorded discontinued bond program losses and LAE of $3.8 million which consisted of 1) a $6.7 million increase in loss and LAE reserves related to the Aegis global settlement with DHS for its immigration

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

bond obligations and the Highlands’ Receiver global settlement with NJAG for its bail bond obligations, 2) a $.2 million net increase in loss and LAE reserves based on revised estimates of potential future liabilities as provided by certain insurance carriers during the first nine months of 2005, and 3) a $3.1 million decrease in loss and LAE reserves based on management’s estimated settlement values with 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.

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; however, because of the subjective nature inherent in assessing the final outcome of the arbitrations, management can not estimate the probability of an adverse or favorable outcome as of September 30, 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 September 30, 2005. In accordance with SFAS No. 5, the Company is reserving to its best estimate of the ultimate liability on the program at September 30, 2005 taking into account the estimated settlement values with certain insurance carriers (as described above) but not taking into account the final outcome of the arbitrations. 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. 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 amount between Highlands and DHS for Highlands’ immigration bond obligations, 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 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.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

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.

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


				Period-to-Period Increase (Decrease)
				Three and Nine Months Ended September 30,
				2004-2005
	Three Months Ended						Nine Months Ended
	Amount			% Change			Amount			% Change

Net premiums earned	$	1,039,641			8.2	%	$	1,502,991			4.0	%
Net realized gains on investments		(80,310	)		(75.4	)%		210,837			19.7	%
Total revenues		1,374,881			9.6	%		2,727,388			6.3	%
Losses and LAE		(7,414,427	)		(54.1	)%		(16,867,759	)		(45.4	)%
Commissions and other insurance expenses		1,483,954			32.8	%		6,521,547			55.7	%
Income (loss) before federal income taxes		7,196,378			137.4	%		13,639,460			141.4	%
Net income (loss)		4,822,460			145.2	%		9,188,642			152.9	%

Net income for the third quarter 2005 was $1,501,631, or $0.30 per diluted share, compared to a net loss of $(3,320,829), or $(0.67) per diluted share, for the third quarter 2004. Net income was $3,180,340, or $0.63 per diluted share, for the first nine months of 2005 compared to a net loss of $(6,008,302), or $(1.22) per diluted share, for the same period last year. The improvement in the Company’s results for the three and nine months ended September 30, 2005 was primarily due to a significant decrease in discontinued bond program losses and LAE incurred compared to the same periods a year ago. In addition, the Company benefited from an increase in profitability for its GAP, CPI and WSB product lines and an increase in investment income when compared to last year. These positive factors were partially offset by an increase in legal, auditing and federal income tax expenses incurred during the three and nine months ended September 30, 2005 when compared to the same periods last year.

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 and nine months ended September 30:


	Three Months Ended						Nine Months Ended
	2005			2004			2005			2004
GAAP:
Loss ratio		46.1	%		108.3	%		52.1	%		98.5	%
Expense ratio		49.1	%		36.2	%		39.0	%		31.2	%

Combined ratio		95.2	%		144.5	%		91.1	%		129.7	%


Statutory:
Loss ratio		46.1	%		108.3	%		52.1	%		98.5	%
Expense ratio		38.7	%		33.1	%		50.3	%		30.8	%

Combined ratio		84.8	%		141.4	%		102.4	%		129.3	%

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

RESULTS OF OPERATIONS

Three Months Ended September 30, 2005 Compared to September 30, 2004

Net Premiums Earned. Total net premiums earned increased 8.2% to $13,771,082 for the third quarter 2005 from $12,731,441 a year ago. Increases in net premiums earned for GAP, CPI, UC and WSB product lines were partially offset by decreases in our ULI and discontinued bond program lines.

Net premiums earned for GAP increased 82.7% to $2,771,281 for the third quarter 2005 from $1,516,913 a year ago. This growth was due to rate increases, volume increases with existing customers and new customers added. Net premiums earned for CPI increased $689,814 for the third quarter 2005 primarily due to fewer return premiums in 2005 when compared to 2004. Net premiums earned for WSB increased 70.3% to $1,189,036 for the third quarter 2005 from $698,112 a year ago as we began participating in this program during the second quarter 2004. Net premiums earned for UC increased slightly to $1,377,390 for the third quarter 2005 from $1,344,928 a year ago.

Net premiums earned for ULI decreased 15.1% to $7,838,536 for the third quarter 2005 from 9,231,455 a year ago. This decrease was primarily due to one of our managing general agents moving a portion of its premium in an effort to evenly distribute its business with existing insurance carriers combined with an increase 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 premiums earned whereas an increase in experience rating adjustments results in a decrease to net premiums earned. Experience rating adjustments increased during the third quarter 2005 when compared to the same period last year primarily due to favorable loss experience for the ULI product line as well as an increase in premium volume by several of our financial institution customers. Management anticipates that experience rating adjustments may fluctuate in future periods based upon loss experience and premium growth. These decreases in ULI net premiums earned were partially offset by an increase in lending volume by several of our other financial institution customers.

Discontinued bond program net premiums earned declined $57,443 for the third quarter 2005 compared to a year ago 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 43.0% to $895,603 for the third quarter 2005 from $626,304 a year ago. 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 $26,140 for the third quarter 2005 compared to $106,450 a year ago. This decrease 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 the cost and estimated fair value is charged to income as a realized loss on investment. There were no impairment charges included in net realized gains on investments for the third quarter 2005 compared to $57,550 a year ago. 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 $91,892 to $776,950 for the third quarter 2005 from $868,842 a year ago primarily due to a decline in codification and subscription code revenue.

Management Fees. Through our UCassure^® product, we insure the payment of certain unemployment compensation benefit charges to be paid from contract funds on deposit. We have agreements with a cost containment service firm to control the unemployment compensation costs of certain qualified entities. Any remaining funds after the payment of all benefit charges are shared between the Company and the cost containment firm as management fees. Our management fees increased to $231,399 for the third quarter 2005 from zero a year ago as a result of favorable unemployment experience during 2005. We expect management fees to vary from period to period depending on unemployment levels and benefit charges.

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 decreased 54.1% to $6,280,544 for the third quarter 2005 from

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

$13,694,971 a year ago. This decline was principally due to a decrease in losses and LAE of $6,038,276 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 $1,376,151 for the third quarter 2005 compared to a year ago primarily due to decreases in our ULI and CPI products which were partially offset by an increase in losses and LAE for our GAP, UC and WSB business.

ULI losses and LAE decreased 26.9% to $4,205,423 for the third quarter 2005 from $5,754,322 a year ago. The decrease was due to favorable loss development combined with a decrease in premium volume. CPI losses and LAE declined 45.2% to $80,585 for the third quarter 2005 from $147,064 a year ago due to the cancellation of a poor-performing book of business in the second quarter of 2004.

GAP losses and LAE increased 2.8% to $1,572,489 for the third quarter 2005 from $1,529,094 a year ago. UC losses and LAE increased $148,230 to $199,186 for the third quarter 2005 from $50,956 a year ago. WSB losses and LAE increased to $118,904 for the third quarter 2005 from $69,811 a year ago. Increases in losses and LAE for these product lines were primarily due to the growth in business for each product.

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 $678,631 to $3,652,612 for the third quarter 2005 from $2,973,981 a year ago principally due to the growth in GAP and WSB premiums combined with an increase in contingent commissions for one of our ULI agents. Other insurance operating expenses increased $805,324 to $2,356,173 for the third quarter 2005 from $1,550,849 a year ago primarily due to legal fees related to the SEC investigation and the discontinued bond program arbitrations, as well as an increase in external audit fees.

Codification and Subscription Expenses. Codification and subscription expenses incurred by ALPC decreased $120,343 to $682,057 for the third quarter 2005 from $802,400 a year ago due to the decline in codification and subscription revenues mentioned above.

Interest Expense. Interest expense increased $77,478 to $297,698 for the third quarter 2005 from $220,220 a year ago primarily due to 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. Federal income tax expense was $458,594 for the third quarter 2005 compared to federal income tax (benefit) of $(1,915,324) for the same period last year. The benefit in 2004 was primarily caused by a decline in pre-tax income due to the discontinued bond program losses.

GAAP Combined Ratio. For the third quarter 2005, the combined ratio decreased to 95.2% from 144.5% a year ago. The loss ratio decreased to 46.1% for the third quarter 2005 from 108.3% a year ago principally due to the decrease in losses and LAE for the discontinued bond program. Excluding the discontinued bond program losses and LAE, the Company’s loss ratio was 45.3% for the third quarter 2005 compared to 60.1% a year ago. 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 49.1% for the third quarter 2005 from 36.2% a year ago primarily due to primarily due to an increase in commission expense and other insurance operating expenses as described above.

Nine Months Ended September 30, 2005 Compared to September 30, 2004

Net Premiums Earned. Net premiums earned increased 4.0% to $ 39,497,536 for the nine months ended September 30, 2005 from $37,994,545 a year ago as a result of increases in GAP, UC and WSB products which were partially offset by decreases in ULI CPI and discontinued bond program business.

Net premiums earned for GAP rose 83.1% to $7,091,677 for the nine months ended September 30, 2005 from $3,872,503 a year ago. This increase was due to purchases of GAP coverage by new customers, as well as rate and volume increases with existing customers. Net premiums earned for UC products grew 7.1% to $4,152,633 for the nine months ended September 30, 2005 from $3,877,956 a year ago primarily due to rate increases. Net premiums earned for WSB increased $2,785,666 to $3,708,406 for the nine months ended September 30, 2005 from $922,740 a year ago as we began participating in this program during the second quarter 2004.

Net premiums earned for ULI decreased 15.0% to $22,664,142 for the nine months ended September 30, 2005 from $26,653,961 a year ago due primarily to decreased lending volume for certain of our financial institution customers, one of our managing general agents moving a portion of its premium in an effort to evenly distribute its business with existing insurance carriers and an increase in experience rating adjustments. Experience rating adjustments increased for the nine months ended September 30, 2005 when compared to

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

the same period last year primarily due to favorable loss experience for the ULI product line. These decreases in ULI net premiums earned were partially offset by an increase in lending volume by several of our other financial institution customers.

CPI net premiums earned decreased 13.9% to $1,718,096 for the nine months ended September 30, 2005 from $1,996,592 for the same period last year as a poor-performing book of business was cancelled in the second quarter 2004.

Discontinued bond program net premiums earned declined $559,740 for the nine months ended September 30, 2005 compared to a year ago 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. Net investment income increased 53.5% to $2,342,545 for the nine months ended September 30, 2005 from $1,526,152 a year ago. 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 $1,283,589 for the nine months ended September 30, 2005 compared to $1,072,752 a year ago. This increase was a combination of the timing of sales of individual securities and other-than-temporary impairments on investments. There were no impairment charges included in net realized gains on investments for the nine months ended September 30, 2005 compared to $508,343 a year ago. Included in impairment charges for the nine months ended September 30, 2004 is a write down of $334,136 related to a private equity investment due to its financial uncertainty. 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 11.9% to $2,502,998 for the nine months ended September 30, 2005 from $2,841,183 a year ago. In 2004, the Company engaged in a one-time project which generated additional fees that were not received in 2005.

Management Fees. Our management fees increased to $511,685 for the nine months ended September 30, 2005 from zero a year ago as a result of favorable unemployment experience during 2005. We expect management fees to vary from period to period depending on unemployment levels and benefit charges.

Losses and Loss Adjustment Expenses. Losses and LAE decreased 45.4% to $20,298,577 for the for the nine months ended September 30, 2005 from $37,166,336 a year ago. This decline was partly due to a decrease in losses and LAE of $11,794,215 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 $5,073,544 for the nine months ended September 30, 2005 compared to a year ago primarily due to decreases in our ULI and CPI products which were partially offset by an increase in losses and LAE for our GAP, UC and WSB business.

ULI losses and LAE decreased 30.2% to $11,366,482 for the nine months ended September 30, 2005 from $16,286,497 a year ago. The decrease was due to favorable loss development combined with a decrease in premium volume. CPI losses and LAE declined 72.6% to $581,974 for the nine months ended September 30, 2005 from $2,124,637 a year ago due to the cancellation of a poor-performing book of business in the second quarter of 2004.

GAP losses and LAE increased 18.4% to $3,568,273 for the nine months ended September 30, 2005 from $3,014,697 a year ago principally due to growth in the business. Losses and LAE for our UC product increased $561,305 compared to a year ago due to favorable loss development in 2004 on an excess of loss policy that was cancelled at the end of 2003 as well as reserve strengthening during 2005 resulting from rising unemployment costs. WSB losses and LAE increased to $370,836 for the nine months ended September 30, 2005 from $92,275 a year ago consistent with the growth in 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 increased 43.0% to $10,398,203 for the nine months ended September 30, 2005 from $7,272,310 a year ago principally due to the growth in GAP and WSB premiums combined with an increase in contingent commissions for one of our ULI agents. Other insurance operating expenses rose 76.5% to $7,831,927 for the nine months ended September 30, 2005 from $4,436,273 a year ago primarily due to legal fees related to the Audit Committee’s independent investigation of E&Y’s withdrawal of its audit reports, the SEC investigation and the discontinued bond program arbitrations, as well as an

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

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 21.9% to $2,111,446 for the nine months ended September 30, 2005 from $2,702,329 a year ago. These decreases were consistent with the decrease in codification and subscription revenues and were primarily attributable to the completion of a one-time project during 2004 that generated additional expenses for last year as well as the write-down of a database in the second quarter 2004.

Interest Expense. Interest expense increased 27.9% to $833,594 for the nine months ended September 30, 2005 from $651,702 a year ago as a result of 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. Federal income tax expense was $812,068 for the nine months ended September 30, 2005 compared to federal income tax (benefit) of $(3,638,750) for the same period last year. The benefit in 2004 was primarily caused by a decline in pre-tax income due to the discontinued bond program losses.

GAAP Combined Ratio. For the nine months ended September 30, 2005, the combined ratio decreased to 91.1% from 129.7% a year ago. The loss ratio improved to 52.1% for the nine months ended September 30, 2005 from 98.5% a year ago due to the decrease in losses and LAE for the discontinued bond program. Excluding the discontinued bond program losses and LAE, the Company’s loss ratio was 42.6% for the nine months ended September 30, 2005 compared to 57.6% a year ago. 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 39.0% for the nine months ended September 30, 2005 from 31.2% a year ago primarily due to an increase in commission expense and other insurance operating expenses as described above.

BUSINESS OUTLOOK

Lender/Dealer Products

Through September 30, 2005, the Company experienced positive underwriting results in its lender/dealer products which was partly attributable to tighter lending standards by our customers and pricing actions taken by the Company. This positive underwriting experience resulted in favorable loss development, primarily within our ULI product line. However, the national economy still appears to be unstable. The Company does not expect to continue to experience the same level of favorable loss development for our ULI product line that has been experienced during the first nine months of 2005. If loan defaults, bankruptcies and automobile repossessions increase, we would anticipate an increase in the frequency of losses for our ULI and CPI products.

Increased incentives being offered on new cars by dealers and manufacturers have depressed the value of the used car market. In addition, the increasing cost of fuel during the second half of 2005 could lower the fair value of less fuel efficient vehicles. If used car prices continue to decline the “gap” between the value of the vehicle and the outstanding loan balance would increase and thus the severity of our GAP losses would increase. The Company has taken pricing actions to mitigate the effect of these trends.

Automobile sale volumes are projected to be lower in 2006 which could result in fewer automobile financings among our lender/dealer customers. As a result, premium volume could decline if our lender/dealer customers are impacted by such trend. In addition, during the third quarter of 2005, one of our managing general agents moved a portion of its ULI and GAP premium in an effort to evenly distribute its business with existing insurance carriers. As a result, the Company expects a decline in premiums earned and losses and commissions incurred of approximately $3.0 million and $2.5 million, respectively, for this managing general agent in 2006 when compared to 2005.

During 2005, two major insurance providers discontinued offering GAP coverage which could lead to additional sales opportunities for the Company as lenders and dealers look to replace these carriers.

Unemployment Compensation and Other Specialty Products

The Company believes that there has been a stabilization of benefit charge levels in our UC product customer base; however if unemployment levels rise, we could experience lower management fees and/or increased losses for our UC products. We anticipate an increase in premiums for our WSB in 2005 compared to 2004 as we participated in the program for a partial year in 2004 and a full year in 2005. Furthermore, any developments on the discontinued bond program and related arbitrations could have a material impact on our results of operations and/or financial condition.

Expenses and Investments

The Company experienced a higher level of expenses during the first nine months of 2005 partly due to legal fees related to the Audit

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Committee’s independent investigation of E&Y’s withdrawal of its audit reports as well as audit fees related to the re-audits of the Company’s financial statements. These represent one-time expenses. As a result, the Company would anticipate a decline in expenses in 2006; however, it should be noted that the Company anticipates it will continue to incur legal costs for the SEC private investigation and the discontinued bond program arbitrations.

If interest rates continue to rise, it would increase the level of interest expense on the Company’s trust preferred debt and any borrowings on its revolving line of credit. In addition, a rise in interest rates could decrease the fair value of the Company’s fixed income investment portfolio.

Over the past several years, the Company has benefited from net realized gains from sales of investments which is mostly attributable to sales of equity securities. As the Company’s has reduced its net unrealized gain position in its equity portfolio, we do not anticipate the same level of net realized gains on investments that have been experienced in the past few years.

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 September 30, 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:


	September 30,			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		27,099,305			24,846,288

Total capitalization	$	42,564,305		$	40,811,288

Ratio of total debt obligations to total capitalization		36.3	%		39.1	%

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 (7.86% and 5.81% at September 30, 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 (8.07% and 6.03% at September 30, 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 September 30, 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 September 30, 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 September 30, 2005, we were in compliance with each these requirements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

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 September 30, 2005, total cash and short-term investments were approximately $16.8 million and net loss and LAE reserves, excluding the discontinued bond program, were approximately $7.4 million.

As discussed in “Overview-Discontinued Bond Program” above and in Note 5 to the Consolidated Financial Statements, the Company recorded $23.0 million in loss and LAE reserves for its discontinued bond program at September 30, 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, settlements with the insurance carriers or other potential recoveries, uncertainties as to the prospective settlement amount between Highlands and DHS for Highlands’ immigration bond obligations, 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 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 provided by operating activities totaled $7,835,225 and $4,134,296 for the nine months ended September 30, 2005 and 2004, respectively. The increase was primarily the result of an increase in premiums and investment income collected and a decrease in paid claims and federal income taxes paid. These increases in cash flows were partially offset by an increase in commissions and other insurance operating expenses paid in the first nine months of 2005 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 September 30, 2005.

Given the Company’s historic cash flows and current financial condition, management believes that the cash flows from operating and

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

investing activities over the next year will provide sufficient liquidity for the operations of the Company.

DISCLOSURES ABOUT MARKET RISK

During the nine months ended September 30, 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.

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 for the nine months ended September 30, 2005 compared to $508,343 for the same period a year ago.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Included in impairment charges for the nine months ended September 30, 2004 is a write down of $334,136 related to a private equity investment due to its financial uncertainty. Impairments within the portfolio during the remainder of 2005 are possible if current economic and financial conditions worsen.

The following table summarizes, for all securities in an unrealized loss position at September 30, 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	$	15,466,766	$	101,246
7-12 months		6,151,425		62,685
Greater than 12 months		2,849,453		36,845

Total fixed maturities		24,467,644		200,776


Equities:
6 months or less		1,230,668		35,731
7-12 months		4,077,054		285,803
Greater than 12 months		8,245		3,995

Total equities		5,315,967		325,529

Total	$	29,783,611	$	526,305

As of September 30, 2005, the Company had unrealized losses on 81 fixed maturity securities totaling $200,776, including 53, 19 and 9 fixed maturity securities that maintained an unrealized loss position for 6 months or less, 7-12 months and greater than 12 months, respectively. All 81 fixed maturity securities had a fair value to cost ratio equal to or greater than 97% as of September 30, 2005.

As of September 30, 2005, the Company had unrealized losses on 14 equity securities totaling $325,529, including 4, 9 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 14 equity securities, 12 securities had a fair value to cost ratio equal to or greater than 90%, 1 security had a fair value to cost ratio of 77% and 1 security had a fair value to cost ratio of 67% (unrealized loss of $3,995) as of September 30, 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 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, settlements with the insurance carriers or other potential recoveries, uncertainties as to the prospective settlement amount between Highlands and DHS for Highlands’ immigration bond obligations, 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

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

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 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 September 30, 2005, our indicated gross loss and LAE reserve range for lender/dealer products was $5.2 million to $6.1 million and our recorded loss and LAE reserves were $5.9 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.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

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.”

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

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

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, 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 and nine months ended September 30, 2005 and 2004 (restated) (unaudited)		4

Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004 (unaudited)		5

Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (restated) (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		29

Item 4. Controls and Procedures		29

PART II — OTHER INFORMATION AND SIGNATURES:

Item 1. Legal Proceedings		31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		31

Item 3. Defaults Upon Senior Securities		Not Applicable

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

Item 5. Other Information		Not Applicable

Item 6. Exhibits		31

Signatures		32
EX-31.1
EX-31.2
EX-32.1


		Exhibits

		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.



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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