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, 2008

or

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o  Accelerated filer o  Non-accelerated filer   o
(Do not check if a smaller reporting company) Smaller reporting company 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 October 21, 2008 was 5,082,574.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

INDEX

	Page No.
PART I — FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2008 and 2007 (unaudited)		3
Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 (unaudited)		4
Condensed Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2008 and 2007 (unaudited)		6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)		7
Notes to Condensed Consolidated Financial Statements (unaudited)		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 4T. Controls and Procedures		42
PART II — OTHER INFORMATION AND SIGNATURES:
Item 1. Legal Proceedings		43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	Not Applicable
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		43
Signatures		44
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1

2

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Statements of Income
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues:
Net premiums earned	$	11,585,058		$	12,215,661		$	36,515,778		$	34,616,643
Net investment income		1,002,029			980,730			2,810,609			2,928,489
Net realized losses on investments		(1,159,484	)		(556,425	)		(2,016,045	)		(483,140	)
Management fees		64,924			164,585			289,238			388,455
Net realized gain on sale of affiliate		—			—			—			62,500
Other income		10,305			67,702			28,425			127,795
Total revenues		11,502,832			12,872,253			37,628,005			37,640,742
Expenses:
Losses and loss adjustment expenses (“LAE”)		5,500,815			6,671,180			18,434,823			17,505,582
Discontinued bond program losses and LAE		—			—			(60,929	)		497,627
Policy acquisition costs		3,019,874			2,042,939			8,838,843			8,260,954
Other operating expenses		1,974,022			2,013,270			5,833,554			5,880,052
SEC investigation expenses		1,035,773			—			3,096,229			—
Interest expense		297,121			372,436			930,945			1,101,951
Total expenses		11,827,605			11,099,825			37,073,465			33,246,166
(Loss) income before federal income taxes		(324,773	)		1,772,428			554,540			4,394,576
Federal income tax (benefit) expense		(135,092	)		168,085			(87,729	)		692,515
Net (loss) income	$	(189,681	)	$	1,604,343		$	642,269		$	3,702,061
Net (loss) income per common share:
Basic	$	(.04	)	$	.33		$	.13		$	.75
Diluted	$	(.04	)	$	.32		$	.13		$	.73

See accompanying notes to condensed consolidated financial statements.

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BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

	September 30,		December 31,
	2008		2007
Assets
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value $5,283,131 in 2008 and $5,291,616 in 2007)	$	5,207,752	$	5,195,137
Available for sale:
Fixed maturities, at fair value (amortized cost $66,598,828 in 2008 and $73,008,250 in 2007)		61,909,195		72,404,324
Equity securities, at fair value (cost $11,792,940 in 2008 and $11,638,505 in 2007)		11,097,168		12,604,618
Short-term investments, at cost which approximates fair value		4,564,763		472,329
Restricted short-term investments, at cost which approximates fair value		6,370,089		6,714,935
Other invested assets		715,000		715,000
Total investments		89,863,967		98,106,343
Cash		2,866,438		4,151,088
Premiums receivable		6,398,776		7,477,434
Reinsurance recoverables		4,866,810		3,842,197
Prepaid reinsurance premiums		34,516,703		26,516,796
Deferred policy acquisition costs		9,078,206		9,059,182
Loans to affiliates		1,075,741		1,034,660
Accrued investment income		1,023,960		1,098,214
Net deferred tax asset		3,773,727		1,455,438
Other assets		1,641,814		1,523,304
Total assets	$	155,106,142	$	154,264,656

See accompanying notes to condensed consolidated financial statements.

4

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets, Continued
(Unaudited)

	September 30,			December 31,
	2008			2007
Liabilities and Shareholders’ Equity
Reserve for unpaid losses and loss adjustment expenses	$	12,528,249		$	10,642,382
Discontinued bond program reserve for unpaid losses and loss adjustment expenses		6,680,435			6,741,364
Unearned premiums		59,565,276			52,886,528
Ceded reinsurance premiums payable		2,330,299			4,663,180
Experience rating adjustments payable		1,784,537			1,994,587
Retrospective premium adjustments payable		1,067,040			4,216,427
Funds held under reinsurance treaties		661,053			663,857
Funds held for account of others		6,370,089			6,714,935
Contract funds on deposit		2,360,494			2,517,046
Taxes, licenses and fees payable		98,922			502,996
Current federal income tax payable		155,277			200,688
Deferred ceded commissions		3,661,059			3,159,732
Commissions payable		2,112,519			2,227,598
Other liabilities		2,147,630			3,211,414
Bank line of credit		2,500,000			—
Trust preferred debt issued to affiliates		15,465,000			15,465,000
Total liabilities		119,487,879			115,807,734
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, 2008 and December 31, 2007, 5,082,574 shares outstanding at September 30, 2008 and 4,997,950 shares outstanding at December 31, 2007		1,794,141			1,794,141
Additional paid-in capital		1,523,141			1,630,394
Accumulated other comprehensive income (loss)		(3,554,369	)		239,041
Retained earnings		41,253,665			40,611,396
		41,016,578			44,274,972
Less: Treasury shares, at cost (1,087,767 common shares at September 30, 2008 and 1,172,391 common shares at December 31, 2007)		(5,398,315	)		(5,818,050	)
Total shareholders’ equity		35,618,263			38,456,922
Total liabilities and shareholders’ equity	$	155,106,142		$	154,264,656

See accompanying notes to condensed consolidated financial statements.

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BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

										Accumulated
							Additional			other								Total
	Preferred Shares				Common		paid-in			comprehensive			Retained		Treasury			shareholders’
	Class A		Class B		shares		capital			income (loss)			earnings		shares			equity
Balance at December 31, 2006		—		—	$	1,794,141	$	1,554,355		$	1,142,957		$	37,607,687	$	(5,733,521	)	$	36,365,619
Comprehensive income:
Net income		—		—		—		—			—			3,702,061		—			3,702,061
Unrealized losses, net of tax and reclassification adjustment		—		—		—		—			(498,674	)		—		—			(498,674	)
Total comprehensive income																			3,203,387
Equity-based compensation expense		—		—		—		246,752			—			—		—			246,752
117,138 common shares repurchased		—		—		—		—			—			—		(730,591	)		(730,591	)
56,729 common shares issued in connection with restricted stock awards		—		—		—		(280,809	)		—			—		280,809			—
89,000 common shares issued in connection with the exercise of stock options		—		—		—		(32,186	)		—			—		366,562			334,376
Balance at September 30, 2007		—		—	$	1,794,141	$	1,488,112		$	644,283		$	41,309,748	$	(5,816,741	)	$	39,419,543
Balance at December 31, 2007		—		—	$	1,794,141	$	1,630,394		$	239,041		$	40,611,396	$	(5,818,050	)	$	38,456,922
Comprehensive income:
Net income		—		—		—		—			—			642,269		—			642,269
Unrealized losses, net of tax and reclassification adjustment		—		—		—		—			(3,793,410	)		—		—			(3,793,410	)
Total comprehensive loss																			(3,151,141	)
Equity-based compensation expense		—		—		—		279,692			—			—		—			279,692
84,624 common shares issued in connection with restricted stock awards		—		—		—		(419,735	)		—			—		419,735			—
Tax benefit related to vesting of restricted stock		—		—		—		32,790			—			—		—			32,790
Balance at September 30, 2008		—		—	$	1,794,141	$	1,523,141		$	(3,554,369	)	$	41,253,665	$	(5,398,315	)	$	35,618,263

See accompanying notes to condensed consolidated financial statements.

6

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended
	September 30,
	2008			2007
Cash flows from operating activities:
Net income	$	642,269		$	3,702,061
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Net realized losses on investments		2,016,045			483,140
Net realized gain from sale of other assets		—			(115,682	)
Depreciation and amortization		471,073			398,729
Equity-based compensation expense		279,692			246,752
Deferred federal income tax benefit		(364,108	)		(183,126	)
Change in assets and liabilities:
Premiums receivable		1,078,658			(2,114,360	)
Reinsurance recoverables		(1,024,613	)		(1,436,441	)
Prepaid reinsurance premiums		(7,999,907	)		(13,225,344	)
Deferred policy acquisition costs		(19,024	)		(218,191	)
Other assets, net		(116,169	)		(114,029	)
Reserve for unpaid losses and loss adjustment expenses		1,824,938			549,962
Unearned premiums		6,678,748			13,284,123
Ceded reinsurance premiums payable		(2,332,881	)		1,102,971
Experience rating adjustments payable		(210,050	)		157,446
Retrospective premium adjustments payable		(3,149,387	)		33,783
Funds held under reinsurance treaties		(2,804	)		228,263
Funds held for account of others		(344,846	)		4,854,360
Contract funds on deposit		(156,552	)		(230,057	)
Deferred ceded commissions		501,327			963,166
Commissions payable		(115,079	)		310,505
Taxes, licenses and fees payable		(404,074	)		(105,299	)
SEC investigation expense payable		(797,189	)		—
Other liabilities, net		(320,254	)		638,003
Net cash (used in) provided by operating activities		(3,864,187	)		9,210,735
Cash flows from investing activities:
Proceeds from held to maturity fixed maturities due to redemption or maturity		1,255,000			245,000
Proceeds from available for sale fixed maturities sold, redeemed or matured		13,443,175			14,501,977
Proceeds from available for sale equity securities sold		8,616,745			6,298,055
Cost of held to maturity fixed maturities purchased		(1,293,250	)		(701,031	)
Cost of available for sale fixed maturities purchased		(8,384,805	)		(18,845,057	)
Cost of available for sale equity securities purchased		(9,691,466	)		(8,825,736	)
Net change in short-term investments		(4,092,434	)		5,830,865
Net change in restricted short-term investments		344,846			(4,854,360	)
Proceeds from sale of other assets		—			388,226
Purchase of land, property and leasehold improvements		(118,274	)		(296,874	)
Net cash provided by (used in) investing activities		79,537			(6,258,935	)
Cash flows from financing activities:
Acquisition of treasury shares		—			(730,591	)
Proceeds from bank line of credit		2,500,000			—
Proceeds from stock options exercised		—			334,376
Net cash provided by (used in) financing activities		2,500,000			(396,215	)
Net (decrease) increase in cash		(1,284,650	)		2,555,585
Cash at beginning of period		4,151,088			1,823,191
Cash at end of period	$	2,866,438		$	4,378,776
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	936,870		$	1,102,569
Federal income taxes	$	289,000		$	746,172

See accompanying notes to condensed consolidated financial statements.

7

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.	Basis of Presentation
	Unless the context indicates otherwise, all references herein to “Bancinsurance,” “we,” “Registrant,” “us,” “its,” “our” or the “Company” refer to Bancinsurance Corporation and its consolidated subsidiaries.
	We prepared the condensed consolidated balance sheet as of September 30, 2008, the condensed consolidated statements of income for the three and nine months ended September 30, 2008 and 2007, the condensed consolidated statements of shareholders’ equity for the nine months ended September 30, 2008 and 2007 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2008 and 2007 without an audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to fairly present the financial condition, results of operations and cash flows of the Company as of September 30, 2008 and for all periods presented have been made.
	We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with Article 8 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 condensed consolidated financial statements together with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. The results of operations for the periods ended September 30, 2008 are not necessarily indicative of the results of operations for the full 2008 fiscal 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 as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions.
	Certain prior year amounts have been reclassified in order to conform to the 2008 presentation. One of the reclassifications includes a new grouping of expenses in the accompanying condensed consolidated statements of income. For certain of our expense line items in the income statement, we had previously presented the following: “commission expense,” “other insurance operating expenses” and “general & administrative expenses.” Beginning in the third quarter of 2008, we eliminated the above expense line items and replaced them with the following: “policy acquisition costs” and “other operating expenses.” Policy acquisition costs include commission expense, premium taxes and administrative fees for our UC product line. Previously, premium taxes and administrative fees were included within other insurance operating expenses and commission expense was its own line item. Other operating expenses now include the previously reported other insurance operating expenses (with the exception of premium taxes and administrative fees as those are now included in policy acquisition costs) and general & administrative expenses. The reason for the change in expense classification was to be more consistent with how other property and casualty insurance companies classify their expenses as well as to separately group those expenses that are variable with our premium production (i.e., policy acquisition costs).
2.	Recently Issued Accounting Standards
	In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The Statement clarifies the rule that fair value be based on the assumptions that market participants would use when pricing an asset or liability, and establishes a fair value hierarchy that prioritizes the framework and information used to develop those assumptions. FASB Staff Position 157-2 delays the effective date of SFAS No. 157 to allow the FASB additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of SFAS No. 157. Under FASB Staff Position 157-2, we are required to adopt the provisions of SFAS No. 157 for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of SFAS No. 157 is not expected to have a material impact on our condensed consolidated financial statements.
	In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.”  SFAS No. 159 permits all entities to choose to measure and report many financial instruments and certain other items at fair value at specified election dates. If such an election is made, any unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each subsequent reporting date. In addition, SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. We were required to adopt the provisions of SFAS No. 159 for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a material impact on our condensed consolidated financial statements.

8

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

	In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (“EITF 06-10”). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF 06-10 did not have a material impact on our condensed consolidated financial statements.
	In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts.” SFAS No. 163 clarifies how SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. SFAS No. 163 also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management activities. Disclosures about the insurance enterprise’s risk-management activities are effective the first period beginning after issuance of SFAS No. 163. The adoption of SFAS No. 163 is not expected to have a material impact on our condensed consolidated financial statements as the Company does not provide financial guarantee insurance contracts.
3.	Investments
	We continually monitor the difference between the book value and the estimated fair value of our investments, which involves judgment 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 record the decline as a realized loss through the income statement. If our judgment changes in the future, we may ultimately record a realized loss for a security after having originally concluded that the decline in value was temporary. We begin to monitor a security for other-than-temporary impairment when its fair value to book value ratio (“fair value to cost ratio”) falls below 80%. Our assessment as to whether a security is other-than-temporarily impaired depends on, among other things: (1) the length of time and extent to which the estimated fair value has been less than book value, (2) whether the decline appears to be related to general market or industry conditions or is issuer specific, (3) our current judgment as to the financial condition and future prospects of the entity that issued the investment security and (4) our ability and intent to hold the security for a period of time sufficient to allow for recovery in the estimated fair value.
	The following table summarizes the fair value to cost ratio for all securities in an unrealized loss position at September 30, 2008:

			Estimated		Gross		Aggregate			Percent
	Book		fair		unrealized		fair value to			of total
Fair value to cost ratio	value		value		loss		cost ratio			book value
Fixed maturities:
90% to 99%	$	29,579,634	$	28,141,392	$	1,438,242		95.1	%		56.0	%
80% to 89%		21,640,226		18,516,665		3,123,561		85.6	%		40.9	%
70% to 79%		1,645,549		1,288,755		356,794		78.3	%		3.1	%
60% to 69%		—		—		—		—			—
Total fixed maturities	$	52,865,409	$	47,946,812	$	4,918,597		90.7	%		100.0	%
Equities:
90% to 99%	$	360,331	$	341,798	$	18,533		94.9	%		5.4	%
80% to 89%		2,095,853		1,755,235		340,618		83.7	%		31.3	%
70% to 79%		3,839,624		2,937,404		902,220		76.5	%		57.3	%
60% to 69%		398,902		261,100		137,802		65.5	%		6.0	%
Total equities	$	6,694,710	$	5,295,537	$	1,399,173		79.1	%		100.0	%
Total	$	59,560,119	$	53,242,349	$	6,317,770		89.4	%		100.0	%

We continually monitor the credit quality of our fixed income investments to gauge our ability to be repaid principal and interest. We consider price declines of securities in our other-than-temporary impairment analysis where such price declines provide evidence of declining credit quality, and we distinguish between price changes caused by credit deterioration, as opposed to rising interest rates. In our evaluation of credit quality, we consider, among other things, credit ratings from major rating agencies, including Moody’s and Standard & Poor’s (“S&P”). The following table shows the composition of fixed income securities in an unrealized loss position at September 30, 2008 by the National Association of Insurance Commissioners (“NAIC”) rating and the generally equivalent S&P and Moody’s ratings. Not all of these securities are rated by S&P and/or Moody’s.

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BANCINSURANCE CORPORATION
AND SUBSIDIARIES

	Equivalent	Equivalent			Estimated		Gross		Aggregate			Percent
NAIC	S&P	Moody’s	Book		fair		unrealized		fair value			of total
rating	rating	rating	value		value		loss		to cost ratio			book value
1FE	AAA/AA/A	Aaa/Aa/A	$	42,481,311	$	38,898,888	$	3,582,423		91.6	%		80.4	%
2FE	BBB	Baa		9,105,402		7,928,603		1,176,799		87.1	%		17.2	%
3FE	BB	Ba		1,278,696		1,119,321		159,375		87.5	%		2.4	%
4FE	B	B		—		—		—		—			—
5FE	CCC or lower	Caa or lower		—		—		—		—			—
6FE				—		—		—		—			—
	Total		$	52,865,409	$	47,946,812	$	4,918,597		90.7	%		100.0	%

The following table summarizes the estimated fair value and gross unrealized loss (pre-tax) for all securities in an unrealized loss position at September 30, 2008 and December 31, 2007, distinguishing between those securities which have been continuously in an unrealized loss position for less than twelve months and twelve months or greater:

	Less Than 12 Months				12 Months or Greater				Total
	Estimated		Gross		Estimated		Gross		Estimated		Gross
	fair		unrealized		fair		unrealized		fair		unrealized
At September 30, 2008	Value		loss		value		loss		value		loss
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	206,500	$	1,069	$	—	$	—	$	206,500	$	1,069
Obligations of states and political subdivisions		28,757,252		1,980,356		18,887,731		2,932,501		47,644,983		4,912,857
Corporate securities		95,329		4,671		—		—		95,329		4,671
Total fixed maturities		29,059,081		1,986,096		18,887,731		2,932,501		47,946,812		4,918,597
Equity securities:
Banks, trusts and insurance companies		1,108,628		281,705		—		—		1,108,628		281,705
Industrial and miscellaneous		303,620		79,080		—		—		303,620		79,080
Closed end bond funds		1,021,827		228,691		2,861,462		809,697		3,883,289		1,038,388
Total equities		2,434,075		589,476		2,861,462		809,697		5,295,537		1,399,173
Total	$	31,493,156	$	2,575,572	$	21,749,193	$	3,742,198	$	53,242,349	$	6,317,770

	Less Than 12 Months				12 Months or Greater				Total
	Estimated		Gross		Estimated		Gross		Estimated		Gross
	fair		unrealized		fair		unrealized		fair		unrealized
At December 31, 2007	value		loss		value		loss		value		loss
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	332,888	$	73	$	—	$	—	$	332,888	$	73
Obligations of states and political subdivisions		30,702,474		1,013,844		6,202,926		178,819		36,905,400		1,192,663
Corporate securities		191,974		8,026		—		—		191,974		8,026
Total fixed maturities		31,227,336		1,021,943		6,202,926		178,819		37,430,262		1,200,762
Equity securities:
Banks, trusts and insurance companies		1,430,800		230,617		—		—		1,430,800		230,617
Industrial and miscellaneous		461,090		113,462		—		—		461,090		113,462
Closed end bond funds		3,392,231		226,408		1,525,391		155,135		4,917,622		381,543
Total equities		5,284,121		570,487		1,525,391		155,135		6,809,512		725,622
Total	$	36,511,457	$	1,592,430	$	7,728,317	$	333,954	$	44,239,774	$	1,926,384

As of September 30, 2008, we had 86 fixed income securities and 5 equity securities that have been in an unrealized loss position for 12 months or longer. Of the fixed income securities, 83 are investment grade (rated BBB and Baa or higher by S&P and Moody’s, respectively). The 3 remaining non-investment grade fixed income securities have an aggregate unrealized loss of $135,967 and an aggregate fair value to cost ratio of 78.9% at September 30, 2008. All 86 of the fixed income securities are current on interest and principal and we believe that it is probable that all contract terms of each security will be satisfied. Of the 5 equity securities, all 5 equity securities relate to investments in closed end bond funds. Each of these investments continues to pay

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	its regularly scheduled monthly dividend and there have been no material changes in credit quality for any of these funds over the past twelve months. The increase in unrealized loss position for investments as of September 30, 2008, including equity securities, is primarily due to the changes in the interest rate environment and/or current capital market conditions, and we believe we have the positive intent and ability to hold the affected securities until they mature or substantially recover in value.
	Impairment charges included in net realized losses on investments during the three months ended September 30, 2008 and 2007 were $1,171,957 and $541,528, respectively. The impairment charges during the three months ended September 30, 2008 were primarily due to the following: (1) $332,000 in impairment charges for a corporate fixed income security (SLM Corp. or Sallie Mae) whose fair value was adversely affected by uncertainty in its investment ratings by certain bond rating agencies; (2) $231,601 in impairment charges for an equity security of a financial institution (AIG) who suffered a liquidity crisis following the downgrade of its credit rating; (3) $200,477 in impairment charges for an equity security of a financial institution (Lehman Brothers) who filed for bankruptcy due to losses in the credit markets; (4) $231,450 in impairment charges for equity securities of three financial institutions whose fair values were adversely affected primarily by the credit markets; and (5) $176,429 in impairment charges of equity securities of two other companies whose fair values were adversely affected by current market conditions.
	Impairment charges included in net realized losses on investments during the nine months ended September 30, 2008 and 2007 were $2,405,678 and $541,528, respectively. The impairment charges during the nine months ended September 30, 2008 were primarily due to the following: (1) $683,836 in impairment charges primarily for floating rate municipal bond securities of nine issuers whose fair values were adversely affected primarily by the decline in short-term interest rates during the first quarter of 2008; (2) $596,357 in impairment charges for equity securities of five financial institutions whose fair values were adversely affected primarily by the credit markets; (3) $332,000 in impairment charges for a corporate fixed income security (SLM Corp or Sallie Mae) whose fair value was adversely affected by uncertainty in its investment ratings by certain bond rating agencies; (4) $231,601 in impairment charges for an equity security of a financial institution (AIG) who suffered a liquidity crisis following the downgrade of its credit rating; (5) $200,477 in impairment charges for an equity security of a financial institution (Lehman Brothers) who filed for bankruptcy due to losses in the credit markets; (6) $139,777 in impairment charges for equity securities of a communications company whose fair value was adversely affected primarily by a recession in the Florida real estate market; and (7) $221,629 in impairment charges of equity securities of three other companies whose fair values were adversely affected by current market conditions.
4.	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. BIC Trust I also issued $248,000 of floating rate common securities to Bancinsurance Corporation. 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 II also issued $217,000 of floating rate common securities to Bancinsurance Corporation. BIC Trust I and BIC Trust II 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 Bancinsurance Corporation. In connection with the issuance of the trust preferred capital securities, Bancinsurance Corporation 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. Bancinsurance Corporation has fully and unconditionally guaranteed the obligations of BIC Trust I and BIC Trust II with respect to the floating rate trust preferred capital securities. BIC Trust I and BIC Trust II distribute the interest received from Bancinsurance Corporation 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 capital securities. BIC Trust I’s floating rate trust preferred capital securities, and the junior subordinated debentures issued in connection therewith, pay dividends and interest, as applicable, on a quarterly basis at a rate equal to three month LIBOR plus four hundred basis points (6.81% and 9.62% at September 30, 2008 and 2007, respectively), are redeemable at par on or after December 4, 2007 and mature on December 4, 2032. BIC Trust II’s floating rate trust preferred capital securities, and the junior subordinated debentures issued in connection therewith, pay dividends and interest, as applicable, on a quarterly basis at a rate equal to three month LIBOR plus four hundred and five basis points (7.81% and 9.28% at September 30, 2008 and 2007, 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, 2008 and 2007 was $269,673 and $372,436, respectively, and $876,195 and $1,101,718 for the nine months ended September 30, 2008 and 2007, respectively. The terms of the junior subordinated debentures contain various restrictive covenants. As of September 30, 2008, Bancinsurance Corporation was in compliance with all such covenants.

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	In January 2003, the 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 BIC Trust II are not considered to be VIEs and are not included in the Company’s condensed consolidated financial statements. If they were included in the condensed consolidated financial statements, there would be no change to net income, only changes in the presentation of the financial statements.
5.	Income Taxes
	Our provision for federal income taxes for the nine months ended September 30, 2008 has been computed based on our estimated annual effective tax rate. Income before federal income taxes differs from taxable income principally due to the effect of tax-exempt investment income and the dividends-received deduction. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
	In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In accordance with FIN 48, we must adjust our financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. We adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material impact on our financial condition or results of operations.
	Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our condensed consolidated financial statements. Our evaluation was performed for the tax years ended December 31, 2005, 2006 and 2007, the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2008. In addition, we do not believe the Company would be subject to any interest or penalties relative to any open tax years and, therefore, have not accrued any such amounts. If we were to incur any interest and/or penalties in connection with income tax deficiencies, we would classify interest in the “interest expense” category and classify penalties in the “other operating expenses” category within our condensed consolidated statements of income.
6.	Equity-Based Compensation
	We maintain two equity compensation plans for the benefit of certain of our officers, directors, employees, consultants and advisors. During the first quarter of 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” applying the modified prospective method. SFAS No. 123(R) requires all equity-based payments to employees and directors, including grants of stock options and restricted stock, to be recognized in net income based on the grant date fair value of the award. Under the modified prospective method, we are required to record equity-based compensation expense for all awards granted after the date of adoption and for the nonvested portion of previously granted awards outstanding as of the date of adoption. The results for prior periods have not been restated.
	We have stock options and restricted stock outstanding at September 30, 2008 under two equity compensation plans (collectively, the “Plans”), each of which has been approved by our shareholders. We will issue authorized but unissued shares or treasury shares to satisfy any future restricted stock awards or the exercise of stock options.
	The Bancinsurance Corporation 1994 Stock Option Plan (the “1994 Stock Option Plan”) provided for the grants of options covering up to an aggregate of 500,000 common shares, with a 100,000 common share maximum for any one participant. Key employees, officers and directors of, and consultants and advisors to, the Company were eligible to participate in the 1994 Stock Option Plan. The 1994 Stock Option Plan is administered by the Compensation Committee which determined to whom and when options were granted along with the terms and conditions of the options. Under the 1994 Stock Option Plan, options for 145,500 common shares were outstanding at September 30, 2008 and expire at various dates from 2009 to 2013 and range in option price per share from $4.063 to $6.25. Of the options for 145,500 common shares outstanding, 16,000 have been granted to our non-employee directors and 129,500 have been granted to employees. All of the options outstanding were granted to employees and directors for compensatory purposes. No new options can be granted under the 1994 Stock Option Plan and the plan remains in effect only with respect to the outstanding options.
	The Bancinsurance Corporation 2002 Stock Incentive Plan, as amended (the “2002 Plan”), provides for certain equity-based awards, including grants of stock options and restricted stock, covering up to an aggregate of 950,000 common shares, with a 100,000 common share maximum for any one participant. Key employees, officers and directors of, and consultants and advisors to, the

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Company are eligible to participate in the 2002 Plan. The 2002 Plan is administered by the Compensation Committee which determines to whom and when awards will be granted as well as the terms and conditions of the awards. Under the 2002 Plan, stock options for 583,000 common shares were outstanding at September 30, 2008 and expire at various dates from 2012 to 2018 and range in option price per share from $4.50 to $8.00. Under the 2002 Plan, 122,443 restricted common shares were also outstanding at September 30, 2008. Of the total equity-based awards for 705,443 common shares outstanding under the 2002 Plan, 34,000 have been granted to our non-employee directors and 671,443 have been granted to employees. All of the equity-based awards outstanding were granted to employees and directors for compensatory purposes. As of September 30, 2008, there were 225,647 common shares available for future grant under the 2002 Plan.

The outstanding restricted stock awards are time-based restricted common shares. Compensation expense for restricted stock awards is measured using the grant date fair value and then recognized over the respective service period, which matches the vesting period. The outstanding restricted stock awards vest in equal annual installments on the first, second and third anniversaries of the date of grant subject to the employee’s continued employment with the Company on the applicable anniversary date. For the nine months ended September 30, 2008, the Company granted 84,624 restricted common shares to employees which were valued at $4.75 per share. There were 18,910 restricted shares that vested during the nine months ended September 30, 2008.

The following table summarizes restricted stock award activity under our 2002 Plan from January 1, 2008 through September 30, 2008:

				Weighted-average
				grant date fair value
	Shares			per common share
Outstanding at January 1, 2008		56,729		$	6.40
Granted		84,624			4.75
Vested		(18,910	)		6.40
Cancelled		—			—
Outstanding at September 30, 2008		122,443		$	5.41

All stock options: (1) have been granted with an exercise price equal to the closing price of our common shares on the date of grant; (2) have a 10-year contractual term; (3) with respect to officers and employees, vest and become exercisable at the rate of 20% per year over a five-year period (subject to the applicable officer’s and employee’s continued employment with the Company); and (4) with respect to non-employee directors, vest and become exercisable on the first anniversary of the date of grant (subject to the applicable director’s continued service on the board of directors of the Company). Compensation expense for stock options is measured on the date of grant at fair value and is recognized over the respective service period, which matches the vesting period.

The fair value of options granted by the Company is estimated on the date of grant using the Black-Scholes option pricing model (“Black-Scholes model”). The Black-Scholes model utilizes ranges of assumptions such as risk-free rate, expected life, expected volatility and dividend yield. The risk-free rate is based on the United States Treasury strip curve at the time of the grant with a term approximating that of the expected option life. We analyze historical data regarding option exercise behaviors, expirations and cancellations to calculate the expected life of the options granted, which represents the length of time in years that the options granted are expected to be outstanding. Expected volatilities are based on historical volatility over a period of time using the expected term of the option grant and using weekly stock prices of the Company; however, for options granted after February 4, 2005, we exclude from our historical volatility the period from February 4, 2005 through January 25, 2006 (the period in which shareholders could not obtain current financial information for the Company and could not rely on the Company’s 2003, 2002, and 2001 financial statements) as we believe that our stock price during that period is not relevant in evaluating the expected volatility of the common shares in the future. A 0% dividend yield is used in the Black-Scholes model based on historical dividends. For the nine months ended September 30, 2008, the Company granted 12,000 stock options to non-employee directors which were valued at $2.72 per share using the following assumptions:

Risk-free interest rate		3.27	%
Expected life	7 years
Expected volatility		53.2	%
Dividend yield		0	%

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The following table summarizes all stock option activity under the Plans from January 1, 2008 through September 30, 2008:

				Weighted-average
				exercise price		Weighted-average		Aggregate
	Shares			per common share		contractual life (years)		intrinsic value
Outstanding at January 1, 2008		748,500		$	5.65
Granted		12,000			4.75
Exercised		—			—
Expired		(32,000	)		4.84
Cancelled		—			—
Outstanding at September 30, 2008		728,500		$	5.67		5.50	$	370,093
Vested and exercisable at September 30, 2008		534,900		$	5.48		4.81	$	355,693

The aggregate intrinsic value represents the total pretax intrinsic value, based on the closing price of our common shares on the OTC Bulletin Board on September 30, 2008 ($5.95), which would have been received by the option holders had all option holders exercised their options and sold the underlying common shares as of that date (only includes options that are in-the-money at September 30, 2008). There were no stock options exercised during the nine months ended September 30, 2008.

The following table summarizes nonvested stock option activity under the Plans from January 1, 2008 through September 30, 2008:

			Weighted-average
			grant date fair value
	Shares		per common share
Nonvested at January 1, 2008		264,800	$	2.41
Granted		12,000		2.72
Vested		83,200		2.27
Expired		—		—
Cancelled		—		—
Nonvested at September 30, 2008		193,600	$	2.49

The compensation expense recognized for all equity-based awards is net of forfeitures and is recognized over the awards’ respective service periods. We recorded equity-based compensation expense for the three months ended September 30, 2008 and 2007 of $102,015 and $96,768 ($67,330 and $63,867 net of tax), respectively, and $279,692 and $246,752 ($184,597 and $162,856 net of tax) for the nine months ended September 30, 2008 and 2007, respectively. In accordance with Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” the equity-based compensation expense is classified within other operating expenses in the condensed consolidated statements of income to correspond with the same line item as cash compensation paid to employees.

As of September 30, 2008, the total pretax equity-based compensation cost related to nonvested stock options and nonvested restricted stock not yet recognized was $973,292. The weighted-average period over which this cost is expected to be recognized is approximately 2.3 years.

The following table summarizes weighted-average information by range of exercise prices for stock options outstanding and stock options exercisable at September 30, 2008:

	Options Outstanding						Options Exercisable
	Number		Weighted-average		Weighted-average		Number		Weighted-average
	outstanding		remaining		exercise		exercisable		exercise
Range of Exercise Prices	at 9/30/08		contractual life (years)		price		at 9/30/08		price
4.063 — 4.82		162,000		3.93	$	4.50		150,000	$	4.48
5.00 — 5.375		189,500		3.58		5.23		189,500		5.23
6.00 — 6.40		248,000		7.65		6.02		116,000		6.04
7.04 — 8.00		129,000		6.18		7.11		79,400		7.14
Total ($4.063 — $8.00)		728,500		5.50	$	5.67		534,900	$	5.48

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7.	Other Comprehensive Income
	The components of other comprehensive income (loss) and the related federal income tax effects for the three and nine months ended September 30, 2008 and 2007 are as follows:

	Three Months Ended September 30, 2008
	Pre-tax			Income tax			Net-of-tax
	amount			expense (benefit)			amount
Net unrealized holding losses on securities:
Unrealized holding losses arising during 2008	$	(4,824,650	)	$	(1,640,381	)	$	(3,184,269	)
Less: reclassification adjustments for losses realized in net income		(1,159,484	)		(394,225	)		(765,259	)
Net unrealized holding losses		(3,665,166	)		(1,246,156	)		(2,419,010	)
Other comprehensive loss	$	(3,665,166	)	$	(1,246,156	)	$	(2,419,010	)

	Three Months Ended September 30, 2007
	Pre-tax			Income tax			Net-of-tax
	amount			expense (benefit)			amount
Net unrealized holding gains (losses) on securities:
Unrealized holding losses arising during 2007	$	(443,176	)	$	(150,680	)	$	(292,496	)
Less: reclassification adjustments for losses realized in net income		(556,425	)		(189,184	)		(367,241	)
Net unrealized holding gains		113,249			38,504			74,745
Other comprehensive income	$	113,249		$	38,504		$	74,745

	Nine Months Ended September 30, 2008
	Pre-tax			Income tax			Net-of-tax
	amount			benefit			amount
Net unrealized holding losses on securities:
Unrealized holding losses arising during 2008	$	(7,763,637	)	$	(2,639,637	)	$	(5,124,000	)
Less: reclassification adjustments for losses realized in net income		(2,016,045	)		(685,455	)		(1,330,590	)
Net unrealized holding losses		(5,747,592	)		(1,954,182	)		(3,793,410	)
Other comprehensive loss	$	(5,747,592	)	$	(1,954,182	)	$	(3,793,410	)

	Nine Months Ended September 30, 2007
	Pre-tax			Income tax			Net-of-tax
	amount			expense (benefit)			amount
Net unrealized holding losses on securities:
Unrealized holding losses arising during 2007	$	(1,238,708	)	$	(421,161	)	$	(817,547	)
Less: reclassification adjustments for losses realized in net income		(483,140	)		(164,267	)		(318,873	)
Net unrealized holding losses		(755,568	)		(256,894	)		(498,674	)
Other comprehensive loss	$	(755,568	)	$	(256,894	)	$	(498,674	)

8.	Reinsurance
	We assume and cede reinsurance with other insurers and reinsurers. Such arrangements serve to enhance our capacity to write business, provide greater diversification, align the interests of our business partners with our interests, and/or limit our 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 reinsurance agreement.
	Several of our lender service insurance producers have formed sister reinsurance companies, each of which is 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, we receive a ceding commission, which is based on a percentage of the premiums ceded. Such arrangements align the

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interests of our business partners with our interests while preserving valued customer relationships. All of our lender service ceded reinsurance transactions are PORC arrangements.

Effective October 1, 2003, we entered into a producer-owned reinsurance arrangement with a creditor placed insurance (“CPI”) customer whereby 100% of that customer’s premiums (along with the associated risk) were ceded to its PORC. For this reinsurance arrangement, we have obtained collateral in the form of a trust from the reinsurer to secure our obligations. Under the provisions of the reinsurance agreement, the collateral must be equal to or greater than 102% of the reinsured reserves and we have immediate access to such collateral if necessary. Effective April 1, 2008, the policy related to this arrangement was cancelled. The reinsurance agreement will remain in place until the business is fully run-off which is expected to be in second quarter of 2009.

Under our waste industry products (“WIP”) program, we assume and cede certain waste surety bond business under three quota share reinsurance arrangements. First, in the second quarter of 2004, we entered into a 50% quota share reinsurance arrangement whereby we assumed 50% of all waste surety bonds with liability limits up to $4.0 million from two insurance carriers. Effective January 1, 2005, the reinsurance arrangement was amended whereby our assumed participation was reduced from 50% to 25%. Effective August 1, 2006, the reinsurance arrangement was further amended whereby we assumed 50% of all waste surety bonds with liability limits up to $1.2 million. Second, effective August 1, 2007, we entered into a 5% quota share reinsurance arrangement whereby we assumed 5% of all waste surety bonds with liability limits over $1.2 million up to $10.0 million from one insurance carrier. Third, in addition to assuming business, we also write on a direct basis waste surety bonds with liability limits up to our Treasury limit ($4.5 million as of July 1, 2008). We then cede 50% of that business to an insurance carrier under a reinsurance arrangement. During 2006, we also began writing directly, assuming and ceding certain contract and escrow surety bond business under several quota share reinsurance arrangements. This business is included as part of our WIP program because it is produced by the same general insurance agent that produces the waste surety bond business. Prior to first quarter of 2008, contract and escrow surety bond business produced by this general insurance agent was reported within our other specialty products line.

Effective January 1, 2005, we entered into a producer-owned reinsurance arrangement with a guaranteed auto protection insurance agent whereby 100% of that agent’s premiums (along with the associated risk) were ceded to its PORC. For this reinsurance arrangement, we have obtained collateral in the form of a letter of credit to secure our obligations. Under the provisions of the reinsurance agreement, the collateral must be equal to or greater than 102% of the reinsured reserves and we have immediate access to such collateral if necessary.

Effective January 1, 2007, we entered into a producer-owned reinsurance arrangement with a new equipment physical damage (“EPD”) customer whereby 100% of that customer’s premiums (along with the associated risk) were ceded to its PORC. For this reinsurance arrangement, we have obtained collateral in the form of funds held and a letter of credit to secure our obligations. Under the provisions of the reinsurance agreement, the collateral must be equal to or greater than 102% of the reinsured reserves and we have immediate access to such collateral if necessary. Prior to first quarter of 2008, EPD was reported within our CPI product line.

In addition to the arrangements discussed above, we have other reinsurance arrangements, including two lender service PORC quota share arrangements, one unemployment compensation facultative reinsurance arrangement, and a reinsurance arrangement for a vehicle service contract program. For more information concerning this vehicle service contract program, see “Automobile Service Program” below.

From 2001 until the end of the second quarter of 2004, we participated in a bail and immigration bond program. This program was discontinued in the second quarter of 2004. For more information concerning this program, see “Discontinued Bond Program” below.

A reconciliation of direct to net premiums, on both a written and earned basis, for the three and nine months ended September 30, 2008 and 2007 is as follows:

	Three Months Ended												Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2008						2007						2008						2007
	Premiums						Premiums						Premiums						Premiums
	Written			Earned			Written			Earned			Written			Earned			Written			Earned
Direct	$	16,848,318		$	15,851,838		$	18,812,031		$	15,208,532		$	51,475,380		$	48,398,215		$	53,531,162		$	40,905,237
Assumed		1,385,217			1,424,927			1,709,567			978,962			4,126,657			3,884,510			3,553,679			2,704,249
Ceded		(8,181,870	)		(5,691,707	)		(7,927,458	)		(3,971,833	)		(23,766,855	)		(15,766,947	)		(22,218,187	)		(8,992,843	)
Net	$	10,051,665		$	11,585,058		$	12,594,140		$	12,215,661		$	31,835,182		$	36,515,778		$	34,866,654		$	34,616,643

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The amounts of recoveries pertaining to reinsurance that were deducted from losses and LAE incurred during the three months ended September 30, 2008 and 2007 were $3,524,018 and $2,059,255, respectively, and $8,448,608 and $4,988,463 during the nine months ended September 30, 2008 and 2007, respectively. During the three months ended September 30, 2008 and 2007, ceded reinsurance decreased commission expense incurred by $767,147 and $595,503, respectively, and by $2,513,511 and $1,773,165 during the nine months ended September 30, 2008 and 2007, respectively.

Discontinued Bond Program

Beginning in 2001 and continuing into the second quarter of 2004, we 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 us. We 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.

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, we came to believe that the discontinued bond program was not being operated as it had been represented to us by agents of the insurance carriers who had solicited our participation in the program, and we 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 the life of the program; and 4) improper premium and claims administration. Consequently, during the second quarter of 2004, we ceased paying claims on the program and retained outside legal counsel to review and defend our rights under the program.

During 2004 and 2005, we entered into arbitrations with the following four insurance carriers that participated in the discontinued bond program: 1) Aegis Security Insurance Company (“Aegis”); 2) Sirius America Insurance Company (“Sirius”); 3) Harco National Insurance Company (“Harco”); and 4) Highlands Insurance Company (“Highlands”). During 2006, the arbitrations with Aegis, Sirius and Harco concluded. For Aegis and Sirius, we entered into settlement agreements with these insurance carriers resolving all disputes between us and these carriers relating to the discontinued bond program. These settlement agreements also relieved us from any potential future liabilities with respect to bonds issued by Aegis and Sirius.

For Harco, in August 2006, the Harco arbitration panel issued its Final Decision and Order ordering each of the reinsurers participating in the arbitration, including us, to pay its proportionate share of past and future claims paid by Harco, subject to certain adjustments, offsets and credits (the “Final Order”). Pursuant to the terms of the Final Order, we have paid Harco for our proportionate share of all past claims paid by Harco which it has invoiced to us through September 30, 2008, except as noted below.

During the second quarter of 2008, we received an invoice from Harco for approximately $0.2 million representing our proportionate share of additional claims paid by Harco. We requested that Harco provide us a detailed accounting of its payment activity. Although Harco indicated that it will provide us this information, we have not received such information as of the date of this report. We also requested that Harco provide us information regarding any recoveries that Harco has received with respect to paid claims and its expected future recoveries. Harco responded that it has received and continues to receive recoveries but does not believe the reinsurers are entitled to a proportionate share of such recoveries under the terms of the Final Order. We disagree with this position. Based on the limited recovery information provided by Harco, we cannot estimate with reasonable certainty the amount or range of amounts (if any) that we may receive from Harco with respect to Harco’s recoveries. We do not intend to pay any current or future Harco invoices until Harco provides us the requested accounting and we resolve with Harco the reinsurers’ rights to a proportionate share of Harco’s recoveries.

As of September 30, 2008, we are reserving for Harco losses based on amounts invoiced by Harco for claims paid and on our proportionate share of Harco’s estimate of its future losses under the program as reflected in the most recent loss information provided to us by Harco (without any offset for recoveries).

It should also be noted that Harco has reported to us that it has received an updated invoice from the Department of Homeland Security (“DHS”) for breached immigration bonds and, that as of September 30, 2008, Harco’s immigration bond reserve estimate was less than the amount of the DHS invoice. As noted above, we are reserving for future Harco losses based on our proportionate

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share of Harco’s estimate of its future losses under the program. If Harco is required to pay the full amount of the DHS invoice, it could result in additional losses to us of approximately $0.8 million (based on the difference between our proportionate share of Harco’s reserve estimate as of September 30, 2008 and the updated DHS invoice).

Pending Arbitration. Highlands participated as an insurer in the discontinued bond program for the 2000, 2001 and 2002 program years, and we were one of its reinsurers for the 2001 and 2002 program years. Highlands was placed in receivership during 2003 (which receivership remains pending). On August 31, 2005, the Highlands’ Receiver demanded a single consolidated arbitration for the 2000, 2001 and 2002 program years against us and its other reinsurers. In November 2005, we responded to this demand by requesting a separate arbitration for the 2001 and 2002 program years and seeking rescission of the reinsurance agreement for the 2001 and 2002 program years, monetary damages for claims that were paid by us and other appropriate relief. Highlands is seeking to recover certain of its losses from us under the reinsurance agreement for the 2001 and 2002 program years. No arbitration panel has yet been constituted. On April 10, 2008, the Highlands’ Receiver filed a petition in a Texas state court seeking to compel a single consolidated arbitration for the 2000, 2001 and 2002 program years against its reinsurers, including us, and other relief. On June 5, 2008, we responded to the petition. As of the date of this report, the court has not ruled on the petition.

Highlands has entered into settlement agreements with the New Jersey Attorney General for its New Jersey bail bond obligations and with the DHS for its federal immigration bond obligations (collectively, the “Settlement Agreements”). The Settlement Agreements cover both past and future losses for bonds issued by Highlands. Highlands has invoiced us for our proportionate share of the settlement value under the Settlement Agreements. Highlands has also provided loss information to us with respect to potential losses for bail bonds issued in states other than New Jersey. As of September 30, 2008, we are reserving for Highlands’ losses based on amounts invoiced under the Settlement Agreements and on our proportionate share of the most recent non-New Jersey bail bond loss information provided to us by Highlands. As of both September 30, 2008 and December 31, 2007, our total loss and LAE reserves for Highlands were approximately $4.8 million.

We believe there is potential for us to mitigate our ultimate liability to Highlands through the arbitration proceeding with Highlands. In accordance with SFAS No. 5, “Accounting for Contingencies,” we are reserving to our best estimate of the ultimate liability on the program at September 30, 2008 without any adjustment for a positive arbitration outcome or a potential settlement amount with Highlands. If we obtain information to determine an estimate of a final arbitration value or estimate a settlement value, we will record changes in our reserves, if any, in the period that an estimate is made. We do not intend to pay any of the Highlands’ losses unless and until the arbitration is settled on a mutually agreeable basis and/or a final binding judgment is made as to our ultimate liability.

Given the uncertainties of the outcome of the Highlands’ arbitration and Highlands’ receivership proceeding, uncertainties in the future loss information provided by Harco and Highlands, and the inherent volatility in assumed reinsurance, actual losses incurred for the discontinued bond program could be materially different from our estimated reserves at September 30, 2008. As a result, future loss development on the discontinued bond program could have a material effect on our results of operations and/or financial condition.

Loss and LAE Reserves. The following compares our loss and LAE reserves for the discontinued bond program at September 30, 2008 and December 31, 2007 (dollars in millions):

	September 30,		December 31,
	2008		2007
Bail Bonds:
Case reserves	$	0.6	$	0.5
Incurred but not reported (“IBNR”) reserves		4.3		4.5
Total bail bond reserves		4.9		5.0
Immigration Bonds:
Case reserves		0.2		0.2
IBNR reserves		1.6		1.5
Total immigration bond reserves		1.8		1.7
Total loss and LAE reserves	$	6.7	$	6.7

For the nine months ended September 30, 2008, we recorded a benefit of $60,929 for the discontinued bond program which was primarily attributable to a decrease in Harco’s reserve estimate during the second quarter of 2008. Discontinued bond program losses and LAE were $497,627 for the nine months ended September 30, 2007. The losses in 2007 were primarily attributable to an increase in reported losses from Highlands during the second quarter of 2007. There were no discontinued bond program losses for the third quarter of 2008 or 2007.

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Automobile Service Contract Program

During 2001, we began issuing insurance policies which guarantee the performance obligations of two automobile service contract providers (the “Providers”). The Providers are owned by a common parent. We have issued insurance policies covering business produced by the Providers in five states. Our insurance policies guarantee the fulfillment of the Providers’ obligations under the service contracts. Under the program, the Providers maintain the reserves and related assets and are responsible for the claims administration. We are obligated to pay a claim only if a Provider fails to do so. Under two reinsurance arrangements, we cede 100% of the business produced to two different insurance carriers. In addition, we obtained collateral in the form of a $4.3 million letter of credit to secure our obligations under the program. On February 15, 2007, one of the Providers entered into an Assignment for the Benefit of Creditors liquidation proceeding. On March 2, 2007, the Illinois Department of Insurance moved for, and obtained, an Order of Conservation, which granted the Illinois Department of Insurance the authority to ascertain the condition and conserve the assets of that Provider. On April 13, 2007, this Provider filed a voluntary petition under Chapter 11 of the Bankruptcy Code. On June 12, 2007, the Bankruptcy Court ruled that the Provider was an eligible debtor for purposes of the Bankruptcy Code. This Provider has not written any service contracts under our insurance policies after the commencement of the February 2007 liquidation proceeding. The other Provider has not written any service contracts under our insurance policies since December 31, 2007.

On August 24, 2007, we drew on the $4.3 million letter of credit and subsequently obtained an additional $0.5 million from the Provider that is not in bankruptcy to further secure our insurance obligations. Claims of the bankruptcy Provider are currently being paid out of these funds. As of September 30, 2008, the total cash held by us as collateral for this program consisted of approximately $4.6 million, which funds are currently invested in short term investments. We have estimated our liability for claims under this program to be approximately $3.4 million as of September 30, 2008. Because we believe our estimated liability for claims under this program is fully collateralized and our loss exposure is 100% reinsured, we do not believe the events described above will have a material adverse impact to us. However, if our actual liability for claims under this program exceeds the collateral held by us and if we are unable to collect on the reinsurance, then this program could have a material adverse effect on our business, financial condition and/or operating results.

9.	Commitments and Contingencies
	See Note 13 to the Condensed Consolidated Financial Statements for information concerning the SEC investigation. See “Discontinued Bond Program” in Note 8 to the Condensed Consolidated Financial Statements for information concerning the Highlands arbitration.
	We were also involved in two other legal proceedings arising in the ordinary course of business. During the third quarter of 2008, we settled both disputes which resulted in approximately $0.6 million of incurred expenses for the nine months ended September 30, 2008.
	In addition, we are involved in other legal proceedings arising in the ordinary course of business, none of which, we believe, either individually or in the aggregate, are reasonably likely to have a material adverse effect on our financial condition, results of operations or liquidity. These legal proceedings are routine in nature and incidental to our business.
	We also are a guarantor for performance on a bridge loan for a non-executive employee whereby the collateral held by us under the guaranty is the mortgage secured by residential real estate. Our risk under the guaranty is that the borrower defaults on the mortgage and the proceeds from the sale of the residential real estate are not sufficient to cover the amount of the mortgage. The original mortgage was $550,400. As of September 30, 2008, the principal balance of the mortgage was $492,360 and the borrower was current on all principal and interest payments. In the event of default by the borrower, we do not believe our fulfillment of the guaranty would have a material adverse effect on our financial condition, results of operations or liquidity.

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10. Supplemental Disclosure For Earnings Per Share

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008			2007		2008		2007
Net income (loss)	$	(189,681	)	$	1,604,343	$	642,269	$	3,702,061
Income (loss) available to common shareholders, assuming dilution		(189,681	)		1,604,343		642,269		3,702,061
Weighted average common shares outstanding		5,054,979			4,950,443		5,017,098		4,959,868
Adjustments for dilutive securities:
Dilutive effect of outstanding stock options		—			91,498		18,013		94,769
Diluted common shares		5,054,979			5,041,941		5,035,111		5,054,637
Net income (loss) per common share (1):
Basic	$	(0.04	)	$	0.33	$	0.13	$	0.75
Diluted	$	(0.04	)	$	0.32	$	0.13	$	0.73

⁽¹⁾ Year-to-date income per share amounts may not foot when adding the quarterly income per share amounts due to rounding.

11.

Segment Information

We have two reportable business segments: (1) property/casualty insurance; and (2) insurance agency. The following table provides financial information regarding our reportable business segments, which includes intersegment management and commission fees. 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. Segment results for the three and nine months ended September 30, 2008 and 2007 are as follows:

	Three Months Ended
	September 30, 2008
						Reportable
	Property/Casualty			Insurance		Segment
	Insurance			Agency		Total
Revenues from external customers	$	10,547,280		$	—	$	10,547,280
Intersegment revenues		—			533,541		533,541
Interest revenue		937,394			287		937,681
Interest expense		—			—		—
Depreciation and amortization		37,778			—		37,778
Segment profit		584,371			533,709		1,118,080
Federal income tax (benefit) expense		(118,716	)		181,460		62,744

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	Three Months Ended
	September 30, 2007
					Reportable
	Property/Casualty		Insurance		Segment
	Insurance		Agency		Total
Revenues from external customers	$	11,827,897	$	—	$	11,827,897
Intersegment revenues		—		519,014		519,014
Interest revenue		969,287		644		969,931
Interest expense		—		—		—
Depreciation and amortization		126,522		—		126,522
Segment profit		1,884,317		519,536		2,403,853
Federal income tax expense		270,623		176,642		447,265

	Nine Months Ended
	September 30, 2008
					Reportable
	Property/Casualty		Insurance		Segment
	Insurance		Agency		Total
Revenues from external customers	$	34,790,202	$	—	$	34,790,202
Intersegment revenues		—		1,451,203		1,451,203
Interest revenue		2,788,952		931		2,789,883
Interest expense		12		—		12
Depreciation and amortization		113,316		—		113,316
Segment profit		3,511,192		1,451,761		4,962,953
Federal income tax expense		429,083		493,598		922,681
Segment assets		150,380,945		392,595		150,773,540

	Nine Months Ended
	September 30, 2007
					Reportable
	Property/Casualty		Insurance		Segment
	Insurance		Agency		Total
Revenues from external customers	$	34,484,683	$	—	$	34,484,683
Intersegment revenues		—		1,014,111		1,014,111
Interest revenue		2,938,292		1,842		2,940,134
Interest expense		233		—		233
Depreciation and amortization		316,254		—		316,254
Segment profit		5,158,503		1,015,601		6,174,104
Federal income tax expense		887,895		345,304		1,233,199
Segment assets		141,733,218		341,320		142,074,538

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues
Total revenues for reportable segments	$	12,018,502		$	13,316,842		$	39,031,288		$	38,438,928
Parent company gain		17,871			74,425			47,920			153,425
Net realized gain on sale of affiliate		—			—			—			62,500
Elimination of intersegment revenues		(533,541	)		(519,014	)		(1,451,203	)		(1,014,111	)
Total consolidated revenues	$	11,502,832		$	12,872,253		$	37,628,005		$	37,640,742
Profit
Total profit for reportable segments	$	1,118,080		$	2,403,853		$	4,962,953		$	6,174,104
Parent company loss, net of intersegment eliminations		(1,442,853	)		(631,425	)		(4,408,413	)		(1,842,028	)
Net realized gain on sale of affiliate		—			—			—			62,500
Total consolidated income (loss) before income taxes	$	(324,773	)	$	1,772,428		$	554,540		$	4,394,576
Assets
Total assets for reportable segments							$	150,773,540		$	142,074,538
Parent company assets								4,544,016			5,313,096
Elimination of intersegment receivables								(211,414	)		(303,340	)
Total consolidated assets							$	155,106,142		$	147,084,294

12.	Common Share Repurchase Program
	On March 7, 2007, the Board of Directors adopted a common share repurchase program authorizing the repurchase of up to 500,000 common shares of the Company. This repurchase program expires on December 31, 2008. Through September 30, 2008, the Company had repurchased 117,348 common shares at an aggregate cost of $731,900 and at an average price per share of $6.24 under this program. There were no common share repurchases during the first nine months of 2008.
13.	Guarantees
	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”), the Company’s former independent registered public accounting firm, 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 had been converted into a formal private investigation. On October 23, 2007, the Company and certain of its current officers (Chief Executive Officer, Chief Financial Officer and Vice President of Specialty Products) each received a “Wells Notice” (the “Notice”) from the staff of the SEC indicating that the staff is considering recommending that the SEC bring a civil action against each of them for possible violations of the federal securities laws. The Notice provides the Company and each officer the opportunity to present their positions to the staff before the staff recommends whether any action should be taken by the SEC. The Company continues to cooperate fully with the SEC and is engaged in discussions with the staff of the SEC in an effort to resolve this matter.
	Pursuant to separate undertaking agreements dated November 12, 2007 between the Company and each officer who received the Notice, the Company has agreed to advance reasonable legal fees and expenses incurred by each officer in connection with the ongoing SEC investigation. The undertaking agreements require each officer to repay the amounts advanced if it is ultimately determined, in accordance with Article Five of the Company’s Amended and Restated Code of Regulations (the “Regulations”), that the officer did not act in good faith or in a manner he reasonably believed to be in or not opposed to the best interests of the Company with respect to the matters covered by the SEC investigation. Under the Company’s Regulations and Ohio law, the Company may also be required to indemnify each officer in connection with the SEC investigation.
	The Company accounts for guarantees in accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34” (“FIN 45”). The Company has determined that the above referenced undertaking agreements are within the scope of FIN 45. In order to estimate the fair value of future obligations under these undertaking agreements, the Company periodically obtains estimates from each legal counsel representing the officers involved in the SEC investigation of the additional legal costs expected to be incurred for the officers to respond to the Notice under the SEC’s Wells Notice procedures. Based on these estimates, the Company recorded a FIN 45 liability of $0.7 million and $1.3 million as of September 30, 2008 and December 31, 2007, respectively, which is included within other liabilities in the accompanying

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condensed consolidated balance sheets. The FIN 45 liability at September 30, 2008 as compared to the FIN 45 liability at December 31, 2007 reflects (a) a decrease of approximately $1.5 million as a result of actual legal fees and expenses for services rendered through September 30, 2008 related to the undertaking agreements and (b) an increase of approximately $1.0 million as a result of a net increase in the estimated future legal costs related to the undertaking agreements. The Company cannot predict what actions, if any, the SEC will take after each officer has responded to the Notice. As a result, the Company cannot estimate any future obligations related to the undertaking agreements beyond the estimated costs to respond to the Notice. Due to the inherent uncertainties of the SEC investigation, actual future payments related to the undertaking agreements may be materially different from the estimated fair value of such future payments as recorded at September 30, 2008 ($0.7 million).

14.

Bank Line of Credit

Bancinsurance Corporation has a $10,000,000 unsecured revolving line of credit with a maturity date of June 30, 2010, having a $2,500,000 and $0 outstanding balance at September 30, 2008 and December 31, 2007, respectively. The terms of the revolving credit agreement contain various restrictive covenants. As of September 30, 2008, Bancinsurance Corporation was in compliance with all such covenants. The revolving line of credit provides for interest payable quarterly at an annual rate equal to the prime rate less 75 basis points (4.25% at September 30, 2008). Interest expense related to the bank line of credit for the three months ended September 30, 2008 and 2007 was $27,448 and $0, respectively, and $54,739 and $0 for the nine months ended September 30, 2008 and 2007, respectively.

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

Unless the context indicates otherwise, all references herein to “Bancinsurance,” “we,” “Registrant,” “us,” “its,” “our” or the “Company” refer to Bancinsurance Corporation and its consolidated subsidiaries.

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 condition, results of operations, business strategy, budgets, projected costs and 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. 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. Risk factors that might cause actual results to differ from those statements include, without limitation, economic factors impacting our specialty insurance products, concentration in specialty insurance products, customer concentration, geographic concentration, reinsurance risk, possible inadequacy of loss reserves, ability to accurately price the risks we underwrite, reliance on general agents, general agents may exceed their authority, risk of fraud or negligence with our insurance agents, importance of industry ratings, importance of treasury listing, changes in laws and regulations, dependence on our insurance subsidiary to meet our obligations, severe weather conditions and other catastrophes, adverse securities market conditions, changes in interest rates, the current credit markets, default on debt covenants, dependence on key executives, reliance on information technology and telecommunication systems, changes in the business tactics or strategies of the Company, controlling interest of the Sokol family, the ongoing Securities and Exchange Commission (“SEC”) investigation, litigation, developments in the discontinued bond program and the automobile service contract program, and the other risk factors described in the Company’s filings with the SEC, any one of which might materially affect our financial condition and/or results of operations. 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.

OVERVIEW

Bancinsurance is a specialty property/casualty insurance holding company that was incorporated in the State of Ohio in 1970. We have two reportable business segments: (1) property/casualty insurance; and (2) insurance agency. These segments are described in more detail below.

Products and Services

Property/Casualty Insurance. Our wholly-owned subsidiary, Ohio Indemnity Company (“Ohio Indemnity”), is a specialty property/casualty insurance company. Our principal sources of revenue are premiums and ceded commissions for insurance policies 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 product lines: (1) lender service; (2) unemployment compensation; and (3) waste industry.

Our lender service product line offers four 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 automobile loans. Second, creditor placed insurance (“CPI”) is an alternative to our ULI 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 borrower’s 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. Our GAP product is sold to auto dealers, lenders and lessors and provides coverage on either an individual or portfolio basis. Fourth, equipment physical damage insurance (“EPD”) is an all risk policy written to cover agricultural, construction and commercial equipment vehicles. EPD was introduced in 2007 and offers insurance protection for financed equipment purchases. This policy protects both lenders and consumers against the risk of physical damage or theft of their financed equipment and is available for the term of the loan or an annual basis. Prior to first quarter of 2008, EPD was reported within our CPI product line.

Our unemployment compensation (“UC”) products are utilized by qualified entities that elect not to pay their unemployment compensation

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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 its 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.

Our waste industry products (“WIP”) consist of waste, contract and escrow surety bonds produced and administered by a general insurance agent. Under this program, we assume and cede certain waste surety bond business under three quota share reinsurance arrangements. First, in the second quarter of 2004, we entered into a 50% quota share reinsurance arrangement whereby we assumed 50% of all waste surety bonds with liability limits up to $4.0 million from two insurance carriers. Effective January 1, 2005, the reinsurance arrangement was amended whereby our assumed participation was reduced from 50% to 25%. Effective August 1, 2006, the reinsurance arrangement was further amended whereby we assumed 50% of all waste surety bonds with liability limits up to $1.2 million. Second, effective August 1, 2007, we entered into a 5% quota share reinsurance arrangement whereby we assumed 5% of all waste surety bonds with liability limits over $1.2 million up to $10.0 million from one insurance carrier. Third, in addition to assuming business, we also write on a direct basis waste surety bonds with liability limits up to our Treasury limit ($4.5 million as of July 1, 2008). We then cede 50% of that business to an insurance carrier under a reinsurance arrangement. The majority of the waste surety bonds under the program satisfy the closure/post-closure financial responsibility obligations 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. Closure/post-closure bonds cover future costs to close and monitor a regulated site such as a landfill. In addition to waste surety bonds, our WIP program includes certain contract and escrow surety bond business which the Company writes directly, assumes and cedes under several quota share reinsurance arrangements. This business is included as part of our WIP program because it is produced by the same general agent that produces the waste surety bond business. All of the surety bonds under the WIP program 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. All surety bonds written directly and assumed under this program are produced and administered by a general insurance agent that is affiliated with one of the insurance carriers participating in the program. The general insurance agent utilizes various insurance carriers to place surety bond business with, including the Company. Our direct premium volume for this program is determined by the general insurance agent’s decision to place business with the Company. Prior to the first quarter of 2008, contract and escrow surety bond business produced by this general insurance agent was reported within our other specialty products line.

We have certain other specialty products which consist primarily of two vehicle service contract programs and two contract surety bonds not produced under our WIP program. The premiums produced under other specialty products are not considered material to our results of operations. Our two contract surety bonds are for one contractor and are indemnified by the principal which reduces our risk of loss. For our two vehicle service contract programs, we maintain collateral in excess of our estimated claim obligations, which reduces our risk of loss. For more information concerning one of the vehicle service contract programs, see “Automobile Service Program” in Note 8 to the Condensed Consolidated Financial Statements and “Overview-Automobile Service Program” below.

In addition, from 2001 until the end of the second quarter of 2004, we participated in a bail and immigration bond program. This program was discontinued in the second quarter of 2004. For a more detailed description of this program, see “Discontinued Bond Program” in Note 8 to the Condensed Consolidated Financial Statements and “Overview-Discontinued Bond Program” below.

We sell our insurance products through multiple distribution channels, including three managing general agents, approximately thirty independent agents and direct sales.

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 and servicing 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, we 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 us. We 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.

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

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collections from third party indemnitors.

In the second quarter of 2004, we came to believe that the discontinued bond program was not being operated as it had been represented to us by agents of the insurance carriers who had solicited our participation in the program, and we 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 the life of the program; and 4) improper premium and claims administration. Consequently, during the second quarter of 2004, we ceased paying claims on the program and retained outside legal counsel to review and defend our rights under the program.

During 2004 and 2005, we entered into arbitrations with the following four insurance carriers that participated in the discontinued bond program: 1) Aegis Security Insurance Company (“Aegis”); 2) Sirius America Insurance Company (“Sirius”); 3) Harco National Insurance Company (“Harco”); and 4) Highlands Insurance Company (“Highlands”). During 2006, the arbitrations with Aegis, Sirius and Harco concluded. For Aegis and Sirius, we entered into settlement agreements with these insurance carriers resolving all disputes between us and these carriers relating to the discontinued bond program. These settlement agreements also relieved us from any potential future liabilities with respect to bonds issued by Aegis and Sirius.

For Harco, in August 2006, the Harco arbitration panel issued its Final Decision and Order ordering each of the reinsurers participating in the arbitration, including us, to pay its proportionate share of past and future claims paid by Harco, subject to certain adjustments, offsets and credits (the “Final Order”). Pursuant to the terms of the Final Order, we have paid Harco for our proportionate share of all past claims paid by Harco which it has invoiced to us through September 30, 2008, except as noted below.

During the second quarter of 2008, we received an invoice from Harco for approximately $0.2 million representing our proportionate share of additional claims paid by Harco. We requested that Harco provide us a detailed accounting of its payment activity. Although Harco indicated that it will provide us this information, we have not received such information as of the date of this report. We also requested that Harco provide us information regarding any recoveries that Harco has received with respect to paid claims and its expected future recoveries. Harco responded that it has received and continues to receive recoveries but does not believe the reinsurers are entitled to a proportionate share of such recoveries under the terms of the Final Order. We disagree with this position. Based on the limited recovery information provided by Harco, we cannot estimate with reasonable certainty the amount or range of amounts (if any) that we may receive from Harco with respect to Harco’s recoveries. We do not intend to pay any current or future Harco invoices until Harco provides us the requested accounting and we resolve with Harco the reinsurers’ rights to a proportionate share of Harco’s recoveries.

As of September 30, 2008, we are reserving for Harco losses based on amounts invoiced by Harco for claims paid and on our proportionate share of Harco’s estimate of its future losses under the program as reflected in the most recent loss information provided to us by Harco (without any offset for recoveries).

It should also be noted that Harco has reported to us that it has received an updated invoice from the Department of Homeland Security (“DHS”) for breached immigration bonds and, that as of September 30, 2008, Harco’s immigration bond reserve estimate was less than the amount of the DHS invoice. As noted above, we are reserving for future Harco losses based on our proportionate share of Harco’s estimate of its future losses under the program. If Harco is required to pay the full amount of the DHS invoice, it could result in additional losses to us of approximately $0.8 million (based on the difference between our proportionate share of Harco’s reserve estimate as of September 30, 2008 and the updated DHS invoice).

Pending Arbitration. Highlands participated as an insurer in the discontinued bond program for the 2000, 2001 and 2002 program years, and we were one of its reinsurers for the 2001 and 2002 program years. Highlands was placed in receivership during 2003 (which receivership remains pending). On August 31, 2005, the Highlands’ Receiver demanded a single consolidated arbitration for the 2000, 2001 and 2002 program years against us and its other reinsurers. In November 2005, we responded to this demand by requesting a separate arbitration for the 2001 and 2002 program years and seeking rescission of the reinsurance agreement for the 2001 and 2002 program years, monetary damages for claims that were paid by us and other appropriate relief. Highlands is seeking to recover certain of its losses from us under the reinsurance agreement for the 2001 and 2002 program years. No arbitration panel has yet been constituted. On April 10, 2008, the Highlands’ Receiver filed a petition in a Texas state court seeking to compel a single consolidated arbitration for the 2000, 2001 and 2002 program years against its reinsurers, including us, and other relief. On June 5, 2008, we responded to the petition. As of the date of this report, the court has not ruled on the petition.

Highlands has entered into settlement agreements with the New Jersey Attorney General for its New Jersey bail bond obligations and with the DHS for its federal immigration bond obligations (collectively, the “Settlement Agreements”). The Settlement Agreements cover both past and future losses for bonds issued by Highlands. Highlands has invoiced us for our proportionate share of the settlement value under

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the Settlement Agreements. Highlands has also provided loss information to us with respect to potential losses for bail bonds issued in states other than New Jersey. As of September 30, 2008, we are reserving for Highlands’ losses based on amounts invoiced under the Settlement Agreements and on our proportionate share of the most recent non-New Jersey bail bond loss information provided to us by Highlands. As of both September 30, 2008 and December 31, 2007, our total loss and LAE reserves for Highlands were approximately $4.8 million.

We believe there is potential for us to mitigate our ultimate liability to Highlands through the arbitration proceeding with Highlands. In accordance with SFAS No. 5, “Accounting for Contingencies,” we are reserving to our best estimate of the ultimate liability on the program at September 30, 2008 without any adjustment for a positive arbitration outcome or a potential settlement amount with Highlands. If we obtain information to determine an estimate of a final arbitration value or estimate a settlement value, we will record changes in our reserves, if any, in the period that an estimate is made. We do not intend to pay any of the Highlands’ losses unless and until the arbitration is settled on a mutually agreeable basis and/or a final binding judgment is made as to our ultimate liability.

Given the uncertainties of the outcome of the Highlands’ arbitration and Highlands’ receivership proceeding, uncertainties in the future loss information provided by Harco and Highlands, and the inherent volatility in assumed reinsurance, actual losses incurred for the discontinued bond program could be materially different from our estimated reserves at September 30, 2008. As a result, future loss development on the discontinued bond program could have a material effect on our results of operations and/or financial condition.

Loss and LAE Reserves. The following compares our loss and LAE reserves for the discontinued bond program at September 30, 2008 and December 31, 2007 (dollars in millions):

	September 30,		December 31,
	2008		2007
Bail Bonds:
Case reserves	$	0.6	$	0.5
Incurred but not reported (“IBNR”) reserves		4.3		4.5
Total bail bond reserves		4.9		5.0
Immigration Bonds:
Case reserves		0.2		0.2
IBNR reserves		1.6		1.5
Total immigration bond reserves		1.8		1.7
Total loss and LAE reserves	$	6.7	$	6.7

For the nine months ended September 30, 2008, we recorded a benefit of $60,929 for the discontinued bond program which was primarily attributable to a decrease in Harco’s reserve estimate during the second quarter of 2008. Discontinued bond program losses and LAE were $497,627 for the nine months ended September 30, 2007. The losses in 2007 were primarily attributable to an increase in reported losses from Highlands during the second quarter of 2007. There were no discontinued bond program losses for the third quarter of 2008 or 2007.

See “Business Outlook-Expenses” below for information regarding our anticipated legal costs associated with the Highlands’ arbitration.

Automobile Service Contract Program

During 2001, we began issuing insurance policies which guarantee the performance obligations of two automobile service contract providers (the “Providers”). The Providers are owned by a common parent. We have issued insurance policies covering business produced by the Providers in five states. Our insurance policies guarantee the fulfillment of the Providers’ obligations under the service contracts. Under the program, the Providers maintain the reserves and related assets and are responsible for the claims administration. We are obligated to pay a claim only if a Provider fails to do so. Under two reinsurance arrangements, we cede 100% of the business produced to two different insurance carriers. In addition, we obtained collateral in the form of a $4.3 million letter of credit to secure our obligations under the program. On February 15, 2007, one of the Providers entered into an Assignment for the Benefit of Creditors liquidation proceeding. On March 2, 2007, the Illinois Department of Insurance moved for, and obtained, an Order of Conservation, which granted the Illinois Department of Insurance the authority to ascertain the condition and conserve the assets of that Provider. On April 13, 2007, this Provider filed a voluntary petition under Chapter 11 of the Bankruptcy Code. On June 12, 2007, the Bankruptcy Court ruled that the Provider was an eligible debtor for purposes of the Bankruptcy Code. This Provider has not written any service contracts under our insurance policies after the commencement of the February 2007 liquidation proceeding. The other Provider has not written any service contracts under our insurance policies since December 31, 2007.

On August 24, 2007, we drew on the $4.3 million letter of credit and subsequently obtained an additional $0.5 million from the Provider that is not in bankruptcy to further secure our insurance obligations. Claims of the bankruptcy Provider are currently being paid out of these funds. As of September 30, 2008, the total cash held by us as collateral for this program consisted of approximately $4.6 million,

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which funds are currently invested in short term investments. We have estimated our liability for claims under this program to be approximately $3.4 million as of September 30, 2008. Because we believe our estimated liability for claims under this program is fully collateralized and our loss exposure is 100% reinsured, we do not believe the events described above will have a material adverse impact to us. However, if our actual liability for claims under this program exceeds the collateral held by us and if we are unable to collect on the reinsurance, then this program could have a material adverse effect on our business, financial condition and/or operating results.

Ongoing SEC Investigation

As previously reported, on February 14, 2005, the Company received notification from the 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”), the Company’s former independent registered public accounting firm, 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 had been converted into a formal private investigation. On October 23, 2007, the Company and certain of its current officers (Chief Executive Officer, Chief Financial Officer and Vice President of Specialty Products) each received a “Wells Notice” (the “Notice”) from the staff of the SEC indicating that the staff is considering recommending that the SEC bring a civil action against each of them for possible violations of the federal securities laws. The Notice provides the Company and each officer the opportunity to present their positions to the staff before the staff recommends whether any action should be taken by the SEC. The Company continues to cooperate fully with the SEC and is engaged in discussions with the staff of the SEC in an effort to resolve this matter.

Pursuant to separate undertaking agreements dated November 12, 2007 between the Company and each officer who received the Notice, the Company has agreed to advance reasonable legal fees and expenses incurred by each officer in connection with the ongoing SEC investigation. The undertaking agreements require each officer to repay the amounts advanced if it is ultimately determined, in accordance with Article Five of the Company’s Amended and Restated Code of Regulations (the “Regulations”), that the officer did not act in good faith or in a manner he reasonably believed to be in or not opposed to the best interests of the Company with respect to the matters covered by the SEC investigation. Under the Company’s Regulations and Ohio law, the Company may also be required to indemnify each officer in connection with the SEC investigation. The undertaking agreements are accounted for under FIN 45 as more fully described in Note 13 to the Condensed Consolidated Financial Statements.

For the three and nine months ended September 30, 2008, the Company incurred expenses of approximately $1.0 million and $3.1 million, respectively, related to the SEC investigation. For the third quarter of 2008, the $1.0 million of expenses consisted of (1) approximately $0.6 million of Company expenses and (2) approximately a $0.4 million net increase in the Company’s FIN 45 liability related to the undertaking agreements as a result of receipt of updated estimates from each legal counsel representing the officers involved in the SEC investigation of the additional legal costs expected to be incurred for the officers to respond to the Notice under the SEC’s Wells Notice procedures. For the first nine months of 2008, the $3.1 million of expenses consisted of (1) approximately a $2.1 million of Company expenses and (2) approximately a $1.0 million net increase in the Company’s FIN 45 liability.

Due to the inherent uncertainties of the SEC investigation, the Company cannot estimate with reasonable certainty the amount, range of amounts, timing or ultimate outcome of the SEC investigation. Accordingly, the Company has not recorded any accrual for loss contingencies for the SEC investigation as of September 30, 2008, other than the FIN 45 liability ($0.7 million) related to the undertaking agreements as discussed in Note 13 to the Condensed Consolidated Financial Statements. The ultimate outcome of the SEC investigation, while not predictable at this time, could have a material adverse effect on the Company’s business, financial condition, or results of operations and the SEC investigation could divert the efforts and attention of management from the Company’s ordinary business operations.

See “Business Outlook-Expenses,” “Liquidity and Capital Resources” and “Critical Accounting Policies-Guarantee Liabilities” below and Note 13 to the Condensed Consolidated Financial Statements for additional information regarding the Company’s legal costs associated with the ongoing SEC investigation.

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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,
	2007-2008
	Three Months Ended						Nine Months Ended
	Amount			% Change			Amount			% Change
Net premiums earned	$	(630,603	)		(5.2	)%	$	1,899,135			5.5	%
Net investment income		21,299			2.2	%		(117,880	)		(4.0	)%
Net realized losses on investments		(603,059	)		108.4	%		(1,532,905	)		317.3	%
Management fees		(99,661	)		(60.6	)%		(99,217	)		(25.5	)%
Total revenues		(1,369,421	)		(10.6	)%		(12,737	)		(0.0	)%
Losses and LAE		(1,170,365	)		(17.5	)%		370,685			2.1	%
Policy acquisition costs		976,935			47.8	%		577,889			7.0	%
SEC investigation expenses		1,035,773			100.0	%		3,096,229			100.0	%
(Loss) income before federal income taxes		(2,097,201	)		(118.3	)%		(3,840,036	)		(87.4	)%
Net (loss) income		(1,794,024	)		(111.8	)%		(3,059,792	)		(82.7	)%

Net (loss) income for the third quarter 2008 was $(189,681), or $(0.04) per diluted share, compared to $1,604,343, or $0.32 per diluted share, a year ago. The decline in third quarter 2008 net income compared to a year ago was primarily attributable to (1) $1.0 million of expenses recorded during the third quarter of 2008 related to the ongoing SEC investigation and (2) a $0.6 million increase in net realized losses on investments due to other-than-temporary impairment charges. On a year-to-date basis, net income was $642,269, or $0.13 per diluted share, for the first nine months of 2008 compared to $3,702,061, or $0.73 per diluted share, for the same period last year. The most significant factors that influenced this period-over-period comparison were (1) $3.1 million of expenses recorded during the first nine months of 2008 related to the ongoing SEC investigation and (2) a $1.5 million increase in net realized losses on investments due to other-than-temporary impairment charges. These negative factors were partially offset by a $0.6 million decrease in discontinued bond program losses during the first nine months of 2008 compared to a year ago.

The combined ratio, which is the sum of the loss ratio and the expense ratio, is the traditional measure of underwriting experience for property/casualty insurance companies. Our specialty insurance products are underwritten by Ohio Indemnity, whose results represent the Company’s combined ratio. The statutory combined ratio is the sum of the ratio of losses to premiums earned plus the ratio of statutory underwriting expenses less management fees 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 costs 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 less management fees to premiums earned. 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
	2008			2007			2008			2007
GAAP:
Loss ratio		50.1	%		56.6	%		52.4	%		53.1	%
Expense ratio		43.4	%		31.4	%		40.1	%		38.9	%
Combined ratio		93.5	%		88.0	%		92.5	%		92.0	%
Statutory:
Loss ratio		50.1	%		56.6	%		52.4	%		53.1	%
Expense ratio		44.7	%		26.4	%		44.3	%		36.3	%
Combined ratio		94.8	%		83.0	%		96.7	%		89.4	%

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2008 Compared to September 30, 2007

Net Premiums Earned. Net premiums earned decreased 5.2%, or $630,603, to $11,585,058 for the third quarter 2008 from $12,215,661 a year ago principally due to a decrease in premiums for our ULI product line.

Net premiums earned for ULI decreased 16.6%, or $1,039,400, to $5,205,534 for the third quarter 2008 from $6,244,934 a year ago primarily due to a decrease in lending volume for certain financial institution customers.

Net premiums earned for CPI increased 231.4%, or $317,709, to $454,987 for the third quarter 2008 from $137,278 a year ago primarily due to a new financial institution customer added during the third quarter of 2008.

Net premiums earned for GAP decreased 16.9%, or $487,943, to $2,405,871 for the third quarter 2008 from $2,893,814 a year ago primarily due to a decrease in lending volume for certain financial institution customers combined with the cancellation of a poor performing customer in the second quarter of 2008.

Net premiums earned for UC products increased 10.5%, or $156,434, to $1,643,212 for the third quarter 2008 from $1,486,778 a year ago primarily due to pricing increases for our UCassure^® product.

Net premiums earned for WIP increased 30.6%, or $423,857, to $1,810,674 for the third quarter 2008 from $1,386,817 a year ago primarily due to an increase in assumed waste surety bonds as a result of a 5% quota share reinsurance arrangement that was entered into in the second quarter of 2007.

Investment Income. We seek to invest in investment-grade obligations of states and political subdivisions primarily 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 slightly to $1,002,029 for the third quarter 2008 from $980,730 a year ago primarily due to an increase in yields.

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 book value and estimated fair value is charged to income as a realized loss on investments. Net realized losses on investments increased $603,059, to $1,159,484 for the third quarter 2008 from $556,425 a year ago primarily due to an increase in impairment charges. Impairment charges included in net realized losses on investments during the three months ended September 30, 2008 and 2007 were $1,171,957 and $541,528, respectively. The impairment charges during the three months ended September 30, 2008 were primarily due to the following: (1) $332,000 in impairment charges for a corporate fixed income security (SLM Corp or Sallie Mae) whose fair value was adversely affected by uncertainty in its investment ratings by certain bond rating agencies; (2) $231,601 in impairment charges for an equity security of a financial institution (AIG) who suffered a liquidity crisis following the downgrade of its credit rating; (3) $200,477 in impairment charges for an equity security of a financial institution (Lehman Brothers) who filed for bankruptcy due to losses in the credit markets; (4) $231,450 in impairment charges for equity securities of three financial institutions whose fair values were adversely affected primarily by the credit markets; and (5) $176,429 in impairment charges of equity securities of two other companies whose fair values were adversely affected by current market conditions.

For more information concerning impairment charges, see “Business Outlook-Investments” and “Critical Accounting Policies-Other-Than-Temporary Impairment of Investments” below and Note 3 to the Condensed Consolidated Financial Statements.

Management Fees. Pursuant to the terms of certain surety bonds issued by us that guarantee the payment of reimbursable unemployment compensation benefits, certain monies are held by us in contract funds on deposit and are used for the payment of benefit charges. We have agreements with cost containment service firms designed to control the unemployment compensation costs of the employers enrolled in the program. Any remaining funds after the payment of all benefit charges are shared between us and the cost containment firms as management fees. Management fees are recognized when earned based on the development of benefit charges. Our management fees decreased 60.6%, or $99,661, to $64,924 for the third quarter 2008 from $164,585 a year ago primarily due to an increase in unemployment benefit charges. Our current benefit charges may not necessarily correlate with the current national unemployment experience as the non-profit entities that utilize our UC coverage may have different factors that are affecting their unemployment rates. We expect management fees to vary from period to period depending on our customers’ unemployment levels and benefit charges.

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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. Losses and LAE decreased 17.5%, or $1,170,365, to $5,500,815 for the third quarter 2008 from $6,671,180 a year ago primarily due to a decrease in losses for our ULI product line.

ULI losses and LAE decreased 24.2%, or $1,090,761, to $3,411,112 for the third quarter 2008 from $4,501,873 a year ago primarily due to the decline in business combined with improved loss ratios for certain financial institution customers.

CPI losses and LAE increased 282.5%, or $86,353, to $116,924 for the third quarter 2008 from $30,571 a year ago primarily due to the growth in the business.

GAP losses and LAE decreased 32.9%, or $560,179, to $1,143,693 for the third quarter 2008 from $1,703,872 a year ago primarily due to the decline in business.

UC losses and LAE increased 229.0%, or $455,586, to $654,522 for the third quarter 2008 from $198,936 a year ago primarily due to the settlement of a pending dispute with a former UC customer during the third quarter of 2008. Also See Note 9 to the Condensed Consolidated Financial Statements for information concerning the settlement of this dispute.

WIP losses and LAE decreased 28.8%, or $67,921, to $167,830 for the third quarter 2008 from $235,751 a year ago primarily due to a decrease in losses and LAE for our waste surety bonds. For WIP, we record loss and LAE reserves using an expected loss ratio reserving method as recommended by the primary insurance carrier and reviewed by our independent actuary. For waste surety bonds, loss and LAE reserves are based on a certain percentage of net premiums earned over the trailing thirty six months.

There were no losses for our discontinued bond program during the third quarter of 2008 or 2007. See “Overview-Discontinued Bond Program” above and “Discontinued Bond Program” in Note 8 to the Condensed Consolidated Financial Statements for more information concerning losses and LAE for the discontinued bond program.

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

Policy Acquisition Costs and Other Operating Expenses. Policy acquisition costs increased 47.8%, or $976,935, to $3,019,874 for the third quarter 2008 from $2,042,939 a year ago primarily due to an increase in WIP commissions due to growth in business and an increase in contingent commission expense for one of our ULI agents due to improved underwriting performance for its book of business. Other operating expenses declined slightly to $1,974,022 for the third quarter 2008 from $2,013,270 a year ago.

SEC Investigation Expenses.

SEC investigation expenses were $1,035,773 during the third quarter of 2008 (compared to zero a year ago) primarily due to legal services rendered during the quarter combined with an increase in estimated future legal costs associated with the undertaking agreements. See “Overview-Ongoing SEC Investigation” above, “Business Outlook-Expenses,” “Liquidity and Capital Resources” and “Critical Accounting Policies-Guarantee Liabilities” below and Note 13 to the Condensed Consolidated Financial Statements for more information concerning the SEC investigation.

Interest Expense. Interest expense declined 20.2%, or $75,315, to $297,121 for the third quarter 2008 from $372,436 a year ago as a result of declining interest rates on our trust preferred debt which was partially offset by an increase in interest expense for our bank line of credit. See “Liquidity and Capital Resources” below and Notes 4 and 14 to the Condensed Consolidated Financial Statements for a discussion of the Company’s trust preferred debt issued to affiliates, which makes up the majority of our interest expense, and our use of the line of credit.

Federal Income Taxes. Our effective income tax rate was 41.6% for the third quarter 2008 compared to 9.5% a year ago. This increase was primarily attributable to the ratio of tax-exempt income when compared to income from operations for each period. The increase in the effective tax rate for third quarter 2008 was primarily attributable to impairment charges taken on our investment portfolio combined with SEC expenses during the quarter which reduced our income from operations, thus making our ratio of tax exempt investment income to income from operations higher than a year ago.

GAAP Combined Ratio. For the third quarter 2008, the combined ratio increased to 93.5% from 88.0% a year ago. The loss ratio improved to 50.1% for the third quarter 2008 from 56.6% a year ago primarily due to improved loss ratios for certain ULI financial institution customers. The expense ratio increased to 43.4% for the third quarter 2008 from 31.4% a year ago primarily due to the increase in commission expense as described above.

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Nine Months Ended September 30, 2008 Compared to September 30, 2007

Net Premiums Earned. Net premiums earned increased 5.5%, or $1,899,135, to $36,515,778 for the first nine months of 2008 from $34,616,643 a year ago primarily due to an increase in premiums for our WIP product line.

ULI net premiums earned increased 4.1%, or $694,560, to $17,694,425 for the first nine months of 2008 from $16,999,865 a year ago primarily due to (1) a decrease in retrospective premium adjustments and (2) an increase in lending volume for certain financial institution customers. These increases were partially offset by a decrease in lending volume for certain financial institution customers. Certain of our policies have a retrospective premium adjustment feature whereby the customer can receive a premium return when their actual loss and expense experience is less than their policy limits. The retrospective premium adjustment is primarily influenced by ULI loss experience-to-date and premium growth. A decrease in retrospective premium adjustments results in a positive impact to net premiums earned whereas an increase in retrospective premium adjustments results in a decrease to net premiums earned. The retrospective premium adjustment does not have any impact to net income (i.e., as losses increase, net premiums earned increases by the same amount through the retrospective premium adjustment; and conversely, as losses decrease, net premiums earned decreases by the same amount through the retrospective premium adjustment). Retrospective premium adjustments decreased for the first nine months of 2008 when compared to a year ago primarily due to an increase in loss frequency for one of our financial institution customers. Management anticipates that retrospective premium adjustments will fluctuate in future periods based upon loss experience and premium growth.

Net premiums earned for CPI increased 27.4%, or $211,294, to $981,891 for the first nine months of 2008 from $770,597 a year ago primarily due to a new financial institution customer added during the third quarter of 2008.

Net premiums earned for GAP decreased 10.5%, or $877,486, to $7,453,826 for the first nine months of 2008 from $8,331,312 a year ago primarily due to a decrease in lending volume for certain financial institution customers.

Net premiums earned for UC products increased 9.6%, or $429,776, to $4,925,419 for the first nine months of 2008 from $4,495,643 a year ago primarily due to pricing increases for our UCassure^® product.

Net premiums earned for WIP increased 38.0%, or $1,457,846, to $5,292,231 for the first nine months of 2008 from $3,834,385 a year ago primarily due to (1) an increase in assumed waste surety bonds as a result of a 5% quota share reinsurance arrangement that was entered into in the second quarter of 2007, (2) an increase in direct waste surety bond premiums due to the general insurance agent increasing its placement of business with us and (3) an increase in contract surety bond premiums, which we began writing in the second half of 2006.

Investment Income. Net investment income decreased 4.0%, or $117,880, to $2,810,609 for the first nine months of 2008 from $2,928,489 a year ago. This decline is consistent with the decline in the size of our average investment portfolio for the first nine months of 2008 compared to a year ago. Yields remained relatively flat from period to period.

Net realized losses on investments increased $1,532,905, to $2,016,045 for the first nine months of 2008 from $483,140 a year ago primarily due to a $1,864,150 increase in impairment charges which was partially offset by a $331,245 increase in net realized gains recorded on the sales of equity and bond securities. Impairment charges included in net realized losses on investments during the nine months ended September 30, 2008 and 2007 were $2,405,678 and $541,528, respectively. The impairment charges during the nine months ended September 30, 2008 were primarily due to the following: (1) $683,836 in impairment charges primarily for floating rate municipal bond securities of nine issuers whose fair values were adversely affected primarily by the decline in short-term interest rates during the first quarter of 2008; (2) $596,357 in impairment charges for equity securities of five financial institutions whose fair values were adversely affected primarily by the credit markets; (3) $332,000 in impairment charges for a corporate fixed income security (SLM Corp. or Sallie Mae) whose fair value was adversely affected by uncertainty in its investment ratings by certain bond rating agencies; (4) $231,601 in impairment charges for an equity security of a financial institution (AIG) who suffered a liquidity crisis following the downgrade of its credit rating; (5) $200,477 in impairment charges for an equity security of a financial institution (Lehman Brothers) who filed for bankruptcy due to losses in the credit markets; (6) $139,777 in impairment charges for equity securities of a communications company whose fair value was adversely affected primarily by a recession in the Florida real estate market; and (7) $221,629 in impairment charges of equity securities of three other companies whose fair values were adversely affected by current market conditions.

For more information concerning impairment charges, see “Business Outlook-Investments” and “Critical Accounting Policies-Other-Than-Temporary Impairment of Investments” below and Note 3 to the Condensed Consolidated Financial Statements.

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Management Fees. Our management fees decreased 25.5%, or $99,217, to $289,238 for the first nine months of 2008 from $388,455 a year ago primarily due to an increase in unemployment benefit charges. Our current benefit charges may not necessarily correlate with the current national unemployment experience as the non-profit entities that utilize our UC coverage may have different factors that are affecting their unemployment rates. We expect management fees to vary from period to period depending on our customers’ unemployment levels and benefit charges.

Losses and Loss Adjustment Expenses. Losses and LAE increased 2.1%, or $370,685, to $18,373,894 for the first nine months of 2008 from $18,003,209 a year ago primarily due to an increase in ULI losses which was partially offset by a decrease in discontinued bond program losses.

ULI losses and LAE increased 5.6%, or $672,378, to $12,646,339 for the first nine months of 2008 from $11,973,961 a year ago primarily due to (1) an increase in loan defaults, bankruptcies and automobile repossessions for certain financial institution customers and (2) growth in business for certain financial institution customers. Theses increases were partially offset by a decrease in losses for certain financial institution customers due to a decline in their lending volume.

CPI losses and LAE increased 63.8%, or $119,082, to $305,728 for the first nine months 2008 from $186,646 a year ago primarily due to the growth in the business.

GAP losses and LAE remained relatively flat at $4,057,030 for the first nine months 2008 compared to 4,043,210 a year ago. The decrease in losses caused by the decline in business was offset by favorable loss development that occurred in the prior year.

UC losses and LAE increased 34.3%, or $242,578, to $948,881 for the first nine months of 2008 from $706,303 a year ago primarily due to the settlement of a pending dispute with a prior UC customer during the third quarter of 2008. Also See Note 9 to the Condensed Consolidated Financial Statements for information concerning the settlement of this dispute.

WIP losses and LAE decreased 21.0%, or $125,093, to $470,192 for the first nine months of 2008 from $595,285 a year ago primarily due to a decrease in losses and LAE for waste surety bonds which was partially offset by an increase in losses and LAE for contract surety bonds due to growth in that business. For WIP, we record loss and LAE reserves using an expected loss ratio reserving method as recommended by the primary insurance carrier and reviewed by our independent actuary. For waste surety bonds, loss and LAE reserves are based on a certain percentage of net premiums earned over the trailing thirty six months. For contract surety bonds, loss and LAE reserves are based on a certain percentage of total net premiums earned.

Discontinued bond program losses and LAE decreased 112.2%, or $558,556, to $(60,929) for the first nine months of 2008 from $497,627 a year ago. See “Overview-Discontinued Bond Program” above and “Discontinued Bond Program” in Note 8 to the Condensed Consolidated Financial Statements for more information concerning losses and LAE for the discontinued bond program.

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

Policy Acquisition Costs and Other Operating Expenses. Policy acquisition costs increased 7.0%, or $577,889, to $8,838,843 for the first nine months of 2008 from $8,260,954 a year ago primarily due to (1) an increase in premium taxes due to growth in our direct earned premiums and (2) an increase in administrative expenses for our UCassure^® product due to its premium growth. Other operating expenses remained relatively flat at $5,833,554 for the first nine months of 2008 compared to $5,880,052 a year ago.

SEC Investigation Expenses.

SEC investigation expenses were $3,096,229 for the first nine months of 2008 (compared to zero a year ago) primarily due to legal services rendered during the period combined with an increase in estimated future legal costs associated with the undertaking agreements. See “Overview-Ongoing SEC Investigation” above, “Business Outlook-Expenses,” “Liquidity and Capital Resources” and “Critical Accounting Policies-Guarantee Liabilities” below and Note 13 to the Condensed Consolidated Financial Statements for more information concerning the SEC investigation.

Interest Expense. Interest expense decreased 15.5%, or $171,006, to $930,945 for the first nine months of 2008 from $1,101,951 a year ago as a result of declining interest rates on our trust preferred debt which was partially offset by an increase in interest expense for our bank line of credit. See “Liquidity and Capital Resources” below and Notes 4 and 14 to the Condensed Consolidated Financial Statements for a discussion of the Company’s trust preferred debt issued to affiliates, which makes up the majority of the Company’s interest expense, and our use of the line of credit.

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Federal Income Taxes. Our estimated annual effective income tax rate was (15.8)% for the first nine months of 2008 compared to 15.8% a year ago. This decrease was primarily attributable to the ratio of tax-exempt income when compared to income from operations for each period. During 2008, the impairment charges on our investment portfolio combined with the SEC investigation expenses have significantly lowered our ratio of tax-exempt income when compared to income from operations which resulted in the negative estimated annual effective rate this year.

GAAP Combined Ratio. For the first nine months of 2008, the combined ratio increased to 92.5% from 92.0% a year ago. The loss ratio improved to 52.4% for the first nine months of 2008 from 53.1% a year ago primarily due to the decrease in discontinued bond program losses. The expense ratio increased to 40.1% for the first nine months of 2008 from 38.9% a year ago primarily due to the increase in premium taxes and administrative fees as described above.

BUSINESS OUTLOOK

Current Financial Crisis

The credit markets suffered a severe upheaval during the third quarter of 2008. Credit spreads expanded due to increased fears of mounting mortgage losses across the financial sector and caused the market’s liquidity crisis to intensify. Higher borrowing rates and fears of outsized losses led to the federal government takeover of Fannie Mae and Freddie Mac in September 2008. This was followed by rapid succession with the bankruptcy of Lehman Brothers, the merger of Merrill and Bank of America, the bailout of AIG, failure of Washington Mutual, and Wachovia putting itself up for sale. After the federal government’s $700 billion bailout plan was approved, the focus of attention shifted from the banking crisis to economic fundamentals around the world and fears about the state of the world economy. These are unprecedented times that are still unfolding. As a result, it is extremely difficult to predict how the global financial crisis will impact us on both a short-term and longer-term basis. Our outlook for the remainder of 2008 and fiscal year 2009 is cautious.

Lender Service Products

Our lender service premium volume is primarily based on new loans made by our banking customers for consumer automobile purchases. The credit crisis is impacting automobile sales as consumers are struggling to qualify for loans and automakers are scaling back leasing. In addition, many consumers are not willing to make big purchases, such as for a new automobile. In September 2008, Ford, Toyota, Chrysler and Nissan all reported U.S. sales drops of over 30 percent. General Motor and Honda reported U.S. sales drops in September of 16 percent and 24 percent, respectively. Through September 30, 2008, certain of our banking customers have experienced declines in lending volume. Based on the current economic conditions, we expect that our banking customers’ lending volume will continue to decline; however, it is difficult for us to predict how much of a decline they will experience.

Premiums and ceded commissions for our insurance products are earned over the related contract period. For GAP and certain of our ULI and CPI products, the contract period averages approximately five years. As a result, the impacts of decreased premium volumes and cancelled business may not be seen in our results immediately and can persist for a number of years. Conversely, the impacts of increased premium volumes and new business may not be seen in our results immediately and may take several years to fully develop.

Due to the current weak economic conditions, certain of our lender service customers have experienced an increase in loan defaults, bankruptcies and automobile repossessions. As the rate of loan defaults, bankruptcies and automobile repossessions increases for our ULI and CPI customers, we experience an increase in the frequency of losses for these product lines. As the national economy remains unstable and unemployment levels remain high, our financial institution customers could experience an increase in loan defaults, bankruptcies and automobile repossessions. Incentives offered on new cars by dealers and manufacturers have depressed the value of the used car market. In addition, the higher level of gas prices has lowered the market value of less fuel-efficient vehicles. As used car prices decline, the “gap” between the value of the vehicle and the outstanding loan balance increases and thus the severity of our GAP losses increases. In addition, higher gas prices are expected to continue to impact the value of less fuel-efficient vehicles. Where possible, we have taken actions to help mitigate the effects of these trends, including monitoring the pricing of our products and taking rate actions when necessary. One of the actions included changing policy types in the second quarter of 2008 for a poor performing ULI financial institution customer that we believe will improve its future underwriting performance. Another action included cancelling a poor performing GAP customer in the second quarter of 2008. During 2007 and the first nine months of 2008, this GAP customer had net premiums earned of $2.6 million and $1.9 million, respectively, and its combined ratio was 121% and 129%, respectively. As noted above, it will take a number of years for this block of business to fully run-off.

Effective January 1, 2007, we entered into a producer-owned reinsurance arrangement with a new EPD customer whereby 100% of that customer’s premiums (along with the associated risk) were ceded to its PORC. For this reinsurance arrangement, we have obtained collateral in the form of funds held and a letter of credit to secure our obligations. Under the provisions of the reinsurance agreement, the collateral must be equal to or greater than 102% of the reinsured reserves and we have immediate access to such collateral if necessary. We expect this program to reduce our commission expense by approximately $0.8 million during fiscal year 2008 compared

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to $0.3 million in 2007. As of September 30, 2008, we had approximately $1.7 million of deferred ceded commissions for this program that will be earned over approximately four years. Prior to first quarter of 2008, EPD was reported within our CPI product line.

Effective October 1, 2003, we entered into a producer-owned reinsurance arrangement with a CPI customer whereby 100% of that customer’s premiums (along with the associated risk) were ceded to its PORC. For this reinsurance arrangement, we have obtained collateral in the form of a trust from the reinsurer to secure our obligations. Under the provisions of the reinsurance agreement, the collateral must be equal to or greater than 102% of the reinsured reserves and we have immediate access to such collateral if necessary. Effective April 1, 2008, the policy related to this arrangement was cancelled. The reinsurance agreement will remain in place until the business is fully run-off which is expected to be in second quarter of 2009. During 2007, this program reduced our commission expense by approximately $0.4 million and we expect this program to reduce our commission expense by approximately $0.3 million during fiscal year 2008 and further decline in 2009.

Unemployment Compensation, Waste Industry and Discontinued Bond Program

During 2008, we experienced an increase in benefit charges for certain of our UC customers, which resulted in lower management fees for the first nine months of 2008 compared to 2007. Given the current economic conditions, it is possible that we could continue to experience an increase in benefit charges for our UC customers which would result in lower management fees and/or increased losses for our UC products; however, it is difficult for us to predict how material the impact would be to us. Where possible, we have taken actions to help mitigate the effects of these trends, including monitoring the pricing of our products and taking rate actions when necessary.

Since we began participating in the WIP program in 2004 there have not been any significant claims to date. If we were to have significant claims experience on this program during fiscal year 2008, such claims experience could have a material impact on our financial performance if our reserves prove to be materially deficient. As of September 30, 2008 our loss and LAE reserves for the WIP program were approximately $2.2 million. We currently do not believe that our reserves will be materially deficient. For more information concerning losses and LAE, see “Critical Accounting Policies-Loss and Loss Adjustment Expense Reserves” below.

Landfill operators can fulfill their collateral requirements under Subtitles C and D of the Federal Resource Conservation and Recovery Act by either posting a surety bond or obtaining a letter of credit from a bank. As the crisis in the credit markets have restricted bank capital, there may be landfill operators who previously used a letter of credit to satisfy their collateral requirement to now use a surety bond instead. If that occurs, it could result in an increase in WIP premiums for us; however, it is difficult to predict if this will happen and if so, whether it will be material to us.

Furthermore, any developments on the discontinued bond program, including Harco and Highlands’ loss development and the Highlands’ arbitration, could have a material impact on our future results of operations and/or financial condition.

Expenses

Because there was little activity in the Highlands’ arbitration during 2007 and the first nine months of 2008, we incurred minimal legal costs during such periods for the Highlands’ arbitration. Management anticipates that we will continue to incur legal costs during fiscal year 2008 for the Highlands’ arbitration; however, it is uncertain how much activity there will be in 2008 for the Highlands’ arbitration. As a result, we cannot predict with reasonable certainty the amount or range of amounts of legal costs that will be incurred during fiscal year 2008 for the Highlands’ arbitration; however, it is possible that the amount of such legal costs could be material to our results of operations when the arbitration proceeding takes place. At the present time, we believe it is unlikely that the arbitration proceeding will take place in 2008. See “Overview-Discontinued Bond Program” above and “Discontinued Bond Program” in Note 8 to the Condensed Consolidated Financial Statements for more information regarding the discontinued bond program arbitrations.

As disclosed above, during the fourth quarter of 2007, the Company and certain of its current officers received the Notice from the SEC staff and the Company entered into undertaking agreements with such officers. As a result of these events, we incurred the following expenses during the last four quarters related to the SEC investigation:

	4Q2007		1Q2008		2Q2008		3Q2008
SEC investigation expenses	$	2,504,122	$	1,450,872	$	609,584	$	1,035,773

We expect to continue to incur costs for the SEC investigation during the fourth quarter of 2008. Due to the inherent uncertainties of the SEC investigation, we cannot predict with reasonable certainty the amount or range of amounts of costs that will be incurred during the remainder of 2008 for the SEC investigation (other than the FIN 45 liability related to the undertaking agreements as discussed in Note 13 to the Condensed Consolidated Financial Statements); however, we believe that the amount of costs that will be incurred in

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the fourth quarter of 2008 will be material to our results of operations for that period and the total amount of costs that will be incurred in fiscal year 2008 will be material to our results of operations for 2008. See “Overview-Ongoing SEC Investigation” above, “Liquidity and Capital Resources” and “Critical Accounting Policies-Guarantee Liabilities” below and Note 13 to the Condensed Consolidated Financial Statements for more information regarding the ongoing SEC investigation.

As interest rates rise (fall), it can increase (decrease) the level of interest expense on our trust preferred debt and any borrowings under our revolving line of credit. Interest rates have declined during the first nine months of 2008 when compared to a year ago. Assuming interest rates stay at their current levels, we would anticipate a decrease in our trust preferred debt interest expense of approximately $0.3 million during fiscal year 2008 when compared to 2007. On March 31, 2008, we drew $2.5 million on our line of credit and that amount remains outstanding at September 30, 2008. Assuming we do not draw additional amounts on the line of credit and/or pay down the line of credit during 2008, we would anticipate an increase in interest expense for the line of credit of approximately $0.1 million during fiscal year 2008 when compared to 2007 (when there was no outstanding balance under our line of credit). See “Liquidity and Capital Resources” below and Notes 4 and 14 to the Condensed Consolidated Financial Statements for more information concerning our trust preferred debt and revolving line of credit.

Investments

As of September 30, 2008, approximately 94% of our fixed income portfolio was invested in tax-exempt municipal bonds. Market liquidity for such bonds has been significantly affected by the current financial crisis and the changes on Wall Street, as trading partners such as Bear, Lehman, Merill and Wachovia had significant roles in supplying liquidity in the bond markets. With brokers gone or merging and other financial houses accumulating capital, the municipal bond markets have witnessed a dramatic widening in bid/ask spreads and a decrease in trading volume. Municipal bond returns for the month of September were the worst of any month of the past 20 years. Higher municipal bond yields and widening yield spreads, along with a general lack of liquidity in the municipal bond market, resulted in the weakest returns of the year for all municipal bonds. Redemptions from municipal bond mutual funds, forced selling from leveraged municipal bond investors and repositioning by some insurance companies toward taxable investments combined to produce a highly over-sold municipal bond market during third quarter of 2008. As a result, the gross unrealized loss for our bond portfolio increased from $1.2 million at June 30, 2008 to $4.9 million at September 30, 2008. The fair value of our fixed income portfolio could also be impacted by credit rating actions and related financial uncertainty associated with insurance companies that guarantee the obligations of our bonds. While municipal credits continue to demonstrate relative credit quality stability, market conditions are not likely to improve until the current liquidity crisis has passed.

Many of the securities within our equity portfolio have been negatively impacted by the current financial crisis. During the first nine months of 2008, we recorded approximately $2.4 million of impairment charges in our investment portfolio ($1.0 million for bonds and $1.4 million for stocks). Additional impairment charges within our investment portfolio during the remainder of 2008 are possible if current economic and financial conditions worsen. For more information concerning the unrealized loss position of our portfolio and impairment charges, see “Critical Accounting Policies-Other-Than-Temporary Impairment of Investments” below and Note 3 to the Condensed Consolidated Financial Statements.

Based on the factors discussed above, our outlook for the remainder of 2008 as well as the 2009 fiscal year is cautious.

LIQUIDITY AND CAPITAL RESOURCES

We are organized in a holding company structure with Bancinsurance Corporation being the parent company and all of our operations being conducted by Bancinsurance Corporation’s wholly-owned subsidiaries, Ohio Indemnity and USA. As of September 30, 2008 and December 31, 2007, our capital structure consisted of trust preferred debt issued to affiliates, a bank line of credit and shareholders’ equity and is summarized in the following table:

	September 30,			December 31,
	2008			2007
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 line of credit		2,500,000			—
Total debt obligations		17,965,000			15,465,000
Total shareholders’ equity		35,618,263			38,720,922
Total capitalization	$	53,583,263		$	54,185,922
Ratio of total debt obligations to total capitalization		33.5	%		28.5	%

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. BIC Trust I also issued

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$248,000 of floating rate common securities to Bancinsurance Corporation. 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 II also issued $217,000 of floating rate common securities to Bancinsurance Corporation. 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 Bancinsurance Corporation. In connection with the issuance of the trust preferred capital securities, Bancinsurance Corporation 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. Bancinsurance Corporation 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 Bancinsurance Corporation 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 capital securities. BIC Trust I’s floating rate trust preferred capital securities, and the junior subordinated debentures issued in connection therewith, pay dividends and interest, as applicable, on a quarterly basis at a rate equal to three month LIBOR plus four hundred basis points (6.81% and 9.62% at September 30, 2008 and 2007, respectively), are redeemable at par on or after December 4, 2007 and mature on December 4, 2032. BIC Trust II’s floating rate trust preferred capital securities, and the junior subordinated debentures issued in connection therewith, pay dividends and interest, as applicable, on a quarterly basis at a rate equal to three month LIBOR plus four hundred and five basis points (7.81% and 9.28% at September 30, 2008 and 2007, 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 to the Company. The terms of the junior subordinated debentures contain various covenants. As of September 30, 2008, Bancinsurance Corporation was in compliance with all such covenants.

Bancinsurance Corporation also has a $10,000,000 unsecured revolving line of credit with a maturity date of June 30, 2010. At September 30, 2008 and December 31, 2007, the outstanding balance under the line of credit was $2,500,000 and $0, respectively. The line of credit provides for interest payable quarterly at an annual rate equal to the prime rate less 75 basis points (4.25% at September 30, 2008). The terms of the revolving credit agreement contain various restrictive covenants. As of September 30, 2008, Bancinsurance Corporation was in compliance with all such covenants. We utilize the line of credit from time to time based on short-term cash flow needs, the then current prime rate and expected changes in the prime rate, Ohio Indemnity’s capital position and the dividend limitations on Ohio Indemnity as discussed below.

As a property/casualty insurer, Ohio Indemnity is subject to a risk-based capital test adopted by the National Association of Insurance Commissioners and The Ohio Department of Insurance (the “Department”). This test serves as a benchmark of an insurance enterprise’s solvency by establishing statutory surplus targets which will require certain company level or regulatory level actions. Ohio Indemnity’s total adjusted capital was in excess of all required action levels as of September 30, 2008. 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 short-term investments and cash receipts from operations, which consist primarily of insurance premiums collected, ceded commissions received 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 our underwriting and investment activities are used to build our investment portfolio and thereby increase future investment income. See Note 3 to the Condensed Consolidated Financial Statements for more information regarding our investment portfolio.

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. We consider 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 policy obligations without being required to liquidate intermediate-term and long-term investments.

As discussed in “Overview-Discontinued Bond Program” above and in “Discontinued Bond Program” in Note 8 to the Condensed Consolidated Financial Statements, discontinued bond program loss and LAE reserves were $6.7 million at September 30, 2008. Ultimate payment on the discontinued bond program may result in a material increase in cash outflows from operations. We consider the discontinued bond program liabilities and the related Highlands’ arbitration 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 and LAE reserves for the discontinued bond program.

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We believe that both liquidity and interest rate risk can be minimized by such asset/liability management described above. With this strategy, we believe we can pay our policy obligations as they become due without being required to use our line of credit 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, financial condition and/or future liquidity.

USA derives its funds principally from commissions and fees which are currently sufficient to meet its operating expenses. USA dividends all of its excess funds to Bancinsurance Corporation on a quarterly basis. Because USA is not an insurance company and is an Ohio limited liability company, it is not subject to any restrictions on the payment of dividends other than laws affecting the rights of creditors generally.

As the parent company, Bancinsurance Corporation generates no funds from operations. Bancinsurance Corporation’s principal assets are the common shares of Ohio Indemnity and the membership interests in USA, and its primary sources of funds are (a) dividends from Ohio Indemnity and USA, (b) borrowings under its line of credit and (c) payments received from Ohio Indemnity and USA under cost and tax sharing agreements. Historically, Bancinsurance Corporation’s expenses have primarily consisted of payment of principal and interest on borrowings and legal and audit expenses directly related to Bancinsurance Corporation, and it has been able to pay these expenses primarily through use of its cash and invested assets, dividends from its subsidiaries, cost and tax sharing payments from its subsidiaries and, since August 2006, excess cash generated from the sale of its publishing subsidiary. During the fourth quarter of 2007 and the first nine months of 2008, Bancinsurance Corporation experienced a significant increase in expenses and cash outflow as a result of expenses associated with the ongoing SEC investigation. Based on management’s expectation that Bancinsurance Corporation would continue to incur significant expenses and have significant cash outflows related to the SEC investigation during 2008, Bancinsurance Corporation drew $2.5 million on its line of credit on March 31, 2008. As of September 30, 2008, June 30, 2008 and March 31, 2008, Bancinsurance Corporation had total cash and invested assets of $1.9 million, $2.1 million and $3.2 million, respectively. The $0.2 million decrease in the third quarter of 2008 was primarily due to SEC investigation expenses paid during the quarter which was partially offset by dividends from USA and tax sharing payments received from Ohio Indemnity and USA during the quarter. Due to the inherent uncertainties associated with the SEC investigation, we cannot predict with reasonable certainty the amount or range of amounts of costs that will be incurred during the fourth quarter of 2008 for the SEC investigation (other than the FIN 45 liability). However, management believes that Bancinsurance Corporation will be able to meet its cash flow requirements during these periods from (1) its cash, (2) the liquidation of its invested assets, (3) dividends from Ohio Indemnity and/or USA, (4) tax and cost sharing payments from Ohio Indemnity or USA and/or (5) additional draws on its line of credit. Management currently plans to cause Ohio Indemnity to declare and pay dividend(s) during future period(s) to Bancinsurance Corporation to enable it to repay the outstanding balance on its line of credit. Management has not determined at this time the timing or amount of such dividend(s), but does not believe that the amount of any such dividend(s) during 2008, if any, will exceed the annual maximum limit described below. See “Overview-Ongoing SEC Investigation” and “Business Outlook-Expenses” above, “Critical Accounting Policies-Guarantee Liabilities” below and Note 13 to the Condensed Consolidated Financial Statements for more information regarding the ongoing SEC investigation.

Ohio Indemnity is restricted by the insurance laws of the State of Ohio as to amounts that can be transferred to Bancinsurance Corporation in the form of dividends without the prior approval of the Department. Ohio Indemnity may pay dividends without such prior approval only from earned surplus and only to the extent that all dividends in the trailing twelve months do not exceed the greater of 10% of its statutory surplus as of the end of the prior fiscal year or statutory net income for the prior calendar year. During 2008, the maximum amount of dividends that may be paid to Bancinsurance Corporation by Ohio Indemnity without such prior approval is $6,669,399.

Net cash (used in) provided by operating activities was $(3,864,187) and $9,210,735 for the first nine months of 2008 and 2007, respectively. The decrease in cash provided by operating activities was primarily due to the following: (1) approximately $4.2 million in expenses paid during the first nine months of 2008 related to the ongoing SEC investigation, (2) a decrease of approximately $2.6 million in net premiums collected, (3) an increase of approximately $2.1 million in net commissions and premium taxes paid and (4) obtaining $4.8 million in cash as funds held for account of others during 2007 as it related to one of our automobile service contract programs (see “Automobile Service Contract Program” in Note 8 to the Condensed Consolidated Financial Statements).

Net cash provided by (used in) investing activities was $79,537 and $(6,258,935) for the first nine months of 2008 and 2007, respectively. The increase was primarily due to the use of certain investment proceeds to fund operating cash requirements during the first nine months of 2008, whereas in 2007, excess cash from operations was used to purchase investments during that period.

Net cash provided by (used in) financing activities was $2,500,000 and $(396,215) for the first nine months of 2008 and 2007, respectively. The increase in 2008 was due to a $2,500,000 draw on our bank line of credit during the first quarter of 2008. The net

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cash used in financing activities during the first nine months of 2007 was primarily from the repurchase of common shares under our common share repurchase program which was partially offset by cash received from stock option exercises.

Given our historic cash flows and current financial condition, we believe that the cash flows from operating and investing activities over the next year and our line of credit will provide sufficient liquidity for the operations of the Company.

CRITICAL ACCOUNTING POLICIES

The preparation of the condensed 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 materially 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 condensed consolidated financial statements.

Other-Than-Temporary Impairment of Investments

We continually monitor the difference between the book value and the estimated fair value of our investments, which involves judgment 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 record the decline as a realized loss through the income statement. If our judgment changes in the future, we may ultimately record a realized loss for a security after having originally concluded that the decline in value was temporary. We begin to monitor a security for other-than-temporary impairment when its fair value to book value ratio falls below 80%. The following discussion summarizes our process and factors considered when evaluating a security for potential impairment.

Fixed Income Securities. On a monthly basis, we review our fixed income 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;

• 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.

We continually monitor the credit quality of our fixed income investments to gauge our ability to be repaid principal and interest. We consider price declines of fixed income securities in our other-than-temporary impairment analysis where such price declines provide evidence of declining credit quality, and we distinguish between price changes caused by credit deterioration, as opposed to rising interest rates. In our evaluation of credit quality, we consider, among other things, credit ratings from major rating agencies, including Moody’s and Standard & Poor’s (“S&P”).

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.

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Under our investment guidelines, we employ what we believe are stringent diversification rules and balance our investment credit risk and related underwriting risks to minimize total potential exposure to any one security or type of security. Our fixed income investment and closed end bond fund portfolio is managed by an outside investment manager that operates under investment guidelines approved by our board of directors. Under our investment guidelines, fixed income securities are required to be investment grade at the time of purchase to protect investments. As of September 30, 2008, approximately 98% of our fixed income portfolio was rated investment grade. Our outside investment manager also monitors the underlying credit of our fixed income portfolio. In performing our other-than-temporary impairment analysis for our fixed income securities and closed end bond funds (equity securities), we rely on the analysis of our outside investment manager regarding the outlook and credit quality of the investment.

See Note 3 to the Condensed Consolidated Financial Statements for information regarding our securities that were in an unrealized loss position at September 30, 2008 which were not considered to be other-than-temporarily impaired. For more information concerning other-than-temporary impairment charges, see “Results of Operations” above and Note 3 to the Condensed Consolidated Financial Statements.

Loss and Loss Adjustment Expense Reserves

We utilize our internal staff, reports from ceding insurers under assumed reinsurance and an independent consulting actuary in establishing our loss and LAE reserves. Our independent consulting actuary reviews our reserves for losses and LAE on a quarterly basis and we consider this review in establishing the amount of our 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. We continually revise reserve estimates as experience develops and further claims are reported and resolved. Changes in reserve estimates are recorded in the results of operations in the period in which the 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 process can be quite long, unexpected events are more difficult to predict. Our ultimate loss reserve estimates for assumed reinsurance are dependent upon and based primarily on information received by us from the underlying ceding insurers.

As discussed in “Overview-Discontinued Bond Program” above and in “Discontinued Bond Program” in Note 8 to the Condensed Consolidated Financial Statements, discontinued bond program loss and LAE reserves were $6.7 million at September 30, 2008. Given the uncertainties of the outcome of the Highlands’ arbitration and Highlands’ receivership proceeding, uncertainties in the future loss information provided by Harco and Highlands, 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 our results of operations and/or financial condition.

For our assumed WIP program, we record loss and LAE reserves using a loss ratio reserving methodology as recommended by the primary insurance carrier and reviewed by our independent actuary. The loss ratio method calculates a reserve based on expected losses in relation to premiums earned. For waste surety bonds, loss and LAE reserves are based on a certain percentage of net premiums earned over the trailing thirty six months. For contract and escrow surety bonds, loss and LAE reserves are based on a certain percentage of total net premiums earned.

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 loss 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. We do not currently 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. However, it is possible that we may experience an increase in the frequency for ULI and CPI losses and an increase in the severity for GAP losses as discussed in “Business Outlook-Lender Service Products” above. 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.

As of September 30, 2008, 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 reserves using annual accident year loss development triangles for the following products:

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• ULI –limited liability (“ULIL”)

• ULI – non-limited liability (“ULIN”)

• 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 in 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 EPD, UC and WIP product lines, we prepared estimates of loss and LAE reserves using primarily the expected loss ratio method. The estimated loss ratio is based on historical data and/or loss 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 outstanding case 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 that was inconsistent with our business, average claim paid or average claim reserve that would be inconsistent with the types of risks we insured in the respective periods.

In performing our loss reserve analysis, we select a single loss reserve estimate for each product line that represents management’s “best estimate” based on facts and circumstances then know to us. Prior to the second quarter of 2008, we also calculated high and low estimates for our lender service product lines; however, we no longer perform such high and low estimates as the lender service product lines do not exhibit significant volatility and such additional information is not considered useful to management.

Equity-Based Compensation Expense

The fair value of stock options granted by us are estimated on the date of grant using the Black-Scholes option pricing model (“Black-Scholes model”). The Black-Scholes model utilizes ranges and assumptions such as risk-free rate, expected life, expected volatility and dividend yield. The risk-free rate is based on the United States Treasury strip curve at the time of the grant with a term approximating that of the expected option life. We analyze historical data regarding option exercise behaviors, expirations and cancellations to calculate the expected life of the options granted, which represents the length of time in years that the options granted are expected to be outstanding. Expected volatilities are based on historical volatility over a period of time using the expected term of the option grant and using weekly stock prices of the Company; however, for options granted after February 4, 2005, we exclude the period from February 4, 2005 through January 25, 2006 (the period in which shareholders could not obtain current financial information for the Company and could not rely on the Company’s 2003, 2002 and 2001 financial statements) as we believe that our stock price during that period is not relevant in evaluating expected volatility of the common shares in the future. Dividend yield is based on historical dividends. See Note 6 to the Condensed Consolidated Financial Statements for information concerning our equity-based compensation expense.

Legal Matters

We are involved in various legal proceedings arising in the ordinary course of business. An estimate is made to accrue for a loss contingency relating to any of these legal proceedings if we believe it is probable that a liability was incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. Because of the subjective nature inherent in assessing the outcome of litigation and because of the potential that an adverse outcome in a legal proceeding could have a material impact on our financial condition and/or results of operations, such estimates are considered to be critical accounting estimates. See Note 9 to the Condensed Consolidated Financial Statements for information concerning our commitments and contingencies.

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Guarantee Liabilities

As disclosed in Note 13 to the Condensed Consolidated Financial Statements, we account for guarantees in accordance with FIN 45. We have determined that the undertaking agreements as described in Note 13 are within the scope of FIN 45. Due to the inherent uncertainties of the SEC investigation, actual future payments related to the undertaking agreements may be materially different than the FIN 45 liability as recorded at September 30, 2008. Because of the subjective nature inherent in assessing the estimated future costs associated with the undertaking agreements and because of the potential that our estimated future costs may be materially different than our actual future costs, such estimates are considered to be critical accounting estimates. See “Ongoing SEC Investigation,” “Business Outlook-Expenses” and “Liquidity and Capital Resources” above and Note 13 to the Condensed Consolidated Financial Statements for more information regarding the ongoing SEC investigation.

OFF-BALANCE SHEET ARRANGEMENTS

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 we believe to be material to investors.

Item 4T. 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, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, 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 that occurred during the last fiscal quarter 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.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Highlands Arbitration. See “Overview-Discontinued Bond Program” in Item 2 of Part I above and “Discontinued Bond Program” in Note 8 to the Condensed Consolidated Financial Statements for information concerning the Highlands arbitration.

SEC Investigation. See “Overview-Ongoing SEC Investigation,” “Business Outlook-Expenses” and “Liquidity and Capital Resources” in Item 2 of Part I above and Note 13 to the Condensed Consolidated Financial Statements for information concerning the SEC investigation.

In addition, we are involved in other legal proceedings arising in the ordinary course of business, none of which, we believe, either individually or in the aggregate, are reasonably likely to have a material adverse effect on our financial condition, results of operations or liquidity. These legal proceedings are routine in nature and incidental to our business.

Item 6. Exhibits

Exhibits

10.1*	Amended and Restated Bancinsurance Corporation 2002 Stock Incentive Plan effective as of January 1, 2009.
10.2*	First Amendment to Bancinsurance Corporation 1994 Stock Option Plan effective as of January 1, 2009.
10.3	Commercial Lease Agreement between Ohio Indemnity Company and 250 East Broad Street Properties, LLC, dated August 11, 2008 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 20, 2008 (File No. 0-08738))..
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.

* Filed with this Quarterly Report on Form 10-Q.

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BANCINSURANCE CORPORATION
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BANCINSURANCE CORPORATION (Registrant)
Date: October 31, 2008	By:	/s/ John S. Sokol
		John S. Sokol
		Chairman, Chief Executive Officer and President (Principal Executive Officer)
Date: October 31, 2008	By:	/s/ Matthew C. Nolan
		Matthew C. Nolan
		Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer)

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EX-10.1

Exhibit 10.1

BANCINSURANCE CORPORATION
AMENDED AND RESTATED
2002 STOCK INCENTIVE PLAN
(effective as of [January 1, 2009])

1.00 PURPOSE

This Plan is intended to foster and promote the Company’s long-term financial success and to increase shareholder value by [1] providing Participants an opportunity to acquire an ownership interest or to increase an ownership interest in the Company and [2] enabling the Company to attract and retain the services of outstanding individuals upon whose judgment, interest and dedication the successful conduct of the Company’s business is largely dependent.

2.00 DEFINITIONS

When used in this Plan, the following terms will have the meanings given to them in this section unless another meaning is expressly provided elsewhere in this Plan. When applying these definitions, the form of any term or word will include any of its other forms.

Act. The Securities Exchange Act of 1934, as amended.

Annual Meeting. The annual meeting of the Company’s shareholders.

Annual Retainer. The annual retainer and committee fees paid to each Director for service as a member of the Board and as a member of any Board committees.

Award. Any Incentive Stock Option, Nonqualified Stock Option, Restricted Stock, Stock Appreciation Right, share of Stock issued under Section 7.02[2] and Stock Unit. The aggregate number of shares of Stock with respect to which Options and SARs may be issued to any Participant for any Plan Year may not be larger than 100,000 shares of Stock (adjusted as provided in Section 4.03), including Options and SARs that are cancelled or deemed to have been cancelled under Treas. Reg. §1.62-27(e)(2)(vi)(B) during the Plan Year issued.

Award Agreement. The written agreement between the Company and each Participant that describes the terms and conditions of each Award.

Beneficiary. The individual a Participant designates to receive (or to exercise) any Plan benefits (or rights) that are unpaid (or unexercised) when the Participant dies. A Beneficiary may be designated only by following the procedures described in Section 11.02; neither the Company nor the Committee is required or permitted to infer a Beneficiary from any other source.

Board. The Company’s board of directors.

Code. The Internal Revenue Code of 1986, as in effect on the Effective Date or as amended or superceded after the Effective Date, and any regulations and applicable rulings issued under the Code.

Committee.

[1] In the case of Awards to Directors, the Board; or

[2] In the case of all other Awards, the Board’s compensation committee which also constitutes a “compensation committee” within the meaning of Treas. Reg. §1.162-27(c)(4). The Committee will be comprised of at least three individuals [a] each of whom must be [i] an outside director, as defined in Treas. Reg. §1.162-27(e)(3)(i) and [ii] a “non-employee director” within the meaning of Rule 16b-3 under the Act and [b] none of whom may receive remuneration in any capacity other than as a director, except as permitted under Treas. Reg. §1.162-27(e)(3)(ii).

Company. Bancinsurance Corporation, a corporation organized under the laws of Ohio, and any successor to it.

Director. Each member of the Board or of the board of directors of any Subsidiary who is not an Employee.

Disability. A disability as defined in Code §22(e)(3).

Effective Date. The Plan was originally adopted on June 3, 2002, was amended on May 30, 2007 to increase the number of shares of Stock available for issuance hereunder and is hereby amended and restated effective as of [January 1, 2009]

Employee. Any individual who is a common law employee of the Company or of any Subsidiary. A worker who is classified as other than a common law employee but who is subsequently reclassified as a common law employee of an employer for any reason and on any basis will be treated as a common law employee only from the date of that determination and will not retroactively be reclassified as an Employee for any purpose of this Plan.

Exercise Price. The price at which a Participant may exercise an Award.

Fair Market Value. The value of one share of Stock on the relevant date, determined as follows:

[1] If the shares are traded on an exchange (including the NASDAQ National Market System), the reported “closing price” on the relevant date, assuming it is a trading date; otherwise on the next trading day.

[2] If the shares are traded over-the-counter with no reported closing price, the mean between the lowest bid and the highest asked prices on that quotation system on the relevant date assuming it is a trading day; otherwise on the next trading day; and

[3] If neither [1] nor [2] applies, the value as determined by the Committee in good faith, except with respect to any Award subject to Code §409A, the value shall be determined through the reasonable application of a reasonable valuation method, taking into account all information material to the value of the Company, within the meaning of Code §409A and the Treasury Regulations promulgated thereunder.

2

Freestanding SAR. An SAR that is not associated with an Option and is granted under Section 7.00.

Grant Date. The date an Award is granted.

Incentive Stock Option. Any Option granted under Section 5.00 that meets the conditions imposed under Code §422(B).

Nonqualified Stock Option. Any Option granted under Section 5.00 that is not an Incentive Stock Option.

Option. The right granted under Section 5.00 to purchase a share of Stock at a stated price for a specified period of time. An Option may be either [1] an Incentive Stock Option or [2] a Nonqualified Stock Option.

Participant. Any Employee or Director to whom the Committee grants an Award.

Plan. Bancinsurance Corporation Amended and Restated 2002 Stock Incentive Plan.

Plan Year. The Company’s fiscal year.

Restricted Stock. An Award granted under Section 6.00.

Restriction Period. The period over which the Committee will determine if grantee has met conditions placed on Restricted Stock.

Stock. Common shares issued by the Company.

Stock Appreciation Right (or “SAR”). An Award granted under Section 7.01 that is either a Tandem SAR or a Freestanding SAR.

Stock Unit. A right to receive payment of the Fair Market Value of a share of Stock as provided in Section 7.02.

Subsidiary. Means:

[1] With respect to an Incentive Stock Option, a “subsidiary corporation” as defined in Code §424(f); and

[2] With respect to all other Awards, any corporation, partnership or other form of unincorporated entity of which the Company owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock, if the entity is a corporation, or of the capital or profits interests, if the entity is a partnership or other form of unincorporated entity.

Tandem SAR. An SAR that is associated with an Option and which expires when that Option expires or is exercised, as described in Section 7.01.

Termination of Service. As appropriate, [1] termination of the employee-employer relationship

3

between a Participant and the Company and all Subsidiaries for any reason or [2] cessation of a Director’s service on the Board (and the boards of directors of all Subsidiaries) for any reason; provided, however, that, with respect to any Award subject to Code §409A, such termination or cessation must also constitute a “separation from service” as defined under Treas. Reg. §1.409A-1(h).

3.00 ADMINISTRATION

3.01 Committee Duties. The Committee is granted all powers appropriate and necessary to administer the Plan. Consistent with the Plan’s purpose, the Committee may adopt, amend and rescind rules and regulations relating to the Plan, to the extent appropriate to protect the Company’s interests and has complete discretion to make all other decisions necessary or advisable for the administration and interpretation of the Plan. Any action by the Committee will be final, binding and conclusive for all purposes and upon all Participants.

3.02 Delegation of Duties. In its sole discretion, the Committee may delegate to any individual or entity (including Employees) that it deems appropriate any of its duties other than those described in Section 3.03[1].

3.03 Participation.

[1] Consistent with the terms of the Plan, the Committee will:

[a] Decide which Employees and Directors may become Participants;

[b] Decide which Participants will be granted Awards;

[c] Identify the type of Awards to be granted to each Participant;

[d] Identify the terms and conditions imposed on any Awards granted;

[e] Identify the procedures through which an Award may be exercised;

[f] Identify the circumstances under which the Company may cancel an Award or reacquire any Award or shares of Stock acquired though the Plan; and

[g] Impose any other terms and conditions the Committee believes are appropriate and necessary to implement the purpose of this Plan.

[2] The Committee may establish different terms and conditions:

[a] For each type of Award;

[b] For Participants receiving the same type of Award; and

[c] For the same Participant for each Award the Participant receives, whether or not those Awards are granted at different times.

4

[3] The Committee will prepare and deliver an Award Agreement to each affected Participant with respect to each Award. The Award Agreement will describe:

[a] The type of Award and when and how it may be exercised;

[b] The effect of exercising the Award;

[c] Any Exercise Price associated with the Award;

[d] Any conditions that must be met before the Award may be exercised;

[e] Any objective restrictions placed on Restricted Stock and any conditions that must be met before those restrictions will be released (e.g., conditions related to Company-wide, divisional or individual performance or growth in earnings per share, revenues or profits) and the related Restriction Periods. Performance related restrictions must be established before 25 percent of the related Restriction Period has expired. In its sole discretion, the Committee may adjust any performance related conditions with respect to any Participant who is transferred during a Restriction Period to a materially different position (or whose job duties change otherwise) to ensure that those conditions are appropriate to his or her new position;

[f] When and how the Award may be exercised; and

[g] Any other applicable terms and conditions affecting the Award.

3.04 Conditions of Participation.

Each Participant receiving an Award agrees:

[1] To sign an Award Agreement; and

[2] To be bound by the terms of the Award Agreement and the Plan.

3.05 Limits on Exercisability and Vesting. Regardless of any other provision of this Section 3.00 or the Plan, all unexercised or unvested Awards granted to a Participant will be forfeited if that Participant, before his or her Termination of Service or after Termination of Service but while any Award remains exercisable or outstanding:

[1] Without the Committee’s written consent, which may be withheld for any reason or for no reason, serves (or agrees to serve) as an officer, director or employee of any proprietorship, partnership or corporation or becomes the owner of a business or a member of a partnership that competes with any portion of the Company’s (or a Subsidiary’s) business or renders any service (including business consulting) to entities that compete with any portion of the Company’s (or a Subsidiary’s) business;

[2] Refuses or fails to consult with, supply information to, or otherwise cooperate with, the Company after having been requested to do so; or

5

[3] Deliberately engages in any action that the Committee concludes has caused substantial harm to the interests of the Company or any Subsidiary.

4.00 STOCK SUBJECT TO PLAN

4.01 Number of Shares.

     [1] Subject to Section 4.03, the number of shares of Stock subject to Awards under the Plan is 950,000 (all of which may be subject to Incentive Stock Options).

     [2] The shares of Stock to be delivered under the Plan may consist, in whole or in part, of treasury Stock or authorized but unissued Stock not reserved for any other purpose.

4.02 Cancelled, Terminated or Forfeited Awards. Any Award (other than an Award granted under Section 6.00) that, for any reason, is cancelled, terminated or otherwise settled without the issuance of any Stock or cash may again be granted under the Plan.

4.03 Adjustment in Capitalization. If, after the Effective Date, there is a Stock dividend or Stock split, recapitalization (including payment of an extraordinary dividend), merger, consolidation, combination, spin-off, distribution of assets to shareholders, exchange of shares or other similar corporate change affecting Stock, the Committee will appropriately adjust the number of Awards that may be issued to a Participant in any Plan Year, the aggregate number of shares of Stock available for Awards under Section 4.01 or subject to outstanding Awards (as well as any share-based limits imposed under this Plan), the respective prices and/or limitations applicable to outstanding Awards and any other affected factor, limit or term applying to Awards. Notwithstanding anything to the contrary in this Section 4.03, any adjustment to an Option or SAR shall be made in accordance with the requirements of Code §§409A and 424, to the extent applicable.

5.00 OPTIONS

5.01 Grant of Options. The Committee may grant Options to Participants at any time during the term of this Plan. Options issued to Employees may be either [1] Incentive Stock Options or [2] Nonqualified Stock Options. However, Options issued to Directors may only be Nonqualified Stock Options.

5.02 Option Price. Each Option will bear an Exercise Price that is not less than the Fair Market Value of a share of Stock on the Grant Date. However, each Incentive Stock Option granted to a Participant who owns (as defined in Code § 424(d)) stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of its Subsidiaries will bear an Exercise Price that is at least 110 percent of the Fair Market Value of a share of Stock on the Grant Date.

5.03 Exercise of Options. Options awarded to a Participant under Section 5.01 may be exercised at the times and subject to the restrictions and conditions (including a vesting schedule) that the Committee specifies in the Award Agreement. However:

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[1] An Option may not be exercised for a fraction of a share, although this limitation will not be applied to prevent a Participant from acquiring the full number of shares of Stock for which Options are then exercisable;

[2] The Committee may prohibit a Participant from exercising Options for fewer than the minimum number of shares specified by the Committee in the Award Agreement but only if this prohibition does not prevent a Participant from acquiring the full number of shares of Stock for which Options are then exercisable; and

[3] Subject to Section 5.04[4], unless the Committee specifies otherwise in the Award Agreement, no Option may be exercised more than 10 years after it is granted.

5.04 Incentive Stock Options. Notwithstanding anything in the Plan to the contrary:

[1] No provision of this Plan relating to Incentive Stock Options will be interpreted, amended or altered, nor will any discretion or authority granted under the Plan be exercised, in a manner that is inconsistent with Code §422 or, without the consent of any affected Participant, to cause any Incentive Stock Option to fail to qualify for the federal income tax treatment afforded under Code §421;

[2] The aggregate Fair Market Value of the Stock (determined as of the Grant Date) with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under all option plans of the Company and all Subsidiaries will not exceed $100,000 [or the amount specified in Code §422(d)];

[3] No Incentive Stock Option may be granted to any individual who is not an Employee; and

[4] No Incentive Stock Option may be exercised more than 10 years after it is granted (five years if the Employee owns (as defined in Code §424(d)) stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of its Subsidiaries on the Grant Date).

5.05 Payment for Options. The Committee will develop procedures through which a Participant may pay an Option’s Exercise Price, including tendering shares of Stock the Participant already has owned for at least six months, either by actual delivery of the previously owned shares of Stock or by attestation, valued at its Fair Market Value on the exercise date, as partial or full payment of the Exercise Price.

5.06 Restrictions on Transferability. The Committee may impose restrictions on any shares of Stock acquired though an Option, including restrictions related to applicable federal securities laws, the requirements of any national securities exchange or system on which Stock are then listed or traded or any applicable blue sky or state securities laws.

6.00 RESTRICTED STOCK

6.01 Restricted Stock Grants. The Committee may grant shares of Restricted Stock to Participants at any time during the term of this Plan.

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6.02 Transferability. Restricted Stock may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated until the end of the applicable Restriction Period. In the Committee’s sole discretion, all shares of Restricted Stock will:

[1] Be held by the Company as escrow agent during the Restriction Period, along with any dividends and other distributions made with respect to escrowed Restricted Stock; or

[2] Be issued to the Participant in the form of certificates bearing a legend describing the restrictions imposed on the shares.

6.03 Forfeitures; Removal of Restrictions. Restricted Stock will be:

[1] Forfeited, if all restrictions have not been met at the end of the Restriction Period, and again become available under the Plan; or

[2] Released from escrow and distributed (or any restrictions described in the certificate removed) as soon as practicable after the last day of the Restriction Period, if all restrictions have then been met.

6.04 Rights Associated with Restricted Stock. During the Restriction Period, and unless the Award Agreement provides otherwise, each Participant to whom Restricted Stock has been issued as described in Section 6.02[2]:

[1] May exercise full voting rights associated with his or her Restricted Stock; and

[2] Subject to Section 6.02[1], will be entitled to receive all dividends and other distributions paid with respect to his or her Restricted Stock. If any dividends or other distributions are paid in shares of Stock, those shares will be subject to the same restrictions on transferability and forfeitability as the shares of Restricted Stock with respect to which they were issued. Also, any dividend or other distribution paid with respect to Restricted Stock will be subject to a Restriction Period that is equal to the remaining Restriction Period imposed on the shares of Restricted Stock with respect to which the dividend or distribution is paid and paid or distributed in accordance with Section 6.03[2], but in no event later than sixty (60) days following the end of the Restriction Period.

7.00 STOCK APPRECIATION RIGHTS AND STOCK UNITS

7.01 Stock Appreciation Rights. The Committee may grant Freestanding SARs and Tandem SARs (or a combination of each) to Participants at any time during the term of this Plan.

[1] The Exercise Price of a SAR specified in the Award Agreement will: [a] In the case of a Freestanding SAR never be less than 100 percent of the Fair Market Value of a share of Stock on the Grant Date; and [b] in the case of a Tandem SAR, may never be less than the Exercise Price of the related Option.

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[2] Tandem SARs may be exercised with respect to all or part of the shares of Stock subject to the related Option by surrendering the right to exercise the equivalent portion of the related Option. However:

[a] A Tandem SAR may be exercised only with respect to the shares of Stock for which its related Option is then exercisable;

[b] A Tandem SAR will expire no later than the date the related Option expires;

[c] The value of the payout with respect to a Tandem SAR related to an Option will not be more than 100 percent of the difference between the Exercise Price of the related Option and the Fair Market Value of the shares of Stock subject to the related Option at the time the Tandem SAR is exercised; and

[d] A Tandem SAR related to an Option may be exercised only if the Fair Market Value of the shares of Stock subject to the related Option is greater than the Option’s Exercise Price.

[3] Freestanding SARs will be exercisable subject to the terms specified in the Award Agreement.

[4] A Participant exercising an SAR will receive an amount equal to:

[a] The difference between the Fair Market Value of a share of Stock on the exercise date and the Exercise Price; multiplied by

[b] The number of shares of Stock with respect to which the SAR is exercised.

At the discretion of the Committee, this amount may be paid in cash, shares of Stock or any combination of both.

7.02 Stock Units.

[1] Each Director may elect to receive all or a portion of his or her Annual Retainer in Stock Units as follows:

[a] Any election made pursuant to Section 7.02[1] shall be made no later than December 31 of the calendar year immediately preceding the calendar year during which the Director will perform the services for which the grant will be made. After the beginning of a calendar year, a Director will not be permitted to change, terminate or revoke the Director’s election to receive all or a portion of his or her Annual Retainer in Stock Units for such calendar year.

[b] Each Director may make an election in accordance with Section 7.02[1][a] by returning to the Committee an Annual Retainer Deferral Form specifying:

[i] The portion (stated in 25 percent increments) of the Annual Retainer to be converted to Stock Units;

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[ii] The date Stock Units are to be settled;

[iii] Whether Stock Units are to be settled in cash or shares of Stock; and

[iv] The period (which may not be longer than 10 years) over which the value of Stock Units is to be distributed.

If a completed Annual Retainer Deferral Form is not timely received, the Director’s Annual Retainer will be paid consistent with the Company’s regular procedures and policies for paying Annual Retainers. Each Director that has effectively elected to receive Stock Units in lieu of all or a portion of his or her Annual Retainer will receive a number of Stock Units (including fractional Stock Units) equal to the portion of the Annual Retainer to be received as Stock Units divided by the Fair Market Value on the date the Annual Retainer would have been paid had that election not been made.

[2] All Stock Units will be settled in cash or shares of Stock as soon as practicable after the later of:

[a] The date the Director has a Termination of Service; or

[b] The date the Director specifies on an Annual Retainer Deferral Form.

If Stock Units are to be settled in cash, the amount distributed will be calculated by multiplying the number of Stock Units to be settled in cash by the Fair Market Value as of the most recent trading date before the settlement date. If a Director dies before all of his or her Stock Units have been settled, the value of any unpaid Stock Units will be paid in a lump sum in cash to his or her Beneficiary.

If Stock Units are to be settled in Stock, the number of shares to be distributed will equal the number of Stock Units, adjusted, if appropriate, under Section 4.03 and rounded down to the nearest whole share.

[3] Once filed, elections made on an Annual Retainer Deferral Form will remain in effect until changed. Any change to an earlier election must be made by completing and returning another completed Annual Retainer Deferral Form to the Committee in accordance with the following:

[a] A Director may change the time and form in which Stock Units are to be settled by completing and returning a new Annual Retainer Deferral Form to the Committee; provided that such change is irrevocable once made (unless changed again pursuant to this Section 7.02[3]) and meets the following requirements: [i] the change may not take effect until at least 12 months after the date on which such change is made, [ii] the settlement date of the Stock Units must be deferred (other than a distribution upon death) for a period of not less than five years from the date the Stock Units were scheduled to be settled, and [iii] if the change relates to a date specified for distribution pursuant to Section 7.02[2][b], the change must be made at least 12 months before the date specified by the Director.

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[b] Once settlement of Stock Units has begun, no further changes to the Director’s distribution election may be made.

[c] For purposes of this Section 7.02[3], the right to a series of installment payments shall be treated as the right to a series of separate payments.

8.00 TERMINATION OF SERVICE/BUY OUT

8.01 Exercise Period. Except as provided in Section 8.02 and unless otherwise specified in the Award Agreement (other than an Award Agreement or portion of an Award Agreement relating to an Incentive Stock Option), all Awards that are outstanding (whether or not then exercisable) when a Participant Terminates Service will expire on the earlier of [1] the date the Award expires under the terms of the Award Agreement, [2] the date the Participant Terminates Service for any reason other than death or Disability or [3] 12 months after the Participant Terminates Service because of death or Disability.

8.02 Buy Out of Awards. At any time, the Committee, in its sole discretion and without the consent of the Participant, may cancel any or all outstanding Awards, other than an Award that is subject to Code §409A, held by that Participant by providing to that Participant written notice (“Buy Out Notice”) of its intention to exercise the rights reserved in this section. If a Buy Out Notice is given, the Company also will pay to each affected Participant the difference between [1] the aggregate Fair Market Value on the date of cancellation of the Stock underlying each Award (or portion of an Award) to be cancelled and [2] the aggregate Exercise Price associated with each cancelled Award. However, unless otherwise specified in the Award Agreement, no payment will be made with respect to any Awards that are not exercisable when cancelled under this section. The Company will complete any buy out made under this section as soon as administratively possible after the date of the Buy Out Notice. At the Committee’s option, payment of the buy out amount may be made in cash, in whole shares of Stock or partly in cash and partly in shares of Stock. The number of whole shares of Stock, if any, included in the buy out amount will be determined by dividing the amount of the payment to be made in shares of Stock by the Fair Market Value as of the date of cancellation.

9.00 MERGER, CONSOLIDATION OR SIMILAR EVENT

If [1] the Company enters into a plan or agreement that results in the merger or consolidation of the Company or reclassification of Stock or the exchange of Stock for the securities of another entity (other than a Subsidiary) that has acquired the Company’s assets or which is in control [as defined in Code §368(c)] of an entity that has acquired the Company’s assets and [2] the terms of that plan or agreement are binding on all holders of Stock (except to the extent that dissenting shareholders are entitled to relief under applicable law), then [3] Awards will become fully exercisable, all restrictions will lapse and each affected Participant will receive, upon payment of the Exercise Price, if applicable, securities or cash, or both, equal to those the Participant would have been entitled to receive under the plan or agreement if the Participant had already exercised the Award; provided, however, that any Award subject to Code §409A will not be settled under this Section 9.00 unless the Change in Control also constitutes a “change in control event” under Code §409A and the Treasury Regulations promulgated thereunder.

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10.00 AMENDMENT, MODIFICATION AND TERMINATION OF PLAN

The Board or the Committee may terminate, suspend or amend the Plan at any time without shareholder approval except to the extent that shareholder approval is required to satisfy applicable requirements imposed by [1] Rule 16b-3 under the Act, or any successor rule or regulation, [2] applicable requirements of the Code or [3] any securities exchange, market or other quotation system on or through which the Company’s securities are listed or traded. Also, no Plan amendment may [4] result in the loss of a Committee member’s status as a “non-employee director” as defined in Rule 16b-3 under the Act, or any successor rule or regulation, with respect to any employee benefit plan of the Company, [5] cause the Plan to fail to meet requirements imposed by Rule 16b-3 or [6] without the consent of the affected Participant, adversely affect any Award issued before the amendment, modification or termination. However, nothing in this section will restrict the Committee’s right to exercise the discretion retained in Section 8.02.

11.00 MISCELLANEOUS

11.01 Assignability. Except as provided in this section, an Award may not be transferred except by will or applicable laws of descent and distribution and, during the Participant’s lifetime, may be exercised only by the Participant or the Participant’s guardian or legal representative. However, with the Committee’s written consent (which may be withheld for any reason or for no reason), a Participant or a specified group of Participants may transfer Awards (other than Incentive Stock Options) to a revocable inter vivos trust, of which the Participant is the settlor, or may transfer Awards (other than Incentive Stock Options) to any member of the Participant’s immediate family, any trust, whether revocable or irrevocable, established solely for the benefit of the Participant’s immediate family, or any partnership or limited liability company whose only partners or members are members of the Participant’s immediate family (“Permissible Transferees”). Any Award transferred to a Permissible Transferee will continue to be subject to all of the terms and conditions that applied to the Award before the transfer and to any other rules prescribed by the Committee.

A Permissible Transferee may subsequently transfer an Award but only to another Permissible Transferee and only after complying with the terms of this section as if the Permissible Transferee was a Participant.

11.02 Beneficiary Designation. Each Participant may name a Beneficiary or Beneficiaries (who may be named contingently or successively) to receive or to exercise any vested Award that is unpaid or unexercised at the Participant’s death. Each designation made will revoke all earlier designations made by the same Participant, must be made on a form prescribed by the Committee and will be effective only when filed in writing with the Committee. If a Participant has not made an effective Beneficiary designation, the deceased Participant’s Beneficiary will be his or her surviving spouse or, if there is no surviving spouse, the deceased Participant’s estate.

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11.03 No Guarantee of Employment or Participation. Nothing in the Plan may be construed as:

[1] Interfering with or limiting the right of the Company or any Subsidiary to terminate any Participant’s employment at any time;

[2] Conferring on any Participant any right to continue as an Employee or Director;

[3] Guaranteeing that any Employee will be selected to be a Participant; or

[4] Guaranteeing that any Participant will receive any future Awards.

11.04 Tax Withholding. The Company will withhold from other amounts owed to a Participant, or require the Participant to remit to the Company, an amount sufficient to satisfy federal, state and local withholding tax requirements on any Award, exercise or cancellation of an Award or purchase of shares of Stock. If these amounts are not to be withheld from other payments due to the Participant, the Company will defer payment of cash or issuance of shares of Stock until the earlier of:

[1] Thirty days after the settlement date; or

[2] The date the Participant remits the required amount.

If the Participant has not remitted the required amount within 30 days after the settlement date, the Company will permanently withhold from the value of the Awards to be distributed the minimum amount required to be withheld to comply with applicable federal, state and local income, wage and employment taxes and distribute the balance to the Participant.

In its discretion, the Committee may allow a Participant to elect, subject to conditions the Committee establishes, to reimburse the Company for this withholding obligation through one or more of the following methods:

[3] By having shares of Stock otherwise issuable under the Plan withheld by the Company (but only to the extent of the minimum amount that must be withheld to comply with applicable state, federal and local income, employment and wage tax laws);

[4] By delivering, including by attestation, to the Company previously acquired shares of Stock that the Participant has owned for at least six months;

[5] By remitting cash to the Company; or

[6] By remitting a personal check immediately payable to the Company.

11.05 Indemnification. Each individual who is or was a member of the Committee or of the Board will be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit or proceeding to which he or she may be made a party or in which he or she may be involved by reason of any action taken or failure to

13

take action under the Plan as a Committee member and against and from any and all amounts paid, with the Company’s approval, by him or her in settlement of any matter related to or arising from the Plan as a Committee member; or paid by him or her in satisfaction of any judgment in any action, suit or proceeding relating to or arising from the Plan against him or her as a Committee member, but only if he or she gives the Company an opportunity, at its own expense, to handle and defend the matter before he or she undertakes to handle and defend it in his or her own behalf. The right of indemnification described in this section is not exclusive and is independent of any other rights of indemnification to which the individual may be entitled under the Company’s organizational documents, by contract, as a matter of law, or otherwise.

11.06 No Limitation on Compensation. Nothing in the Plan is to be construed to limit the right of the Company to establish other plans or to pay compensation to its employees or Directors in cash or property, in a manner not expressly contemplated by the Plan.

11.07 Requirements of Law. The grant of Awards and the issuance of shares of Stock will be subject to all applicable laws, rules and regulations and to all required approvals of any governmental agencies or national securities exchange, market or other quotation system. Also, no shares of Stock will be issued under the Plan unless the Company is satisfied that the issuance of those shares of Stock will comply with applicable federal and state securities laws. To the extent that such applicable federal and state securities laws require a delay in the issuance of shares of Stock pursuant to this Plan, such shares of Stock shall be issued on the earliest date that the Company reasonably believes that such issuance shall comply the applicable federal and state securities laws. Certificates for shares of Stock delivered under the Plan may be subject to any stock transfer orders and other restrictions that the Committee believes to be advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange or other recognized market or quotation system upon which the Stock is then listed or traded or any other applicable federal or state securities law. The Committee may cause a legend or legends to be placed on any certificates issued under the Plan to make appropriate reference to restrictions within the scope of this section.

11.08 Term of Plan. The Plan was effective on June 3, 2002. Subject to Section 10.00, the Plan will continue until June 3, 2012.

11.09 Governing Law. The Plan and all related agreements will be construed in accordance with and governed by the laws (other than laws governing conflicts of laws) of the United States and of the State of Ohio.

11.10 Section 409A.

[1] It is intended that, with respect to any Award subject to Code §409A, the Plan comply with Code §409A and the Treasury Regulations promulgated thereunder (and any subsequent notices or guidance issued by the Internal Revenue Service), and the Plan shall be interpreted, administered and operated accordingly. Nothing herein shall be construed as an entitlement to or guarantee of any particular tax treatment to a Participant.

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[2] The Company may accelerate the time or schedule of a payment to a Participant at any time the Plan fails to meet the requirements of Code §409A and the Treasury Regulations promulgated thereunder. Such payment may not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Code §409A and the Treasury Regulations promulgated thereunder.

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EX-10.2

Exhibit 10.2

FIRST AMENDMENT TO
BANCINSURANCE CORPORATION
1994 STOCK OPTION PLAN

     WHEREAS, Bancinsurance Corporation (the “Company”) maintains the Bancinsurance Corporation 1994 Stock Option Plan (the “Plan”); and

     WHEREAS, the Plan permitted the Company to grant both incentive stock options and nonstatutory options (collectively, the “Awards”); and

     WHEREAS, the Plan became effective on June 14, 1994 and terminated on June 14, 2004; and

     WHEREAS, the last date that Awards may have been granted under the Plan was June 14, 2004 and no further Awards may be granted under the terms of the Plan; and

     WHEREAS, outstanding Awards granted before the Plan’s termination continue to be effective and are governed by the Plan until they are exercised or expire by their terms, in each case as provided by the Plan and their respective award agreements; and

     WHEREAS, Section 409A (“Section 409A”) was added to the Internal Revenue Code of 1986, as amended effective January 1, 2005 and applies to deferred compensation plans, including the Plan; and

     WHEREAS, final regulations issued under Section 409A become effective January 1, 2009; and

     WHEREAS, the Company has concluded that certain outstanding Awards granted under the Plan that were earned and vested as of December 31, 2004 are exempt from Section 409A as “grandfathered” Awards; and

     WHEREAS, the Company desires to amend the Plan so that any outstanding Awards that are not grandfathered Awards comply with Section 409A;

     NOW, THEREFORE, effective as of [January 1, 2009], the Company hereby amends the Plan with respect to any Award outstanding under the Plan that is not a grandfathered Award as follows:

     1. Paragraph 10 of the Plan is hereby amended by adding the following sentence to the end thereof:

“With respect to Options that are earned and/or become vested after December 31, 2004, any Tax Offset Payments granted after December 31, 2004 with respect to such Award shall be paid to the Optionee by the end of the calendar year next following the calendar year in which the Optionee first remits the federal, state,

local or foreign taxes related to the exercise of an NSO or certain disposition of Shares acquired by an ISO.”

     3. Paragraph 13(a) of the Plan is hereby amended by adding the following sentence to the end thereof:

“Notwithstanding anything to the contrary in this paragraph 13(a), an adjustment to an Option shall be made in accordance with the requirements of sections 409A and 424 of the Code, to the extent applicable.”

     4. The first sentence of Paragraph 19 of the Plan is hereby deleted in its entirety and replaced with the following:

“The Plan, the grant and exercise of Options thereunder, and the obligation of the Company to sell and deliver the Shares under such Options, will be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required; provided, however, that to the extent any Shares cannot be delivered pursuant to this Plan due to the application of such applicable federal and state laws, rules and regulations, such Shares will be issued on the earliest date at which the Company reasonably anticipates that their issuance will be in compliance with such laws, rules and regulations.”

     IN WITNESS WHEREOF, this Amendment is adopted effective as of the date set forth above.

BANCINSURANCE CORPORATION

By: /s/ Matthew C. Nolan Print Name: Matthew C. Nolan

Title: Vice President, Chief Financial Officer,

Treasurer and Secretary

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EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John S. Sokol, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Bancinsurance Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules l3a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 31, 2008	/s/John S. Sokol
	John S. Sokol
	Chairman, Chief Executive Officer
	and President
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Matthew C. Nolan, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Bancinsurance Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules l3a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 31, 2008	/s/ Matthew C. Nolan
	Matthew C. Nolan
	Vice President, Chief Financial Officer,
	Treasurer and Secretary
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Bancinsurance Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, John S. Sokol, Chairman, Chief Executive Officer and President of the Company, and Matthew C. Nolan, Vice President, Chief Financial Officer, Treasurer and Secretary of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John S. Sokol John S. Sokol

Chairman, Chief Executive Officer

and President

(Principal Executive Officer)

October 31, 2008

/s/ Matthew C. Nolan

Matthew C. Nolan
Vice President, Chief Financial Officer,

Treasurer and Secretary

(Principal Financial Officer)

October 31, 2008