Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2010


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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o 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.


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

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 July 16, 2010 was 5,215,706.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Statements of Income
(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Revenues:
Net premiums earned	$	12,741,198		$	11,543,292		$	23,311,051		$	21,392,827
Net investment income		1,047,259			956,057			2,046,720			1,915,146
Net realized (losses) gains on investments		(261,024	)		117,360			(251,822	)		264,166
Other-than-temporary impairments on investments		—			(197,979	)		—			(2,767,189	)
Management fees		—			116,305			—			279,654
Other income		2,333			3,676			4,267			11,663

Total revenues		13,529,766			12,538,711			25,110,216			21,096,267

Expenses:
Losses and loss adjustment expenses		3,840,234			6,113,032			8,898,335			10,551,656
Policy acquisition costs		4,525,160			2,733,251			6,286,668			5,483,341
Other operating expenses		2,271,765			1,950,382			4,194,618			4,098,299
Interest expense		167,827			218,832			333,013			457,219

Total expenses		10,804,986			11,015,497			19,712,634			20,590,515

Income before federal income taxes		2,724,780			1,523,214			5,397,582			505,752

Federal income tax expense		816,395			77,753			1,511,323			31,812


Net income	$	1,908,385		$	1,445,461		$	3,886,259		$	473,940


Net income per common share:
Basic	$	.37		$	.28		$	.75		$	.09

Diluted	$	.36		$	.28		$	.74		$	.09

See accompanying notes to condensed consolidated financial statements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(Unaudited)


	June 30,		December 31,
	2010		2009

Assets
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value $5,195,053 at June 30, 2010 and $5,294,900 at December 31, 2009)	$	5,091,944	$	5,181,905
Available for sale:
Fixed maturities, at fair value (amortized cost $60,437,609 at June 30, 2010 and $71,013,020 at December 31, 2009)		61,977,175		71,573,049
Equity securities, at fair value (cost $6,898,484 at June 30, 2010 and $5,774,207 at December 31, 2009)		8,876,735		7,251,637
Short-term investments, at cost which approximates fair value		9,800,497		342,002
Restricted short-term investments, at cost which approximates fair value		3,168,749		3,410,069
Other invested assets		1,715,000		715,000


Total investments		90,630,100		88,473,662


Cash		10,034,338		9,551,372
Premiums receivable		7,639,173		4,614,787
Reinsurance recoverable		7,194,169		6,821,490
Prepaid reinsurance premiums		49,560,772		41,949,098
Deferred policy acquisition costs		4,931,300		3,723,961
Loans to affiliates		1,184,695		1,165,905
Accrued investment income		849,825		1,085,096
Net deferred tax asset		1,591,196		2,322,885
Other assets		2,307,995		1,071,642


Total assets	$	175,923,563	$	160,779,898

See accompanying notes to condensed consolidated financial statements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets, Continued
(Unaudited)


	June 30,			December 31,
	2010			2009

Liabilities and Shareholders’ Equity
Reserve for unpaid losses and loss adjustment expenses	$	14,661,088		$	15,793,241
Discontinued bond program reserve for unpaid losses and loss adjustment expenses		—			4,450,000
Unearned premiums		73,634,839			62,185,040
Ceded reinsurance premiums payable		4,311,386			3,362,762
Experience rating adjustments payable		739,865			1,025,137
Retrospective premium adjustments payable		1,202,126			958,883
Funds held under reinsurance treaties		768,225			784,622
Funds held for account of others		3,168,749			3,410,069
Contract funds on deposit		3,343,702			2,062,992
Taxes, licenses and fees payable		227,541			294,821
Current federal income tax payable		488,051			140,183
Commissions payable		2,878,597			2,176,797
Other liabilities		1,465,019			1,298,632
Bank line of credit		4,000,000			3,000,000
Trust preferred debt issued to affiliates		15,465,000			15,465,000


Total liabilities		126,354,188			116,408,179


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 June 30, 2010 and December 31, 2009, 5,215,706 shares outstanding at June 30, 2010 and 5,205,706 shares outstanding at December 31, 2009		1,794,141			1,794,141
Additional paid-in capital		1,859,098			1,574,340
Accumulated other comprehensive income		2,321,759			1,344,720
Retained earnings		48,324,835			44,438,576

		54,299,833			49,151,777
Less: Treasury shares, at cost (954,635 common shares at June 30, 2010 and 964,635 common shares at December 31, 2009)		(4,730,458	)		(4,780,058	)


Total shareholders’ equity		49,569,375			44,371,719


Total liabilities and shareholders’ equity	$	175,923,563		$	160,779,898

See accompanying notes to condensed consolidated financial statements.

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, 2008		—		—	$	1,794,141	$	1,638,503		$	(5,346,647	)	$	41,972,699	$	(5,398,315	)	$	34,660,381

Comprehensive income:
Net income		—		—		—		—			—			473,940		—			473,940
Unrealized gains, net of tax and reclassification adjustment		—		—		—		—			3,942,523			—		—			3,942,523

Total comprehensive income																			4,416,463

Equity-based compensation expense		—		—		—		227,857			—			—		—			227,857
Tax benefit related to vesting of restricted stock		—		—		—		21,859			—			—		—			21,859

Balance at June 30, 2009		—		—	$	1,794,141	$	1,888,219		$	(1,404,124	)	$	42,446,639	$	(5,398,315	)	$	39,326,560


Balance at December 31, 2009		—		—	$	1,794,141	$	1,574,340		$	1,344,720		$	44,438,576	$	(4,780,058	)	$	44,371,719

Comprehensive income:
Net income		—		—		—		—			—			3,886,259		—			3,886,259
Unrealized gains, net of tax and reclassification adjustment		—		—		—		—			977,039			—		—			977,039

Total comprehensive income																			4,863,298

Equity-based compensation expense		—		—		—		255,471			—			—		—			255,471
10,000 shares issued in connection with the exercise of stock options		—		—		—		(8,970	)		—			—		49,600			40,630
Tax benefit relating to vesting of restricted stock		—		—		—		38,257			—			—		—			38,257

Balance at June 30, 2010		—		—	$	1,794,141	$	1,859,098		$	2,321,759		$	48,324,835	$	(4,730,458	)	$	49,569,375

See accompanying notes to condensed consolidated financial statements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)


	Six Months Ended June 30,
	2010			2009
Cash flows from operating activities:
Net income	$	3,886,259		$	473,940
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized losses (gains) on investments		251,822			(264,166	)
Other-than-temporary impairments on investments		—			2,767,189
Depreciation and amortization		148,214			288,655
Equity-based compensation expense		255,471			227,857
Deferred federal income tax expense (benefit)		228,366			(862,125	)
Change in assets and liabilities:
Premiums receivable		(3,024,386	)		(2,002,205	)
Reinsurance recoverable		(372,679	)		(1,429,990	)
Prepaid reinsurance premiums		(7,611,674	)		(2,980,181	)
Deferred policy acquisition costs		(1,207,339	)		(236,267	)
Other assets, net		251,232			27,200
Reserve for unpaid losses and loss adjustment expenses		(1,132,153	)		(444,851	)
Discontinued bond program reserve for unpaid losses and loss adjustment expenses		(4,450,000	)		—
Unearned premiums		11,449,799			3,417,192
Ceded reinsurance premiums payable		948,624			716,825
Experience rating adjustments payable		(285,272	)		496,253
Retrospective premium adjustments payable		243,243			164,032
Funds held under reinsurance treaties		(16,397	)		110,931
Funds held for account of others		(241,320	)		(183,587	)
Contract funds on deposit		1,280,710			377,808
Taxes, licenses and fees payable		(67,280	)		(267,649	)
Commissions payable		701,800			654,194
Other liabilities, net		514,255			860,506

Net cash provided by operating activities		1,751,295			1,911,561

Cash flows from investing activities:
Proceeds from held to maturity fixed maturities due to redemption or maturity		1,790,000			705,000
Proceeds from available for sale fixed maturities sold, redeemed or matured		11,655,902			3,398,999
Proceeds from available for sale equity securities sold		2,363,891			8,039,989
Cost of held to maturity fixed maturities purchased		(1,836,009	)		(741,888	)
Cost of available for sale fixed maturities purchased		(2,119,868	)		(8,673,749	)
Cost of available for sale equity securities purchased		(3,914,622	)		(7,857,397	)
Net change in short-term investments		(9,458,495	)		2,435,445
Net change in restricted short-term investments		241,320			183,587
Cost of other invested assets purchased		(1,000,000	)		—
Purchase of land, property and leasehold improvements		(31,078	)		(185,198	)

Net cash used in investing activities		(2,308,959	)		(2,695,212	)

Cash flows from financing activities:
Proceeds from stock options exercised		40,630			—
Proceeds from bank line of credit		8,000,000			—
Payments on bank line of credit		(7,000,000	)		(2,500,000	)

Net cash provided by (used in) financing activities		1,040,630			(2,500,000	)

Net increase (decrease) in cash		482,966			(3,283,651	)
Cash at beginning of period		9,551,372			5,499,847

Cash at end of period	$	10,034,338		$	2,216,196


Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	342,257		$	468,072
Federal income taxes	$	896,532		$	700,000

See accompanying notes to condensed consolidated financial statements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 June 30, 2010, the condensed consolidated statements of income for the three and six months ended June 30, 2010 and 2009, the condensed consolidated statements of shareholders’ equity for the six months ended June 30, 2010 and 2009 and the condensed consolidated statements of cash flows for the six months ended June 30, 2010 and 2009 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 June 30, 2010 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, 2009. The results of operations for the periods ended June 30, 2010 are not necessarily indicative of the results of operations for the full 2010 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 2010 presentation.

Recently Issued Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued two new FASB statements: (1) SFAS No. 166 (Codification reference ASC 860), “Accounting for Transfers of Financial Assets,” and (2) SFAS No. 167 (Codification reference ASC 810), “Amendments to FASB Interpretation No. 46(R).” These FASB statements establish new criteria governing whether transfers of financial assets are accounted for as sales and are expected to result in more variable interest entities being consolidated. These FASB statements are effective for annual periods beginning after November 15, 2009. The Company adopted these FASB statements effective January 1, 2010, which did not have a material impact on the Company’s condensed consolidated financial statements.

In January 2010, the FASB released a reworked version of ASC subtopic 820-10 (formerly SFAS No. 157). The amended rule requires companies to make separate disclosures for any significant transfers made in or out of Levels 1 and 2 of the fair value hierarchy and describe the reasons for making the transfers. The amended rule also states that companies can no longer lump together information about swings in Level 3 fair-value measurements associated with purchases, sales, issuances and settlements of financial instruments. The amended rule also states that companies should provide disclosures about the valuation techniques and inputs used to measure recurring and nonrecurring items that fall into either the Level 2 or Level 3 category. The amended rule is effective for periods beginning after December 15, 2009, with one exception: the provisions about disclosure of Level 3 measurement changes tied to the purchase, sales, issuances and settlements of financial instruments will go into effect for fiscal years beginning after December 15, 2010. The adoption of the amended rule did not have a material impact on the Company’s condensed consolidated financial statements.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Investments

The amortized cost, gross unrealized gains and losses and estimated fair value of investments in held to maturity and available for sale securities at June 30, 2010 and December 31, 2009 were as follows:


	June 30, 2010
			Gross		Gross			Estimated
	Amortized		unrealized		unrealized			fair
	cost		gains		losses			value
Held to maturity:
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	2,449,442	$	27,495	$	—		$	2,476,937
Obligations of U.S. states, municipals and political subdivisions		2,642,502		75,614		—			2,718,116

Total held to maturity		5,091,944		103,109		—			5,195,053

Available for sale:
Fixed maturities:
Obligations of U.S. states, municipals and political subdivisions		59,523,968		1,615,847		(698,432	)		60,441,383
Corporate and other taxable debt securities		764,791		575,545		—			1,340,336
Redeemable preferred stock		148,850		46,606		—			195,456

Total fixed maturities		60,437,609		2,237,998		(698,432	)		61,977,175

Equity securities:
Banks, trusts and insurance companies		1,238,796		701,141		—			1,939,937
Industrial and miscellaneous		2,307,991		225,200		(5,031	)		2,528,160
Closed-end mutual funds		3,351,697		1,060,641		(3,700	)		4,408,638

Total equity securities		6,898,484		1,986,982		(8,731	)		8,876,735


Total available for sale		67,336,093		4,224,980		(707,163	)		70,853,910


Total	$	72,428,037	$	4,328,089	$	(707,163	)	$	76,048,963


	December 31, 2009
			Gross		Gross			Estimated
	Amortized		unrealized		unrealized			fair
	cost		gains		losses			value
Held to maturity:
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	2,321,243	$	5,620	$	—		$	2,326,863
Obligations of U.S. states, municipals and political subdivisions		2,860,662		107,375		—			2,968,037

Total held to maturity		5,181,905		112,995		—			5,294,900

Available for sale:
Fixed maturities:
Obligations of U.S. states, municipals and political subdivisions		69,903,319		1,569,125		(1,589,637	)		69,882,807
Corporate and other taxable debt securities		960,851		554,696		(20,205	)		1,495,342
Redeemable preferred stock		148,850		46,050		—			194,900

Total fixed maturities		71,013,020		2,169,871		(1,609,842	)		71,573,049

Equity securities:
Banks, trusts and insurance companies		441,185		419,825		—			861,010
Industrial and miscellaneous		1,908,973		235,728		(11,960	)		2,132,741
Closed-end mutual funds		3,424,049		847,064		(13,227	)		4,257,886

Total equity securities		5,774,207		1,502,617		(25,187	)		7,251,637


Total available for sale		76,787,227		3,672,488		(1,635,029	)		78,824,686


Total	$	81,969,132	$	3,785,483	$	(1,635,029	)	$	84,119,586

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

The amortized cost and estimated fair value of fixed maturity investments in held to maturity and available for sale securities at June 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	June 30, 2010
	Held to Maturity				Available for Sale
	Amortized		Estimated		Amortized		Estimated
	cost		fair value		cost		fair value

Due in one year or less	$	983,203	$	997,013	$	155,000	$	155,291
Due after one year but less than five years		2,970,341		3,028,847		1,588,852		2,170,664
Due after five years but less than ten years		636,458		655,333		4,763,561		4,842,441
Due after ten years		501,942		513,860		53,930,196		54,808,779

Total	$	5,091,944	$	5,195,053	$	60,437,609	$	61,977,175

Net investment income for the three and six months ended June 30, 2010 and 2009 is summarized below:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Fixed maturities	$	888,570		$	865,274		$	1,809,535		$	1,729,117
Equity securities		196,561			116,844			321,120			208,649
Short-term investments		19,426			29,101			36,849			76,795
Other		5,036			6,073			9,774			12,771
Expenses		(62,334	)		(61,235	)		(130,558	)		(112,186	)

Net investment income	$	1,047,259		$	956,057		$	2,046,720		$	1,915,146

The proceeds from sales of available for sale securities (excluding bond calls, prepayments and maturities) were $5,379,340 and $9,371,934 for the six months ended June 30, 2010 and 2009, respectively, which includes zero and $7,551,340, respectively, from sales of our money market mutual fund which we buy and sell from time to time as part of our liquidity management.

Pre-tax net realized gains (losses) on investments, other-than-temporary impairments and changes in unrealized gains (losses) on available for sale investments were as follows for the three and six months ended June 30, 2010 and 2009:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Gross realized gains:
Fixed maturities	$	94,654		$	34,867		$	208,263		$	165,348
Equity securities		16,876			96,271			16,876			115,639

Total gains		111,530			131,138			225,139			280,987

Gross realized losses
Fixed maturities		(17,784	)		(2,986	)		(122,191	)		(3,749	)
Equity securities		(354,770	)		(10,792	)		(354,770	)		(13,072	)

Total losses		(372,554	)		(13,778	)		(476,961	)		(16,821	)

Net realized (losses) gains on investments	$	(261,024	)	$	117,360		$	(251,822	)	$	264,166


Other-than-temporary impairments	$	—		$	(197,979	)	$	—		$	(2,767,189	)


Changes in net unrealized gains (losses) on available for sale investments:
Fixed maturities	$	386,490		$	2,369,312		$	979,537		$	3,829,599
Equity securities		(149,489	)		1,575,239			500,821			2,143,924

Net change in net unrealized gains (losses)	$	237,001		$	3,944,551		$	1,480,358		$	5,973,523

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

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

investment is temporary, we record the decline as an unrealized loss in our shareholders’ equity. If we believe an investment is “other-than-temporarily impaired,” we record the decline in the value of the investment as a realized loss through our 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%. 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 intent to sell the security or the likelihood that we will be required to sell the security before its anticipated recovery.

The following table summarizes the fair value to book value ratio for all securities in a gross unrealized loss position at June 30, 2010 and December 31, 2009:


	June 30, 2010
								Aggregate
			Estimated		Gross			fair value to			Percent
	Book		fair		unrealized			book value			of total
Fair value to book value ratio	value		value		losses			ratio			book value
Fixed maturities:
90% to 99%	$	19,331,934	$	18,854,545	$	(477,389	)		97.5	%		91.7	%
80% to 89%		1,491,725		1,327,892		(163,833	)		89.0			7.1
70% to 79%		251,835		194,625		(57,210	)		77.3			1.2

Total fixed maturities		21,075,494		20,377,062		(698,432	)		96.7			100.0

Equity securities:
90% to 99%		316,961		308,230		(8,731	)		97.2			100.0

Total equity securities		316,961		308,230		(8,731	)		97.2			100.0

Total	$	21,392,455	$	20,685,292	$	(707,163	)		96.7	%		100.0	%


	December 31, 2009
								Aggregate
			Estimated		Gross			fair value to			Percent
	Book		fair		unrealized			book value			of total
Fair value to book value ratio	value		value		losses			ratio			book value
Fixed maturities:
90% to 99%	$	26,912,700	$	25,974,320	$	(938,380	)		96.5	%		88.1	%
80% to 89%		2,288,457		1,975,020		(313,437	)		86.3			7.5
70% to 79%		1,093,641		819,751		(273,890	)		75.0			3.6
60% to 69%		245,730		161,595		(84,135	)		65.8			0.8

Total fixed maturities		30,540,528		28,930,686		(1,609,842	)		94.7			100.0

Equity securities:
90% to 99%		1,301,601		1,276,414		(25,187	)		98.1			100.0

Total equity securities		1,301,601		1,276,414		(25,187	)		98.1			100.0

Total	$	31,842,129	$	30,207,100	$	(1,635,029	)		94.9	%		100.0	%

We continually monitor the credit quality of our fixed maturity 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 Industry Services (“Moody’s”) and Standard & Poor’s (“S&P”). The following table shows the composition of fixed maturity securities in a gross unrealized loss position at June 30, 2010 and December 31, 2009 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.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES


	June 30, 2010
										Aggregate
	Equivalent	Equivalent			Estimated		Gross			fair value to			Percent
NAIC	S&P	Moody’s	Book		fair		unrealized			book value			of total
rating	rating	rating	value		value		losses			ratio			book value

1FE	AAA/AA/A	Aaa/Aa/A	$	15,488,155	$	15,135,830	$	(352,325	)		97.7	%		73.5	%
2FE	BBB	Baa		5,587,339		5,241,232		(346,107	)		93.8			26.5
3FE	BB	Ba		—		—		—			—			—
4FE	B	B		—		—		—			—			—
5FE	CCC or lower	Caa or lower		—		—		—			—			—
6FE				—		—		—			—			—

Total			$	21,075,494	$	20,377,062	$	(698,432	)		96.7	%		100.0	%


	December 31, 2009
										Aggregate
	Equivalent	Equivalent			Estimated		Gross			fair value to			Percent
NAIC	S&P	Moody’s	Book		fair		unrealized			book value			of total
rating	rating	rating	value		value		losses			ratio			book value

1FE	AAA/AA/A	Aaa/Aa/A	$	23,998,345	$	23,051,591	$	(946,754	)		96.1	%		78.6	%
2FE	BBB	Baa		6,542,183		5,879,095		(663,088	)		89.9			21.4
3FE	BB	Ba		—		—		—			—			—
4FE	B	B		—		—		—			—			—
5FE	CCC or lower	Caa or lower		—		—		—			—			—
6FE				—		—		—			—			—

Total			$	30,540,528	$	28,930,686	$	(1,609,842	)		94.7	%		100.0	%

The following table summarizes the estimated fair value and gross unrealized losses (pre-tax) for all securities in an unrealized loss position at June 30, 2010 and December 31, 2009, 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 June 30, 2010	value		losses			value		losses			value		losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	—	$	—		$	—	$	—		$	—	$	—
Obligations of U.S. states, municipals and political subdivisions		4,717,550		(40,139	)		15,659,512		(658,293	)		20,377,062		(698,432	)
Corporate and other taxable debt securities		—		—			—		—			—		—

Total fixed maturities		4,717,550		(40,139	)		15,659,512		(658,293	)		20,377,062		(698,432	)

Equity securities:
Banks, trusts and insurance companies		—		—			—		—			—		—
Industrial and miscellaneous		217,630		(5,031	)		—		—			217,630		(5,031	)
Closed-end mutual funds		90,600		(3,700	)		—		—			90,600		(3,700	)

Total equity securities		308,230		(8,731	)		—		—			308,230		(8,731	)

Total	$	5,025,780	$	(48,870	)	$	15,659,512	$	(658,293	)	$	20,685,292	$	(707,163	)

BANCINSURANCE CORPORATION
AND SUBSIDIARIES


	Less Than 12 Months					12 Months or Greater					Total
	Estimated		Gross			Estimated		Gross			Estimated		Gross
	fair		unrealized			fair		unrealized			fair		unrealized
At December 31, 2009	value		losses			value		losses			value		losses
Fixed maturities:
Obligations of U.S. states, municipals and political subdivisions	$	10,236,585	$	(160,640	)	$	18,694,101	$	(1,449,202	)	$	28,930,686	$	(1,609,842	)
Corporate and other taxable debt securities		—		—			—		—			—		—

Total fixed maturities		10,236,585		(160,640	)		18,694,101		(1,449,202	)		28,930,686		(1,609,842	)

Equity securities:
Banks, trusts and insurance companies		—		—			—		—			—		—
Industrial and miscellaneous		295,944		(11,960	)		—		—			295,944		(11,960	)
Closed-end mutual funds		980,470		(13,227	)		—		—			980,470		(13,227	)

Total equity securities		1,276,414		(25,187	)		—		—			1,276,414		(25,187	)

Total	$	11,512,999	$	(185,827	)	$	18,694,101	$	(1,449,202	)	$	30,207,100	$	(1,635,029	)

As of June 30, 2010, we had approximately 62 fixed maturity securities and zero equity securities that have been in a gross unrealized loss position for 12 months or longer. All 62 of the fixed maturity securities are investment grade (rated BBB and Baa or higher by S&P and Moody’s, respectively). All 62 of the fixed maturity securities are current on interest and principal and we believe that it is reasonably likely that all contract terms of each security will be satisfied. We currently do not have the intent to sell these fixed maturity securities and we currently do not believe it is more likely than not that we will be required to sell these fixed maturity securities before their anticipated recovery. The decrease in gross unrealized loss position for investments as of June 30, 2010 when compared to December 31, 2009 was primarily due to our fixed maturity portfolio as a result of the changes in the interest rate environment and/or current capital market conditions.

Other-than-temporary impairments on investments during the six months ended June 30, 2010 and 2009 were zero and $2,767,189, respectively. The $2,767,189 of impairment charges recorded during the first six months of 2009 were primarily due to the following: (1) $1,273,792 in impairment charges for four closed-end mutual funds whose fair values were adversely affected by the market conditions; (2) $572,020 in impairment charges for a corporate fixed maturity security of a lending institution (SLM Corp. or Sallie Mae) whose fair value was adversely affected by uncertainty in its investment ratings by certain bond rating agencies; (3) $797,619 in impairment charges for equity securities of seven financial institutions whose fair values were adversely affected primarily by the credit markets; and (4) $62,157 in impairment charges for an equity security of an insurance company whose fair value was adversely affected by the market conditions.

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 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 (4.54% and 4.65% at June 30, 2010 and 2009, respectively), are redeemable at par 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 (4.58% and 4.65% at June 30, 2010 and 2009, respectively), are redeemable at par 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 was $167,526 and $203,034 for the three months ended June 30, 2010 and 2009, respectively, and $325,088

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

and $425,796 for the six months ended June 30, 2010 and 2009, respectively. The terms of the junior subordinated debentures contain various covenants. As of June 30, 2010, Bancinsurance Corporation was in compliance with all such covenants.

GAAP 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. 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.

Income Taxes

Our provision for federal income taxes for the six months ended June 30, 2010 and 2009 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.

GAAP 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. As a result, we must adjust our financial statements to reflect only those tax positions that are more-likely-than-not to be sustained.

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, 2006, 2007, 2008 and 2009, the tax years which remain subject to examination by major tax jurisdictions as of June 30, 2010. 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.

Equity-Based Compensation

We maintain two equity compensation plans for the benefit of certain of our officers, directors, employees, consultants and advisors. GAAP 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. We are required to record equity-based compensation expense for all awards granted after January 1, 2006 and the nonvested portion of previously granted awards outstanding as January 1, 2006.

We have stock options and restricted stock outstanding at June 30, 2010 under two equity compensation plans (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 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 86,000 common shares were outstanding at June 30, 2010, expire at various dates from 2011 to 2013 and range in option price per share from $4.38 to $6.00. Of the options for 86,000 common shares outstanding, 14,000 have been granted to our non-employee directors and 72,000 have been granted to our 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. Key employees, officers and directors of, and consultants and advisors to, the 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, options for 595,000 common shares were outstanding at June 30, 2010, expire at various dates from 2012 to 2019 and range in option price per share from $3.40 to $8.00. Under the 2002 Plan, 184,370 unvested

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

restricted common shares were also outstanding at June 30, 2010. Of the total equity-based awards for 779,370 common shares outstanding under the 2002 Plan, 46,000 have been granted to our non-employee directors and 733,370 have been granted to our employees. All of the equity-based awards outstanding were granted to employees and directors for compensatory purposes. As of June 30, 2010, there were 85,693 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 (i.e., the closing price of our common shares on the date of grant) and 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. No restricted common shares were granted during the three and six months ended June 30, 2010. There were 18,911 restricted common shares that vested during the three and six months ended June 30, 2010.

The following table summarizes restricted stock award activity under the 2002 Plan from January 1, 2010 through June 30, 2010:


				Weighted-average
				grant date fair value
	Shares			per common share
Outstanding at January 1, 2010		203,281		$	4.05
Granted		—			—
Vested		(18,911	)		6.40
Cancelled		—			—

Outstanding at June 30, 2010		184,370			3.81

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 or employee’s continued employment with the Company on the applicable vesting date); 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 on the applicable vesting date). 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 (the “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 our common shares in the future. The dividend yield is based on historical dividends on the date of grant. There were no stock options granted during the three and six months ended June 30, 2010.

The following table summarizes all stock option activity under the Plans from January 1, 2010 through June 30, 2010:


				Weighted-average
				exercise price		Weighted-average		Aggregate
	Shares			per common share		contractual life (years)		intrinsic value
Outstanding at January 1, 2010		691,000		$	5.65
Granted		—			—
Exercised		(10,000	)		4.06
Expired		—			—
Cancelled		—			—

Outstanding at June 30, 2010		681,000			5.68		4.25	$	368,310

Vested and exercisable at June 30, 2010		625,000			5.70		4.04	$	337,110

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the closing price of our common shares on the OTC Bulletin Board on June 30, 2010 ($6.00), 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 were in-the-money at June 30, 2010 (i.e., options with an exercise price less than $6.00)). There were 10,000 stock options exercised during the three and six months ended June 30, 2010.

The following table summarizes nonvested stock option activity under the Plans from January 1, 2010 through June 30, 2010:


				Weighted-average
				grant date fair value
	Shares			per common share
Nonvested at January 1, 2010		100,000		$	2.45
Granted		—			—
Vested		(44,000	)		2.47
Expired		—			—
Cancelled		—			—

Nonvested at June 30, 2010		56,000			2.43

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 of $123,335 and $114,213 ($81,401 and $75,380 net of tax ) for the three months ended June 30, 2010 and 2009, respectively, and $255,471 and $227,857 ($168,611 and $150,385 net of tax) for the six months ended June 30, 2010 and 2009, respectively. The equity-based compensation expense is classified within other operating expenses in the accompanying condensed consolidated statements of income to correspond with the same line item as cash compensation paid to employees.

As of June 30, 2010, the total pre-tax equity-based compensation expense related to nonvested stock options and nonvested restricted common shares not yet recognized was $548,160. The weighted-average period over which this expense is expected to be recognized is approximately 1.6 years.

The following table summarizes weighted-average information by range of exercise prices for stock options outstanding and stock options exercisable at June 30, 2010:


	Options Outstanding						Options Exercisable
	Number		Weighted-average		Weighted-average		Number		Weighted-average
	outstanding		remaining		exercise		exercisable		exercise
Range of Exercise Prices	at 6/30/10		contractual life (years)		price		at 6/30/10		price
3.40		12,000		9.08	$	3.40		—	$	—
4.063 – 4.82		152,000		2.34		4.53		152,000		4.53
5.00 – 5.30		140,000		2.82		5.18		140,000		5.18
6.00 – 6.40		248,000		5.90		6.02		204,000		6.02
7.04 – 8.00		129,000		4.43		7.11		129,000		7.11

Total ($3.40 – $8.00)		681,000		4.25		5.68		625,000		5.70

Other Comprehensive Income

The components of other comprehensive income and the related federal income tax effects for the three and six months ended June 30, 2010 and 2009 are as follows


	Three Months Ended June 30, 2010
	Pre-tax			Income tax			Net-of-tax
	amount			effect			amount
Net unrealized holding gains on securities:
Unrealized holding losses arising during 2010	$	(24,023	)	$	(8,168	)	$	(15,855	)
Add back: reclassification adjustments for losses realized in net income		261,024			88,748			172,276

Net unrealized holding gains		237,001			80,580			156,421

Other comprehensive income	$	237,001		$	80,580		$	156,421

BANCINSURANCE CORPORATION
AND SUBSIDIARIES


	Three Months Ended June 30, 2009
	Pre-tax		Income tax		Net-of-tax
	amount		effect		amount
Net unrealized holding gains on securities:
Unrealized holding gains arising during 2009	$	3,863,932	$	1,313,737	$	2,550,195
Add back: reclassification adjustments for losses realized in net income		80,619		27,410		53,209

Net unrealized holding gains		3,944,551		1,341,147		2,603,404

Other comprehensive income	$	3,944,551	$	1,341,147	$	2,603,404


	Six Months Ended June 30, 2010
	Pre-tax		Income tax		Net-of-tax
	amount		effect		amount
Net unrealized holding gains on securities:
Unrealized holding gains arising during 2010	$	1,228,536	$	417,700	$	810,836
Add back: reclassification adjustments for losses realized in net income		251,822		85,619		166,203

Net unrealized holding gains		1,480,358		503,319		977,039

Other comprehensive income	$	1,480,358	$	503,319	$	977,039


	Six Months Ended June 30, 2009
	Pre-tax		Income tax		Net-of-tax
	amount		effect		amount
Net unrealized holding gains on securities:
Unrealized holding gains arising during 2009	$	3,470,500	$	1,179,972	$	2,290,528
Add back: reclassification adjustments for losses realized in net income		2,503,023		851,028		1,651,995

Net unrealized holding gains		5,973,523		2,031,000		3,942,523

Other comprehensive income	$	5,973,523	$	2,031,000	$	3,942,523

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 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 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 an equipment physical damage 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.

Under our waste industry products (“WIP”) program, we assume, write on a direct basis and cede certain waste surety bond business

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

under various reinsurance arrangements. Effective August 1, 2006, the 50% quota share reinsurance arrangement we entered into in the second quarter of 2004 was amended whereby we assumed 50% of certain waste surety bonds with liability limits up to $1.2 million from two insurance carriers. This reinsurance arrangement was amended effective June 1, 2010 whereby the liability limit was increased from $1.2 million to $4.0 million for one of the customers subject to this arrangement. Effective August 1, 2007, we entered into a 5% quota share reinsurance arrangement whereby we assumed 5% of certain waste surety bonds with liability limits over $1.2 million up to $10.0 million from two insurance carriers. This reinsurance arrangement is renegotiated annually and was renewed with similar terms on August 1, 2009, except that our participation was changed to 12.5%. This reinsurance arrangement was renewed with similar terms on August 1, 2010. In addition to assuming business, we also write on a direct basis certain waste surety bonds with liability limits up to $5.0 million. We then cede 50% of that business to an insurance carrier under a reinsurance arrangement. In addition to the quota share arrangements, we also participate in several facultative reinsurance arrangements. 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. Effective October 1, 2009, we increased our participation from 25% to 33% for our contract surety assumed reinsurance arrangement. The contract and escrow surety bond 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.

In addition to the reinsurance arrangements discussed above, we have other reinsurance arrangements, including two lender service PORC quota share reinsurance arrangements, one unemployment compensation facultative reinsurance arrangement and three reinsurance arrangements for our vehicle service contract programs.

A reconciliation of direct to net premiums, on both a written and earned basis, for the three and six months ended June 30, 2010 and 2009 is as follows:


	Three Months Ended												Six Months Ended
	June 30,						June 30,						June 30,						June 30,
	2010						2009						2010						2009
	Premiums						Premiums						Premiums						Premiums
	Written			Earned			Written			Earned			Written			Earned			Written			Earned
Direct	$	23,480,734		$	19,072,085		$	18,372,535		$	16,493,396		$	46,140,566		$	35,042,304		$	34,953,295		$	30,679,578
Assumed		1,407,243			1,509,963			825,612			1,125,335			3,154,003			2,844,495			2,163,764			2,360,004
Ceded		(15,369,692	)		(7,840,850	)		(9,572,710	)		(6,075,439	)		(22,187,423	)		(14,575,748	)		(14,626,936	)		(11,646,755	)

Net	$	9,518,285		$	12,741,198		$	9,625,437		$	11,543,292		$	27,107,146		$	23,311,051		$	22,490,123		$	21,392,827

The amounts of recoveries pertaining to reinsurance that were deducted from losses and loss adjustment expense incurred were $3,000,054 and $3,386,467 for the three months ended June 30, 2010 and 2009, respectively, and $5,769,008 and $6,094,439 for the six months ended June 30, 2010 and 2009, respectively. Ceded reinsurance decreased commission expense incurred by $895,547 and $804,622 for the three months ended June 30, 2010 and 2009, respectively, and $1,792,382 and $1,790,848 for the six months ended June 30, 2010 and 2009, respectively.

Commitments and Contingencies

We are involved in legal proceedings arising in the ordinary course of business which are routine in nature and incidental to our business. We currently believe that none of these matters, either individually or in the aggregate, is reasonably likely to have a material adverse effect on our financial condition, results of operations or liquidity. However, because these legal proceedings are subject to inherent uncertainties and the outcome of such matters cannot be predicted with reasonable certainty, there can be no assurance that any one or more of these matters will not have a material adverse effect on our financial condition, results of operations and/or liquidity.

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 June 30, 2010, the principal balance of the mortgage was $486,869 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.

Also see Note 14 for information concerning a gain contingency that will be recorded during the third quarter of 2010.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

10.

Supplemental Disclosure For Earnings Per Share


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009

Net income	$	1,908,385	$	1,445,461	$	3,886,259	$	473,940

Income available to common shareholders, assuming dilution		1,908,385		1,445,461		3,886,259		473,940


Weighted average common shares outstanding		5,211,750		5,082,574		5,208,745		5,082,574
Adjustments for dilutive securities:
Dilutive effect of outstanding stock options		60,709		—		50,836		—

Weighted average diluted common shares outstanding		5,272,459		5,082,574		5,259,581		5,082,574


Net income per common share:
Basic	$	0.37	$	0.28	$	0.75	$	0.09
Diluted	$	0.36	$	0.28	$	0.74	$	0.09

11.

Segment Information

We have two reportable business segments: (1) property/casualty insurance; and (2) insurance agency. The following tables provide 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 six months ended June 30, 2010 and 2009 were as follows:


	Three Months Ended
	June 30, 2010
					Reportable
	Property/Casualty		Insurance		Segments
	Insurance		Agency		Total

Revenues from external customers	$	12,552,037	$	—	$	12,552,037
Intersegment revenues		—		465,889		465,889
Interest revenue		1,165,801		—		1,165,801
Interest expense		—		—		—
Depreciation and amortization		37,824		—		37,824
Segment profit		3,203,532		465,785		3,669,317
Federal income tax expense		864,538		158,367		1,022,905


	Three Months Ended
	June 30, 2009
					Reportable
	Property/Casualty		Insurance		Segments
	Insurance		Agency		Total

Revenues from external customers	$	11,566,304	$	—	$	11,566,304
Intersegment revenues		—		441,198		441,198
Interest revenue		964,052		94		964,146
Interest expense		—		—		—
Depreciation and amortization		53,820		—		53,820
Segment profit		1,490,346		440,518		1,930,864
Federal income tax expense		270,384		149,776		420,160

BANCINSURANCE CORPORATION
AND SUBSIDIARIES


	Six Months Ended
	June 30, 2010
					Reportable
	Property/Casualty		Insurance		Segments
	Insurance		Agency		Total

Revenues from external customers	$	23,189,482	$	—	$	23,189,482
Intersegment revenues		—		851,267		851,267
Interest revenue		2,087,393		—		2,087,393
Interest expense		—		—		—
Depreciation and amortization		75,651		—		75,651
Segment profit		5,857,721		849,987		6,707,708
Federal income tax expense		1,530,975		288,996		1,819,971
Segment assets		163,338,855		301,631		163,640,486


	Six Months Ended
	June 30, 2009
						Reportable
	Property/Casualty			Insurance		Segments
	Insurance			Agency		Total

Revenues from external customers	$	19,157,177		$	—	$	19,157,177
Intersegment revenues		—			876,024		876,024
Interest revenue		1,921,738			174		1,921,912
Interest expense		—			—		—
Depreciation and amortization		105,998			—		105,998
Segment profit		542,915			874,453		1,417,368
Federal income tax (benefit) expense		(256,309	)		297,314		41,005
Segment assets		154,564,126			321,424		154,885,550

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Revenues
Total revenues for reportable segments	$	14,183,727		$	12,971,648		$	26,128,142		$	21,955,113
Parent company gain (loss)		(188,072	)		8,261			(166,659	)		17,178
Elimination of intersegment revenues		(465,889	)		(441,198	)		(851,267	)		(876,024	)

Total consolidated revenues	$	13,529,766		$	12,538,711		$	25,110,216		$	21,096,267


Profit
Total profit for reportable segments	$	3,669,317		$	1,930,864		$	6,707,708		$	1,417,368
Parent company other expenses, net of intersegment eliminations		(944,537	)		(407,650	)		(1,310,126	)		(911,616	)

Total consolidated income before income taxes	$	2,724,780		$	1,523,214		$	5,397,582		$	505,752


Assets
Total assets for reportable segments							$	163,640,486		$	154,885,550
Parent company assets								12,583,103			3,922,787
Elimination of intersegment receivables, net								(300,026	)		(310,783	)

Total consolidated assets							$	175,923,563		$	158,497,554

12.

Fair Value Measurements

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established under GAAP. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates is based on whether the significant inputs used in the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority is given to unobservable inputs that reflect the Company’s significant market assumptions. The three levels of the hierarchy are as follows:

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

•

Level 1 — Quoted prices for identical instruments in active markets.

•

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

•

Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The following table presents the level within the fair value hierarchy at which the Company’s financial assets were measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009:


	June 30, 2010
	Total		Level 1		Level 2		Level 3
Available for sale investments:
Fixed maturities	$	61,977,175	$	195,456	$	61,781,719	$	—
Equity securities		8,876,735		8,876,735		—		—

Total	$	70,853,910	$	9,072,191	$	61,781,719	$	—


	December 31, 2009
	Total		Level 1		Level 2		Level 3
Available for sale investments:
Fixed maturities	$	71,573,049	$	194,900	$	71,378,149	$	—
Equity securities		7,251,637		7,251,637		—		—

Total	$	78,824,686	$	7,446,537	$	71,378,149	$	—

As of June 30, 2010 and December 31 2009, the Company had no financial liabilities that were measured at fair value and no financial assets that were measured at fair value on a non-recurring basis. The Company also did not have any non-financial assets or non-financial liabilities that were measured at fair value on a recurring or non-recurring basis.

Valuation of Investments

For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. The Company receives the quoted market prices from an independent, nationally recognized pricing service (the “pricing service”). When quoted market prices are unavailable, the Company relies on the pricing service to determine an estimate of fair value and these prices are included in the amounts disclosed in Level 2 of the hierarchy.

The Company validates the prices received from the pricing service by examining their reasonableness. The Company’s review process includes comparing the pricing service’s estimated fair values to the estimated fair values established by our investment custodian (for both equity and fixed maturity securities) and our outside fixed income investment manager (for fixed maturity securities). Our investment custodian utilizes the same pricing service as us, and our outside fixed income investment manager utilizes another nationally recognized pricing service for the municipal bond portfolio and utilizes the same pricing service as us for taxable bonds and closed-end mutual funds. Based on this review, any material differences are investigated and, if we deem prices provided by our pricing service to be materially unreasonable, we would use the estimated fair value established by our investment custodian and/or outside fixed income investment manager, depending on which prices were deemed more reasonable. As of June 30, 2010 and December 31 2009, the Company did not adjust any prices received from its pricing service.

In order to determine the proper disclosure classification for each financial asset, the Company obtains from the pricing service the pricing procedures and inputs used by the pricing service to price securities in our portfolio. For our fixed maturity portfolio, the Company also has our outside fixed income investment manager review our portfolio to ensure the disclosure classification is consistent with the information obtained from the pricing service.

The following section describes the valuation methods used by the Company for each type of financial instrument it holds that is carried at fair value.

Available for Sale Equity Securities. The fair values of our equity securities were based on observable market quotations for identical assets and therefore have been disclosed in Level 1 of the hierarchy. The Level 1 category includes publicly traded equity securities.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

Available for Sale Fixed Maturity Securities. The fair values of our redeemable preferred stocks were based on observable market quotations for identical assets and therefore have been disclosed in Level 1 of the hierarchy. A number of the Company’s investment grade bonds are frequently traded in active markets and traded market prices for these securities existed at June 30, 2010 and December 31, 2009. However, these securities were classified as Level 2 because the pricing service also utilizes valuation models, which use observable market inputs, in addition to traded market prices. Substantially all of these input assumptions are observable in the marketplace or can be derived from or supported by observable market data. The Level 2 category generally includes municipal and corporate bonds.

Fair Value of Financial Instruments

The carrying amount and estimated fair value of financial instruments subject to disclosure requirements were as follows at June 30, 2010 and December 31, 2009:


	June 30,				December 31,
	2010				2009
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets:
Held to maturity fixed maturities	$	5,091,944	$	5,195,053	$	5,181,905	$	5,294,900
Available for sale fixed maturities		61,977,175		61,977,175		71,573,049		71,573,049
Available for sale equity securities		8,876,735		8,876,735		7,251,637		7,251,637
Short-term investments		9,800,497		9,800,497		342,002		342,002
Restricted short-term investments		3,168,749		3,168,749		3,410,069		3,410,069
Cash		10,034,338		10,034,338		9,551,372		9,551,372
Liabilities:
Trust preferred debt issued to affiliates		15,465,000		15,465,000		15,465,000		15,465,000
Bank line of credit		4,000,000		4,000,000		3,000,000		3,000,000

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value:

•

Cash and short-term investments: The carrying amounts are reasonable estimates of fair value.

•

Fixed maturities and equity securities: See “Valuation of Investments” above, which also applies to our held to maturity fixed maturities.

•

Trust preferred debt issued to affiliates and bank line of credit: Fair value is estimated using discounted cash flow calculations based on interest rates currently being offered for similar obligations with maturities consistent with the obligation being valued. As the interest rate adjusts regularly, the carrying amount is a reasonable estimate of fair value.

13.

Bank Line of Credit

Bancinsurance Corporation also has an unsecured revolving bank line of credit. On June 17, 2010, Bancinsurance Corporation amended its existing unsecured revolving credit facility in the following respects:

•

the revolving line of credit available was decreased from $10.0 million to $5.0 million;

•

the maturity date was extended from June 30, 2010 to June 29, 2011;

•

the interest rate payable on outstanding borrowings was changed from the Prime Rate minus 0.75% to the one month LIBOR rate plus 2.60% (2.95% at June 30, 2010); and

•

the debt service coverage ratio covenant was modified to exclude from its calculation equity-based compensation expense and other-than-temporary impairment charges.

All other terms of the unsecured revolving bank line of credit remained unchanged and continue in full force and effect.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

various restrictive covenants. As of June 30, 2010, Bancinsurance Corporation was in compliance with all such covenants. The bank line of credit provides for interest payable quarterly at an annual rate equal to the one month LIBOR (London Interbank Offered Rate) rate plus 2.60% (2.95% at June 30, 2010). Interest expense related to the bank line of credit was $330 and $15,798 for the three months ended June 30, 2010 and 2009, respectively, and $7,955 and $31,423 for the six months ended June 30, 2010 and 2009, respectively. The bank that provides the line of credit is also a policyholder of the Company.

14.

Subsequent Events

D&O Claim Settlement

In connection with the previously disclosed SEC investigation, the Company submitted a claim under its director & officer liability insurance policy (the “Policy”) for reimbursement of certain expenses incurred by the Company related to the SEC investigation. The Policy provided coverage up to a $1,000,000 aggregate limit of liability subject to a $100,000 retention. The Company incurred in excess of $1,000,000 of expenses related to the SEC investigation. The Company and the insurance carrier disagreed with respect to the scope of coverage under the Policy. On July 13, 2010, the Company and the insurance carrier resolved their disagreement and the insurance carrier agreed to pay $700,000 to the Company in respect of its claim. As a result of the settlement, the Company will record a gain of $700,000 ($462,000 after tax) during the third quarter of 2010.

Proposed Transaction

On August 10, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Fenist, LLC, an Ohio limited liability company (“Parent”), and Fenist Acquisition Sub, Inc., a wholly-owned subsidiary of Parent and an Ohio corporation (“Acquisition Sub”), pursuant to which Acquisition Sub will be merged with and into the Company, with the Company surviving as a direct wholly-owned subsidiary of Parent (the “Merger”). At the effective time of the Merger, Parent will be owned, directly or indirectly, by John S. Sokol (the Chairman of the Board, Chief Executive Officer and President of the Company), Barbara K. Sokol, James K. Sokol, Carla A. Sokol, Falcon Equity Partners, L.P., Matthew D. Walter (a member of the Board of Directors of the Company), Daniel J. Clark, Joseph E. LoConti, Edward Feighan and Charles Hamm (collectively the “Proposing Persons”). On August 10, 2010, the Proposing Persons collectively beneficially owned approximately 70% of the issued and outstanding common shares.

If the Merger is consummated, each Company shareholder (other than the Company and its subsidiaries, Parent, Acquisition Sub and the Proposing Persons) (collectively, the “Unaffiliated Shareholders”) will be entitled to receive $8.50 in cash, without interest, for each common share that the Unaffiliated Shareholder owns (the “Merger Consideration”), unless such shareholder has sought and properly perfected its appraisal rights under Ohio law. In addition, immediately before the effective time of the Merger, the Company will (i) cause each issued and outstanding option to purchase common shares (whether or not exercisable or vested) to be cancelled automatically and converted into the right to receive an amount in cash per common share equal to the excess of the Merger Consideration over the exercise price of the option and (ii) pay such excess amount to the holder of the option.

The Company expects that the closing of the Merger will occur in the fourth quarter of 2010, subject to regulatory approvals and other customary closing conditions, including (i) Acquisition Sub obtaining debt financing on the terms set forth in the debt financing commitment letter it has received and (ii) the adoption of the Merger Agreement and approval of the Merger by (A) the holders of a majority of the Company’s issued and outstanding common shares and (B) the holders of a majority of the Company’s issued and outstanding common shares that are held by the Unaffiliated Shareholders who cast votes for or against the Merger (whether in person or by proxy) at the special meeting of shareholders of the Company to be held for the purpose of voting on the adoption of the Merger Agreement and approval of the Merger. There is no assurance that the proposed merger will be completed.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

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

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 and major customers, 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, litigation, the controlling interest of the Sokol family, the pending proposal to take the Company private, the risk that the Bancinsurance shareholders do not approve the proposed going-private transaction and the risk that the proposed transaction is not consummated for other reasons, diversion of management attention from the operations of the business as a result of preparations for the proposed transaction and the transaction related expenses that are expected to be incurred regardless of whether the proposed transaction is consummated, and the other risk factors described in the Company’s filings with the Securities and Exchange Commission (the “SEC”), any one of which might materially affect our financial condition, results of operations and/or liquidity. 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 Corporation is a specialty property/casualty insurance holding company incorporated in the State of Ohio in 1970. The Company has two reportable business segments: (1) property/casualty insurance; and (2) insurance agency. 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.

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 50 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. Ohio Indemnity’s premiums are derived primarily 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 primarily to 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 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.

Our unemployment compensation (“UC”) products are utilized by entities that are qualified to elect not to pay unemployment compensation taxes and instead reimburse state unemployment agencies for benefits paid by the agencies to the entities’ former employees.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

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, write on a direct basis and cede certain waste surety bond business under various reinsurance arrangements. Effective August 1, 2006, the 50% quota share reinsurance arrangement we entered into in the second quarter of 2004 was amended whereby we assumed 50% of certain waste surety bonds with liability limits up to $1.2 million from two insurance carriers. This reinsurance arrangement was amended effective June 1, 2010 whereby the liability limit was increased from $1.2 million to $4.0 million for one of the customers subject to this arrangement. Effective August 1, 2007, we entered into a 5% quota share reinsurance arrangement whereby we assumed 5% of certain waste surety bonds with liability limits over $1.2 million up to $10.0 million from two insurance carriers. This reinsurance arrangement is renegotiated annually and was renewed with similar terms on August 1, 2009, except that our participation was changed to 12.5%. This reinsurance arrangement was renewed with similar terms on August 1, 2010. In addition to assuming business, we also write on a direct basis certain waste surety bonds with liability limits up to $5.0 million. We then cede 50% of that business to an insurance carrier under a reinsurance arrangement. In addition to the quota share arrangements, we also participate in several facultative reinsurance arrangements. The majority of the waste surety bonds under the program satisfy the closure/post-closure financial responsibility obligations imposed on 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. Effective October 1, 2009, we increased our participation from 25% to 33% for our contract surety assumed reinsurance arrangement. The contract and escrow surety bond 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 fully 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, assumed and ceded 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, including the Company, in placing its surety bond business. Our direct premium volume for this program is determined by the general insurance agent’s decision to place business with the Company.

We have certain other specialty products which consist primarily of two vehicle service contract programs. The premiums produced under other specialty products are not considered material to our results of operations. For our two vehicle service contract programs, we maintain reinsurance and/or collateral in excess of our estimated claim obligations, which reduces our risk of loss.

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.

Proposed Transaction

On August 10, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Fenist, LLC, an Ohio limited liability company (“Parent”), and Fenist Acquisition Sub, Inc., a wholly-owned subsidiary of Parent and an Ohio corporation (“Acquisition Sub”), pursuant to which Acquisition Sub will be merged with and into the Company, with the Company surviving as a direct wholly-owned subsidiary of Parent (the “Merger”). At the effective time of the Merger, Parent will be owned, directly or indirectly, by John S. Sokol (the Chairman of the Board, Chief Executive Officer and President of the Company), Barbara K. Sokol, James K. Sokol, Carla A. Sokol, Falcon Equity Partners, L.P., Matthew D. Walter (a member of the Board of Directors of the Company), Daniel J. Clark, Joseph E. LoConti, Edward Feighan and Charles Hamm (collectively the “Proposing Persons”). On August 10, 2010, the Proposing Persons collectively beneficially owned approximately 70% of the issued and outstanding common shares.

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will (i) cause each issued and outstanding option to purchase common shares (whether or not exercisable or vested) to be cancelled automatically and converted into the right to receive an amount in cash per common share equal to the excess of the Merger Consideration over the exercise price of the option and (ii) pay such excess amount to the holder of the option.

SUMMARY RESULTS

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


	Period-to-Period Increase (Decrease)
	Three and Six Months Ended June 30,
	2009-2010
	Three Months Ended						Six Months Ended
	Amount			% Change			Amount			% Change
Net premiums earned	$	1,197,906			10.4	%	$	1,918,224			9.0	%
Net investment income		91,202			9.5	%		131,574			6.9	%
Net realized gains (losses) on investments		(378,384	)		(322.4	)%		(515,988	)		(195.3	)%
Other-than-temporary impairments on investments		197,979			(100.0	)%		2,767,189			(100.0	)%
Management fees		(116,305	)		(100.0	)%		(279,654	)		(100.0	)%
Total revenues		991,055			7.9	%		4,013,949			19.0	%
Losses and loss adjustment expenses		(2,272,798	)		(37.2	)%		(1,653,321	)		(15.7	)%
Policy acquisition costs		1,791,909			65.6	%		803,327			14.7	%
Other operating expenses		321,383			16.5	%		96,319			2.4	%
Interest expense		(51,005	)		(23.3	)%		(124,206	)		(27.2	)%
Income before federal income taxes		1,201,566			78.9	%		4,891,830			967.2	%
Net income		462,924			32.0	%		3,412,319			720.0	%

Net income for the second quarter 2010 was $1,908,385, or $0.36 per diluted share, compared to $1,445,461, or $0.28 per diluted share, a year ago. The most significant factor that influenced this period-over-period increase was a $1.4 million ($0.9 million after tax) increase in underwriting profit for our GAP product line which was primarily attributable to favorable loss reserve development as used car values improved during the second quarter 2010 when compared to a year ago. See “Results of Operations” and “Business Outlook” below for more information concerning the underwriting performance for our GAP product line during the second quarter 2010.

Net income for the first six months of 2010 was $3,886,259, or $0.74 per diluted share, compared to $473,940, or $0.09 per diluted share, for the same period last year. The most significant factors that influenced this period-over-period increase were (1) a $2.8 million ($1.8 million after tax) decrease in other-than-temporary impairment charges on investments, (2) a $2.0 million ($1.3 million after tax) increase in underwriting profit for our GAP product line which was primarily attributable to favorable loss reserve development as used car values improved during the first six months of 2010 when compared to a year ago and (3) a $0.3 million ($0.2 million after tax) increase in underwriting profit for our UC product line which was primarily attributable to favorable loss reserve development during the first quarter 2010. See “Results of Operations” and “Business Outlook” below for more information concerning the underwriting performance for our GAP and UC product lines during the first six months of 2010.

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

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premiums earned. In addition, statutory accounting principles may require additional unearned premium reserves that result in net premiums earned on a statutory basis differing from that of net premiums earned on a GAAP basis which also impacts the comparison of the combined ratio for GAAP and statutory purposes. The following table reflects Ohio Indemnity’s loss, expense and combined ratios on both a statutory and GAAP basis for the three and six months ended June 30, 2010 and 2009:


	Three Months Ended						Six Months Ended
	2010			2009			2010			2009
GAAP:
Loss ratio		31.7	%		54.9	%		39.8	%		51.4	%
Expense ratio		50.8	%		39.7	%		43.5	%		43.3	%

Combined ratio		82.5	%		94.6	%		83.3	%		94.7	%


Statutory:
Loss ratio		31.6	%		55.5	%		39.8	%		52.1	%
Expense ratio		51.2	%		39.9	%		41.9	%		42.8	%

Combined ratio		82.8	%		95.4	%		81.7	%		94.9	%

See “Results of Operations” below for more information concerning our loss, expense and combined ratios for the three and six months ended June 30, 2010 and 2009.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Net Premiums Earned. Certain of our lender service policies have an experience rating or retrospective premium adjustment (collectively, “premium adjustments”) feature whereby the customer receives a return of premiums when the customer’s actual loss and expense experience is less than its policy limits. Premium adjustments are primarily influenced by loss experience-to-date and premium growth. A decrease in premium adjustments results in a positive impact to net premiums earned whereas an increase in premium adjustments results in a decrease to net premiums earned. Premium adjustments do not have any impact to net income (i.e., as losses increase, net premiums earned increases by the same amount through the premium adjustment; and conversely, as losses decrease, net premiums earned decreases by the same amount through the premium adjustment). Management anticipates that premium adjustments will fluctuate from period to period based upon loss experience and premium growth.

Net premiums earned increased 10.4%, or $1,197,906, to $12,741,198 for the second quarter 2010 from $11,543,292 a year ago principally due to increases in premiums for our CPI and WIP product lines which were partially offset by a decrease in premiums for our ULI and GAP product lines.

ULI net premiums earned decreased 2.4%, or $131,484, to $5,244,767 for the second quarter 2010 from $5,376,251 a year ago. ULI net premiums earned decreased approximately $0.4 million as a result of premium adjustments. This decrease was partially offset by an increase in lending volume for certain financial institution customers during the second quarter 2010 when compared to a year ago.

Net premiums earned for CPI increased 210.9%, or $1,296,873, to $1,911,808 for the second quarter 2010 from $614,935 a year ago primarily due to one of our CPI insurance agents placing more business with us.

Net premiums earned for GAP decreased 26.2%, or $539,167, to $1,519,755 for the second quarter 2010 from $2,058,922 a year ago. Approximately $0.2 million of the decrease related to the cancellation of a poor performing GAP customer in the second quarter of 2008 that is in run off. Approximately $0.1 million of the decrease related to premium adjustments. The remaining decrease was principally due to a decline in lending volume for the majority of our GAP customers.

Net premiums earned for UC increased 4.3%, or $77,403, to $1,885,331 for the second quarter 2010 from $1,807,928 a year ago primarily due to pricing increases.

Net premiums earned for WIP increased 32.7%, or $528,787, to $2,147,270 for the second quarter 2010 from 1,618,483 a year ago primarily due to an increase in waste surety bond premiums. The increase in waste surety bond premiums primarily resulted from us increasing our participation from 5.0% to 12.5% effective August 1, 2009 for one of our assumed reinsurance arrangements as discussed in “Overview-Products and Services” above.

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For more information concerning premiums, see “Business Outlook” below.

Investment Income. Net investment income increased 9.5%, or $91,202, to $1,047,259 for the second quarter 2010 from $956,057 a year ago principally due to an increase in yields.

Net Realized Gains (Losses) on Investments. Net realized gains (losses) on investments decreased 322.4%, or $378,384, to $(261,024) for the second quarter 2010 from $117,360 a year ago primarily due to the timing of sales of available for sale securities. We generally decide whether to sell securities based upon investment opportunities, perceived investment risk and/or tax consequences.

Other-Than-Temporary Impairments on Investments. Other-than-temporary impairments on investments decreased 100.0%, or $197,979, to zero for the second quarter 2010 from $197,979 a year ago. The $197,979 of impairment charges recorded during the second quarter 2009 were primarily due to the following: (1) $104,535 in impairment charges for a closed-end mutual fund whose fair value was adversely affected by the market conditions; and (2) $62,157 in impairment charges for an equity security of an insurance company whose fair value was adversely affected by the market conditions.

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

Management Fees. Our management fees decreased 100.0%, or $116,305, to zero for the second quarter 2010 from $116,305 a year ago. Based on an increase in benefit charges combined with our estimate of future development of benefit charges, we recorded zero management fees for the second quarter 2010. We expect management fees to vary from period to period depending on our customers’ unemployment levels and benefit charges. For more information concerning management fees, see “Business Outlook” below.

Losses and Loss Adjustment Expenses. Losses and LAE decreased 37.2%, or $2,272,798, to $3,840,234 for the second quarter 2010 from $6,113,032 a year ago principally due to a decrease in ULI and GAP losses.

ULI losses and LAE decreased 11.5%, or $435,979, to $3,368,766 for the second quarter 2010 from $3,804,745 a year ago primarily due to a decrease in frequency of losses for certain financial institution customers. Approximately $0.2 million of the decrease related to policies with premium adjustments and therefore, such decrease did not have any impact on net income.

CPI losses and LAE decreased 14.1%, or $41,777, to $254,093 for the second quarter 2010 from $295,870 a year ago primarily due to approximately $0.5 million of favorable loss reserve development during the second quarter 2010 which was mostly offset by a $0.4 million increase in net paid losses which resulted from the growth in business described above. Our CPI product line is agency business that is subject to contingent commission based on underwriting performance of the agent’s business. As a result, the $0.5 million of favorable loss reserve development for our CPI product line during the second quarter 2010 had no effect on net income as this decrease in losses was offset by a corresponding increase to contingent commission expense (i.e. policy acquisition costs).

GAP losses and LAE decreased 101.9%, or $1,913,257, to a benefit of $35,354 for the second quarter 2010 from a loss of $1,877,904 a year ago. Approximately $0.8 million of the decrease related to $0.5 million of favorable loss reserve development during the second quarter 2010 as compared to $0.3 million of unfavorable loss reserve development during the second quarter 2009. Approximately $0.3 million of the decrease related to the cancellation of a poor performing GAP customer in the second quarter of 2008 that is in run off. The remaining decrease in GAP losses was primarily due to the decline in business described above combined with a decrease in severity and frequency of losses for the majority of our GAP customers. The favorable loss reserve development during the second quarter 2010 when compared to a year ago was primarily due to a lower severity and frequency of claims from what we originally expected when establishing the reserves. Although we are unable to definitively identify what is driving the decrease in severity and frequency of losses, we believe that the economic conditions affecting the automotive industry, including improvements in used car values during the second quarter 2010 when compared to a year ago, were a primary contributor. See “Results of Operations-GAAP Combined Ratio” and “Business Outlook” below for more information concerning our GAP losses.

UC losses and LAE remained relatively flat at $114,680 for the second quarter 2010 compared to $99,398 a year ago.

WIP losses and LAE increased 62.4%, or $76,043, to $197,979 for the second quarter 2010 from $121,936 a year ago. 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 and escrow surety bonds, loss and LAE reserves are based on a certain percentage

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of total net premiums earned. The increase in WIP losses for the second quarter 2010 was primarily related to the increase in net premiums earned for waste surety bonds as described above.

Other specialty products losses and LAE increased $23,888 for the second quarter 2010 compared to a year ago primarily due to favorable loss reserve development in the prior year for one of our automobile service contract programs that is in run off.

The majority of our losses are short-tail in nature and adjustments to reserve amounts occur rather quickly. Conditions that affected the loss development in our reserves during the second quarter 2010 may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate this loss reserve development to future periods. For more information concerning losses and LAE, see “Business Outlook” and “Critical Accounting Policies-Loss and Loss Adjustment Expense Reserves” below.

Policy Acquisition Costs. Policy acquisition costs increased 65.6%, or $1,791,909, to $4,525,160 for the second quarter 2010 from $2,733,251 a year ago primarily due to (1) a $1.2 million increase in lender service contingent commission expense which resulted primarily from premium growth combined with favorable loss reserve development for certain agency business that is subject to contingent commission based on underwriting performance of the agent’s business and (2) a $0.4 million increase in commission expense for our WIP product line as a result of the premium growth in the waste surety business as described above.

Other Operating Expenses. Other operating expenses increased 16.5%, or $321,383, to $2,271,765 for the second quarter 2010 from $1,950,382 a year ago primarily due to an increase in consulting and legal expenses related to the proposed going-private transaction described above.

Interest Expense. Interest expense decreased 23.3%, or $51,005, to $167,827 for the second quarter 2010 from $218,832 a year ago primarily due to a decline in interest rates on our trust preferred debt. See “Business Outlook” and “Liquidity and Capital Resources” below and Note 4 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).

Federal Income Taxes. The Company’s estimated effective federal income tax rate was 30.0% for the second quarter 2010 compared to 5.1% a year ago. This increase was primarily attributable to the increase in income from operations when compared to a year ago. For more information concerning our federal income taxes, see Note 5 to the Condensed Consolidated Financial Statements.

GAAP Combined Ratio. For the second quarter 2010, the combined ratio improved to 82.5% from 94.6% a year ago. The loss ratio improved to 31.7% for the second quarter 2010 from 54.9% a year ago primarily due to a decrease in the loss ratio for our GAP product line as a result of the favorable loss reserve development and improved loss performance described above (our GAP loss ratio improved to 2.3% for the second quarter 2010 from 91.2% a year ago). The expense ratio increased to 50.8% for the second quarter 2010 from 39.7% a year ago primarily due to the increase in lender service contingent commission expense as described above.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Net Premiums Earned. Net premiums earned increased 9.0%, or $1,918,224, to $23,311,051 for the first six months of 2010 from $21,392,827 a year ago principally due to increases in our ULI, CPI, UC and WIP product lines which were partially offset by a decrease in premiums for our GAP product line.

ULI net premiums earned increased 4.2%, or $369,004, to $9,237,219 for the first six months of 2010 from $8,868,175 a year ago. ULI net premiums earned increased approximately $0.9 million as a result of premium adjustments. This increase was partially offset by a decrease in lending volume for certain financial institution customers during the first six months of 20101 when compared to a year ago.

Net premiums earned for CPI increased 174.5%, or $1,883,335, to $2,962,669 for the first six months of 2010 from $1,079,334 a year ago primarily due to one of our CPI insurance agents placing more business with us.

Net premiums earned for GAP decreased 30.7%, or $1,306,907, to $2,956,561 for the first six months of 2010 from $4,263,468 a year ago. Approximately $0.4 million of the decrease related to the cancellation of a poor performing GAP customer in the second quarter of 2008 that is in run off. Approximately $0.4 million of the decrease related to premium adjustments. The remaining decrease was principally due to a decline in lending volume for the majority of our GAP customers.

Net premiums earned for UC increased 10.7%, or $396,940, to $4,097,705 for the first six months of 2010 from $3,700,765 a year ago primarily due to pricing increases.

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Net premiums earned for WIP increased 19.2%, or $642,967, to $3,988,530 for the first six months of 2010 from 3,345,564 a year ago primarily due to an increase in waste surety bond premiums which was partially offset by a decrease in contract surety bond premiums. The increase in waste surety bond premiums primarily resulted from us increasing our participation from 5.0% to 12.5% effective August 1, 2009 for one of our assumed reinsurance arrangements as discussed in “Overview-Products and Services” above.

For more information concerning premiums, see “Business Outlook” below.

Investment Income. Net investment income increased 6.9%, or $131,574, to $2,046,720 for the first six months of 2010 from $1,915,146 a year ago principally due to an increase in yields.

Net Realized Gains (Losses) on Investments. Net realized gains (losses) on investments decreased 195.3%, or $515,988, to $(251,822) for the first six months of 2010 from $264,166 a year ago primarily due to the timing of sales of available for sale securities. We generally decide whether to sell securities based upon investment opportunities, perceived investment risk and/or tax consequences.

Other-Than-Temporary Impairments on Investments. Other-than-temporary impairments on investments decreased 100.0%, or $2,767,189, to zero for the first six months of 2010 from $2,767,189 a year ago. The $2,767,189 of impairment charges recorded during the first six months of 2009 were primarily due to the following: (1) $1,273,792 in impairment charges for four closed-end mutual funds whose fair values were adversely affected by the market conditions; (2) $572,020 in impairment charges for a corporate fixed maturity security of a lending institution (SLM Corp. or Sallie Mae) whose fair value was adversely affected by uncertainty in its investment ratings by certain bond rating agencies; (3) $797,619 in impairment charges for equity securities of seven financial institutions whose fair values were adversely affected primarily by the credit markets; and (4) $62,157 in impairment charges for an equity security of an insurance company whose fair value was adversely affected by the market conditions.

Management Fees. Our management fees decreased 100.0%, or $279,654, to zero for the first six months of 2010 from $279,654 a year ago. Based on an increase in benefit charges combined with our estimate of future development of benefit charges, we recorded zero management fees for the first six months of 2010. We expect management fees to vary from period to period depending on our customers’ unemployment levels and benefit charges. For more information concerning management fees, see “Business Outlook” below.

Losses and Loss Adjustment Expenses. Losses and LAE decreased 15.7%, or $1,653,321, to $8,898,335 for the first six months of 2010 from $10,551,656 a year ago principally due to a decrease in GAP losses which was partially offset by an increase in ULI and CPI losses.

ULI losses and LAE increased 7.7%, or $453,665, to $6,362,679 for the first six months of 2010 from $5,909,014 a year ago. Approximately $0.6 million of the increase related to policies with premium adjustments and therefore, such increase did not have any impact on net income.

CPI losses and LAE increased 274.9%, or $1,022,909, to $1,395,077 for the first six months of 2010 from $372,168 a year ago primarily due to the growth in business described above.

GAP losses and LAE decreased 84.0%, or $3,235,541, to $617,091 for the first six months of 2010 from $3,852,632 a year ago. Approximately $1.1 million of the decrease related to $0.5 million of favorable loss reserve development during the first six months of 2010 as compared to $0.6 million of unfavorable loss reserve development during the first six months of 2009. Approximately $0.7 million of the decrease related to the cancellation of a poor performing GAP customer in the second quarter of 2008 that is in run off. The remaining decrease in GAP losses was primarily due to the decline in business described above combined with a decrease in severity and frequency of losses for the majority of our GAP customers. The favorable loss reserve development during the first six months of 2010 when compared to a year ago was primarily due to a lower severity and frequency of claims from what we originally expected when establishing the reserves. Although we are unable to definitively identify what is driving the decrease in severity and frequency of losses, we believe that the economic conditions affecting the automotive industry, including improvements in used car values during the first six months of 2010 when compared to a year ago, were a primary contributor. See “Results of Operations-GAAP Combined Ratio” and “Business Outlook” below for more information concerning our GAP losses.

UC losses and LAE increased 15.0%, or $46,302, to $354,605 for the first six months of 2010 from $308,303 a year ago. The increase was primarily caused by a $0.5 million increase in losses for our excess of loss product which was partially offset by a $0.5 million

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decrease in losses for our UCassure^® product as a result of favorable loss reserve development primarily during the first quarter of 2010. Our excess of loss product is subject to contingent commission based on the underwriting performance of the agent’s business. As a result, the increase in losses for our excess of loss product had a minimal effect on net income as this increase was primarily offset by a decrease in contingent commission expense as described in “Policy Acquisition Costs” below. The favorable loss reserve development for our UCassure^® product for the first six months of 2010 resulted primarily from fewer benefit charges than what we originally expected when establishing the reserves.

WIP losses and LAE decreased 5.0%, or $14,193, to $269,604 for the first six months of 2010 from $283,797 a year ago. 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 and escrow surety bonds, loss and LAE reserves are based on a certain percentage of total net premiums earned. The decrease in WIP losses for the first six months of 2010 was primarily related to the decline in net premiums earned for contract surety bonds, partially offset by an increase in losses for waste surety bonds due to the premium growth as described above.

Other specialty products losses and LAE increased $67,534 for the first six months of 2010 compared to a year ago primarily due to favorable loss reserve development in the prior year for one of our automobile service contract programs that is in run off.

The majority of our losses are short-tail in nature and adjustments to reserve amounts occur rather quickly. Conditions that affected the loss development in our reserves during the first six months of 2010 may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate this loss reserve development to future periods. For more information concerning losses and LAE, see “Business Outlook” and “Critical Accounting Policies-Loss and Loss Adjustment Expense Reserves” below.

Policy Acquisition Costs. Policy acquisition costs increased 14.7%, or $803,327, to $6,286,668 for the first six months of 2010 from $5,483,341 a year ago primarily due to a $1.1 million increase in commission expense for our CPI and WIP product lines as a result of the premium growth for those product lines as described above. This increase was partially offset by a $0.4 million decrease in UC contingent commission expense as a result of the increase in losses for our excess of loss product as described above.

Other Operating Expenses. Other operating expenses increased 2.4%, or $96,319, to $4,194,618 for the first six months of 2010 from $4,098,299 a year ago primarily due to an increase in consulting and legal expenses related to the proposed going-private transaction described above, which increase was partially offset by a decrease in other consulting expenses.

Interest Expense. Interest expense decreased 27.2%, or $124,206, to $333,013 for the first six months of 2010 from $457,219 a year ago primarily due to a decline in interest rates on our trust preferred debt. See “Business Outlook” and “Liquidity and Capital Resources” below and Note 4 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).

Federal Income Taxes. The Company’s estimated effective federal income tax rate was 28.0% for the first six months of 2010 compared to 6.3% a year ago. This increase was primarily attributable to the increase in income from operations when compared to a year ago. For more information concerning our federal income taxes, see Note 5 to the Condensed Consolidated Financial Statements.

GAAP Combined Ratio. For the first six months of 2010, the combined ratio improved to 83.3% from 94.7% a year ago. The loss ratio improved to 39.8% for the first six months of 2010 from 51.4% a year ago primarily due to a decrease in the loss ratio for our GAP product line as a result of the favorable loss reserve development and improved loss performance described above (our GAP loss ratio improved to 20.9% for the first six months of 2010 from 90.4% a year ago). The expense ratio remained relatively flat at 43.5% for the first six months of 2010 compared to 43.3% a year ago.

BUSINESS OUTLOOK

Lender Service Products

Our lender service premium volume is primarily based on new loans made by our banking customers for consumer automobile purchases. The current economic conditions have impacted automobile sales as consumers have struggled to qualify for loans. In addition, many consumers are not willing to make big purchases, such as for a new automobile. Furthermore, consumers purchasing new automobiles may obtain financing through the automobile manufacturer or another lender rather than from our banking customers. In 2009, the U.S. automobile industry experienced its worst sales results in 16 years. For the first six months of 2010, U.S. new automobile sales were up approximately 17% when compared to the first six months of 2009. Although U.S. new automobile sales were up during the first six

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months of 2010, many of our financial institution customers have not experienced similar increases in lending volumes for automobiles during this same period. For ULI, our premium collections were down 3% during the first six months of 2010 when compared to a year ago. For GAP, our premium collections were up 2% during the first six months of 2010 when compared to the first six months of 2009. Based on the current economic conditions, we cannot predict with reasonable certainty the level of U.S. automobile sales or the level of our lender service premium volume for fiscal year 2010.

Premiums and ceded commissions for our insurance products are earned over the related contract periods. For GAP, EPD and certain of our ULI 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, pricing increases and/or 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 may experience 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 in the future. Incentives offered on new cars by dealers and manufacturers can depress the value of the used car market. In addition, higher level of gas prices can lower 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. 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. However, as noted above, rate increases for our longer duration policies may take several years to have an impact as the rate increase is only for new business while run off of the older business at the old rate will take place for a number of years.

One of the actions we took to mitigate loss severity was cancelling a poor performing GAP customer in the second quarter of 2008. During 2009 and the first six months of 2010, this GAP customer had net premiums earned of approximately $1.6 million and $0.5 million, respectively, and its combined ratio was 139% and 93%, respectively. As of June 30, 2010, we had approximately $1.1 million of unearned premiums for this customer that will be earned over approximately two years.

As described in “Summary Results” and “Results of Operations” above, our GAP product line had a significant impact to our net income and loss ratio during the three and six months ended June 30, 2010 when compared to a year ago. The loss ratio for our GAP product line was at a historic low level through the first six months of 2010 based on a decline in severity and frequency which resulted in favorable loss reserve development. While we cannot predict with reasonable certainty the amount of severity and frequency for our GAP claims in the future, we do not anticipate that our loss ratio for GAP will remain at the current low level given our historical experience with GAP and the current economic conditions affecting the automotive industry. In addition, it should be noted that the majority of our GAP customers have experienced a decline in lending volume over the last several years and as a result, we anticipate that our earned premium for GAP will continue to decline over the next several years; however, we cannot predict with reasonable certainty the level of premium decline.

Unemployment Compensation

Increased benefit charge levels for our UC customers could result in lower management fees and/or increased losses for our UC product line. 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. During the first six months of 2010, we experienced an increase in benefit charges for our UCassure^® product when compared to a year ago which resulted in a $279,654 decrease in management fees during such period. We believe that our excess of loss product could also experience an increase in benefit charges during fiscal year 2010, especially considering its geographical concentration in California (approximately 35% of this business is in California). Given the decline in tax revenue at many state and local levels, we believe we will see a continued contraction of services and increased unemployment levels for many of our UC customers. Given the current economic conditions, including high unemployment levels, we believe it is possible that we could experience an overall increase in benefit charges for fiscal year 2010 when compared to fiscal year 2009; however, we cannot predict the level of benefit charges or how material the impact will be to us. Where possible, we have taken actions to help mitigate the effects of these trends, including monitoring the coverage and pricing of our products and taking actions when necessary.

Waste Industry

As discussed in “Overview-Products and Services” above, effective August 1, 2009, our participation was changed from 5.0% to 12.5% for one of our assumed reinsurance arrangements under our WIP program. We estimate that this change in participation should increase

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our net premiums earned by approximately $1.2 million for fiscal year 2010 when compared to fiscal year 2009.

Since we began participating in the WIP program in 2004, there have not been any significant paid claims to date. If we were to have significant claims experience on this program during fiscal year 2010, such claims experience could have a material adverse effect on our business, financial condition and/or operating results if our reserves prove to be materially deficient; however, we currently do not believe that our reserves will be materially deficient. As of June 30, 2010, our net loss and LAE reserves for the WIP program were approximately $3.1 million. For waste surety and contract surety, as of June 30, 2010, our largest net exposure in a single surety bond was approximately $4.5 million and $2.1 million, respectively, and our net loss and LAE reserves were approximately $1.8 million and $0.9 million, respectively, for such products.

Our escrow surety bond business relates to surety bonds issued to the State of Nevada in 2006. The surety bonds were issued in connection with escrow deposits made by purchasers of units of a real estate development in Las Vegas, Nevada. Each surety bond is conditioned upon the real estate developer (the “Developer”) performing its duties relating to the purchase of the units specified in the surety bond. Certain of the purchasers (the “Purchasers”) have contended that they are entitled to rescind their purchase contracts with the Developer and receive a refund of their escrow deposits which are secured by our surety bonds. The Purchasers are currently in legal proceedings with the Developer over the matter (the “Disputed Contracts”). The Company would likely incur a surety bond loss for the Disputed Contracts if each of the following events occur: (1) the Purchasers prevail in their claims against the Developer; (2) the Purchasers receive an award entitling them to a refund of their escrow deposits; (3) the Developer fails to provide such refund to the Purchaser; (4) the state of Nevada determines that the insurer has to pay a claim under the surety bond; (5) we are unsuccessful in enforcing our indemnification agreement with the Developer; and (6) the loss payment due is greater than our loss reserves. As of June 30, 2010, our maximum net loss exposure related to the Disputed Contracts was approximately $8.4 million and our net loss and LAE reserves for the escrow surety bond business was approximately $0.4 million. Due to the inherent uncertainties associated with the Disputed Contracts, the Company cannot predict with reasonable certainty the amount, timing or ultimate outcome of this matter. The ultimate outcome of the Disputed Contracts, while not predictable at this time, could have a material adverse effect on the Company’s business, financial condition and/or operating results if our reserves prove to be materially deficient. As discussed above, 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.

Gain Contingency

In connection with the previously disclosed SEC investigation, the Company submitted a claim under its director & officer liability insurance policy (the “Policy”) for reimbursement of certain expenses incurred by the Company related to the SEC investigation. The Policy provided coverage up to a $1,000,000 aggregate limit of liability subject to a $100,000 retention. The Company incurred in excess of $1,000,000 of expenses related to the SEC investigation. The Company and the insurance carrier disagreed with respect to the scope of coverage under the Policy. On July 13, 2010, the Company and the insurance carrier resolved their disagreement and the insurance carrier agreed to pay $700,000 to the Company in respect of its claim. As a result of the settlement, the Company will record a gain of $700,000 ($462,000 after tax) during the third quarter of 2010.

Expenses

As interest rates rise (fall), it can increase (decrease) the level of interest expense on our trust preferred debt and any borrowings under our bank line of credit. Interest rates declined during the first six months of 2010 when compared to a year ago which resulted in a decrease in interest expense of $124,206 for the first six months of 2010 when compared to a year ago. See “Liquidity and Capital Resources” below and Notes 4 and 13 to the Condensed Consolidated Financial Statements for more information concerning our trust preferred debt and bank line of credit.

As a result of the proposed going-private transaction discussed above in “Overview-Proposed Transaction,” the Company incurred approximately $0.4 million of legal and consulting expenses during the first six months of 2010. The Company expects to incur additional consulting and legal expenses during fiscal year 2010 related to the proposed transaction. The Company currently estimates that total expenses related to the proposed transaction could range from $0.5 million to $1.0 million. However, given the inherent uncertainties of this matter, the actual amount incurred related to the proposed transaction could be materially different from this estimate.

Investments

As of June 30, 2010, approximately 98% of our available for sale fixed maturity portfolio was invested in tax-exempt municipal bonds which consisted primarily of revenue issue bonds (approximately 95%) and general obligation bonds (approximately 5%). Municipal bond prices improved during the second quarter 2010 when compared to the fourth quarter 2009, and total gross unrealized losses for our available for sale fixed maturity portfolio decreased from $1.6 million at December 31, 2009 to $0.7 million at June 30, 2010. While municipal credits continue to demonstrate relative credit quality stability, market conditions are still somewhat unsettled. The fair value of

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our fixed maturity portfolio could also be impacted by credit rating actions and/or financial uncertainty associated with insurance companies that guarantee the obligations of some of our bonds.

Based on the current economic conditions and our other-than-temporary impairment accounting policy, impairment charges within our investment portfolio are possible during fiscal year 2010. As disclosed in Note 3 to the Condensed Consolidated Financial Statements and “Critical Accounting Policies-Other-Than-Temporary Impairment of Investments” below, we begin to monitor a security for other-than-temporary impairment when its fair value to book value ratio falls below 80%. As shown in Note 3 to the Condensed Consolidated Financial Statements, as of June 30, 2010, we did not have any equity securities that had a fair value to book value ratio below 80%. Assuming the estimated fair value for our equity securities remained the same during the remainder of 2010 as they were at June 30, 2010, we would not likely record any material other-than-temporary impairment charges for equity securities during fiscal year 2010. With respect to those fixed maturity securities having a fair value to book value ratio below 80% as shown in Note 3 to the Condensed Consolidated Financial Statements, all of these securities are investment grade and we would likely not have any material other-than-temporary impairment charges on these securities during the remainder of 2010 unless they were to fall below investment grade or it became likely that we would sell the security before its anticipated recovery. Due to the inherent uncertainties of the investment markets, we cannot predict with reasonable certainty the amount or range of amounts of other-than-temporary impairment charges, if any, that will be recorded during fiscal year 2010; however, if market conditions deteriorate, we believe that the amount of such other-than-temporary impairment charges could be material to our results of operations. For more information concerning the unrealized loss position of our investment portfolio and impairment charges, see “Critical Accounting Policies-Other-Than-Temporary Impairment of Investments” below and Note 3 to the Condensed Consolidated Financial Statements.

During the first six months of 2010, we recorded $251,822 of net realized losses on investments. We generally decide whether to sell securities based upon investment opportunities, perceived investment risk and/or tax consequences. Due to the inherent uncertainties of the investment markets, we cannot predict with reasonable certainty the amount of net realized gains or losses that will be recorded during fiscal year 2010; however, the amount of such net realized gains or losses could be material to our results of operations.

Based on the factors discussed above and the current economic conditions, our outlook for the remainder of the 2010 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 June 30, 2010 and December 31, 2009, 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:


	June 30,			December 31,
	2010			2009
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		4,000,000			3,000,000

Total debt obligations		19,465,000			18,465,000


Total shareholders’ equity		49,569,375			44,371,719

Total capitalization	$	69,034,375		$	62,836,719

Ratio of total debt obligations to total capitalization		28.2	%		29.4	%

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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 (4.54% and 4.65% at June 30, 2010 and 2009, respectively), are redeemable at par 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 (4.58% and 4.65% at June 30, 2010 and 2009, respectively), are redeemable at par 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 June 30, 2010, Bancinsurance Corporation was in compliance with all such covenants.

Bancinsurance Corporation also has an unsecured revolving bank line of credit. As previously reported, on June 17, 2010, Bancinsurance Corporation amended its existing unsecured revolving credit facility in the following respects:

•

the revolving line of credit available was decreased from $10.0 million to $5.0 million;

•

the maturity date was extended from June 30, 2010 to June 29, 2011;

•

the interest rate payable on outstanding borrowings was changed from the Prime Rate minus 0.75% to the one month LIBOR rate plus 2.60% (2.95% at June 30, 2010); and

•

the debt service coverage ratio covenant was modified to exclude from its calculation equity-based compensation expense and other-than-temporary impairment charges.

All other terms of the unsecured revolving bank line of credit remained unchanged and continue in full force and effect.

The bank line of credit had a $4,000,000 and $3,000,000 outstanding balance at June 30, 2010 and December 31, 2009, respectively. On December 30, 2009, Bancinsurance Corporation drew $3,000,000 on the bank line of credit, primarily in anticipation of the $3,000,000 settlement payment to Highlands Insurance Company. On February 3, 2010, Bancinsurance Corporation repaid the $3,000,000 outstanding balance under the bank line of credit. On March 29, 2010, Bancinsurance Corporation drew $4,000,000 on the bank line of credit to increase its debt to capital ratio at March 31, 2010 to a level similar to that at December 31, 2009. On April 1, 2010, Bancinsurance Corporation repaid the $4,000,000 outstanding balance under the bank line of credit. On June 30, 2010, Bancinsurance Corporation drew $4,000,000 on the bank line of credit to increase its debt to capital ratio at June 30, 2010 to a level similar to that at December 31, 2009. On July 1, 2010, Bancinsurance Corporation repaid the $4,000,000 outstanding balance under the bank line of credit. The terms of the revolving credit agreement contain various restrictive covenants. As of June 30, 2010, Bancinsurance Corporation was in compliance with all such covenants. Interest expense related to the bank line of credit was $330 and $15,798 for the three months ended June 30, 2010 and 2009, respectively, and $7,955 and $31,423 for the six months ended June 30, 2010 and 2009, respectively. We utilize the bank line of credit from time to time based on short-term cash flow needs, the then current one month LIBOR rate, the Company’s capital position (including Ohio Indemnity’s capital position) and the dividend limitations on Ohio Indemnity as discussed below.

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 (1) cash receipts from operations, which consist primarily of insurance premiums collected, ceded commissions received and investment income, and (2) our cash and short-term investment portfolio. In addition, our fixed maturity investment portfolio has historically generated additional cash flows through bond maturities and calls (over 90% of our fixed maturity portfolio has call features). When a bond matures or is called by the issuer, the resulting cash flows are generated without selling the security at a loss. We utilize these cash flows to either build our cash and short-term investment position or reinvest in other securities, depending on our liquidity needs. To the extent our cash from operations, cash and short-term investments and cash flows from bond maturities or calls are not sufficient to meet our liquidity needs, our investment portfolio is a source of additional liquidity through the sale of readily marketable fixed maturity and equity securities. As of June 30, 2010, we had approximately $46.7 million of available for sale fixed maturity and equity securities that were in an unrealized gain position that, if necessary, we could sell without recognizing a loss to meet liquidity needs. After satisfying our cash requirements and meeting our desired cash and short-term investment position, any excess cash flows from our operating and/or investment activities are used to build our investment portfolio and thereby increase future investment income. For more information concerning our investment portfolio, see “Critical Accounting Policies-Other-Than-Temporary Impairment of Investments” below and Note 3 to the Condensed Consolidated Financial Statements.

Because of the nature of the risks we insure, 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

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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 our cash and short-term investment position 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 and capital needs without being required to liquidate intermediate-term and long-term investments at a loss. As of June 30, 2010 and December 31, 2009, our cash and short-term investment position was $19.8 million and $9.9 million respectively, which included $4.0 million and $3.0 million, respectively, that was generated from borrowings under our bank line of credit. The increase in our cash and short-term investment position at June 30, 2010 when compared to December 31, 2009 was primarily influenced by the timing of sales and purchases of available for sale securities.

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

As of June 30, 2010 and December 31, 2009, our discontinued bond program loss and LAE reserves were zero and $4,450,000, respectively. As previously disclosed, in January 2010, the Company paid $1,450,000 to Harco National Insurance Company (“Harco”) and $3,000,000 to Highlands Insurance Company (“Highlands”) pursuant to the Company’s settlement agreements with those companies in full and final resolution of all disputes with those companies, including any potential future liabilities with respect to bonds issued by those companies. As a result of the Harco and Highlands settlements, all of the Company’s liabilities and obligations under the discontinued bond program have been satisfied. On December 30, 2009, the Company drew $3.0 million on its bank line of credit primarily in anticipation of the Highlands settlement payment of $3.0 million. Given our then projected cash flows and the low interest rate on the bank line of credit as compared to the average yield on our fixed income portfolio, the Company made the decision to draw on the bank line of credit as opposed to selling fixed income securities for the Highlands payment. On February 3, 2010, the Company repaid the $3.0 million outstanding bank line of credit using excess cash flows from operating and investing activities. Although the settlement payments resulted in a material increase in the Company’s cash outflows from operations during 2010, these payments did not have a material impact on the Company’s 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 (1) dividends from Ohio Indemnity and USA, (2) borrowings under its bank line of credit and (3) 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 and cost and tax sharing payments from its subsidiaries.

As of June 30, 2010 and December 31, 2009, Bancinsurance Corporation had total cash and invested assets of $9.7 million and $4.2 million, respectively. This increase in cash and invested assets was primarily due to (1) $4.9 million of dividends that were paid by Ohio Indemnity to Bancinsurance Corporation during the first quarter 2010 and (2) Bancinsurance Corporation increasing its net borrowings under its bank line of credit by $1.0 million during the first quarter 2010. As discussed above, on July 1, 2010, Bancinsurance Corporation repaid the $4,000,000 outstanding balance under the bank line of credit which reduced Bancinsurance Corporation’s cash and invested asset position to $5.7 million as of July 1, 2010.

Bancinsurance Corporation did not pay any dividends during the first six months of 2010 or 2009. The declaration and payment of future dividends (if any) are subject to the discretion of Bancinsurance Corporation’s board of directors and will depend upon our results of operations, financial condition, capital levels and requirements, cash requirements, future prospects, any legal, tax, regulatory and contractual restrictions and other factors deemed relevant by the board of directors. Accordingly, there can be no assurance that Bancinsurance Corporation will declare and pay any future dividends.

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

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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. On December 17, 2009, Ohio Indemnity’s board of directors declared a cash dividend in an aggregate amount of $4.9 million that was paid to Bancinsurance Corporation during the first quarter 2010. Of the $4.9 million dividend, $2.9 million required and received approval by the Department. During 2010, the maximum amount of dividends that may be paid to Bancinsurance Corporation by Ohio Indemnity without the prior approval of the Department is $5,300,961. The declaration and payment of future dividends (if any) are subject to the discretion of Ohio Indemnity’s board of directors and will depend upon our results of operations, financial condition, capital levels and requirements, cash requirements, future prospects, any legal, tax, regulatory and contractual restrictions and other factors deemed relevant by the board of directors.

As a property/casualty insurer, Ohio Indemnity is subject to a risk-based capital test adopted by the NAIC and 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 June 30, 2010.

Net cash provided by operating activities was $1,751,295 and $1,911,561 for the first six months of 2010 and 2009, respectively. The decrease in net cash provided by operating activities was primarily due to aggregate payments of $4,450,000 during the first quarter 2010 related to the Harco and Highlands settlement agreements as discussed above. Excluding the effects of the discontinued bond program payments, net cash provided by operating activities increased $4.3 million during the first six months of 2010 when compared to a year ago primarily due to improved cash flows from our CPI and GAP product lines. Our CPI product line net cash flow increased by approximately $2.1 million for the first six months of 2010 compared to a year ago primarily due to one of our CPI insurance agents placing more business with us. We estimate that approximately $1.6 million of this cash flow will be refunded in future periods due to policy cancellations as CPI is a product line with a high cancellation rate due to its nature; however, we do not believe these estimated refunds will have a material impact to our future liquidity. Our GAP product line net cash flow increased by approximately $1.7 million for the first six months of 2010 compared to a year ago principally due to the improved loss performance described in “Results Of Operations” above.

Net cash used in investing activities was $2,308,959 and $2,695,212 for the first six months 2010 and 2009, respectively. The decrease was primarily due to more excess cash from operating activities being used to purchase investments during the first six months of 2009 when compared to the first six months of 2010.

Net cash provided by (used in) financing activities was $1,040,630 and $(2,500,000) for the first six months of 2010 and 2009, respectively, as Bancinsurance Corporation increased its net borrowings under its bank line of credit by $1.0 million during the first six months of 2010, compared to paying down our bank line of credit in the amount of $2,500,000 during the second quarter of 2009.

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 bank line of credit will provide sufficient liquidity for the operations of the Company.

INFLATION

We do not consider the impact of inflation to be material in the analysis of our net revenues, income from continuing operations or overall operations.

CRITICAL ACCOUNTING POLICIES

The preparation of our 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 our 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

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

•

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

•

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

•

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

•

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

•

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

•

the judgment of our outside fixed income investment manager;

•

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

•

our intent to sell the security or the likelihood that we will be required to sell the security before its anticipated recovery.

We continually monitor the credit quality of our fixed maturity investments to gauge our ability to be repaid principal and interest. We consider price declines of fixed maturity 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 Investors Services and Standard & Poor’s.

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.

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 maturity and closed-end mutual 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 maturity securities are required to be investment grade at the time of purchase to protect investments. As of June 30, 2010, approximately 99% of our fixed maturity portfolio was rated investment grade. Our outside investment manager also monitors the underlying credit quality of our fixed maturity portfolio. In performing our other-than-temporary impairment analysis for our fixed maturity securities and closed-end mutual funds, 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 securities in our investment portfolio that were in an unrealized loss position at June 30, 2010 which were not considered to be other-than-temporarily impaired. For more information concerning other-than-temporary impairment charges, see “Results of Operations-Other-Than-Temporary Impairments on Investments,” “Business Outlook-Investments” and “Liquidity and Capital Resources” above and Note 3 to the Condensed Consolidated Financial Statements.

Loss and Loss Adjustment Expense Reserves

We utilize our internal staff, information 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.

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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 our 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 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 primarily dependent upon information received by us from the underlying ceding insurers. 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 factors not currently recognized in our historical data. Such extraordinary changes or claims emergence may impact the level of required reserves in ways that are not presently quantifiable. Thus, while we believe our reserve estimates are reasonable given the information currently available to us, actual emergence of losses could deviate materially from our estimates and from the amounts recorded by us.

As of June 30, 2010, 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:

•

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 loss development for each accident year. In addition, we evaluate reserve and loss trends in our quarterly reserving methodology. These selected factors and quarterly reserve trends 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 the 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 loss and LAE 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 loss and LAE 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. Other than for our GAP product line, 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. See “Results of Operations” and “Business Outlook”

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

above for information concerning changes in the severity and frequency of losses for our GAP product line during the first six months of 2010 when compared to a year ago.

In performing our loss and LAE reserve analysis, we select a single loss reserve estimate for each product line that represents our “best estimate” based on facts and circumstances then known to us.

The majority of our losses are short-tail in nature and adjustments to reserve amounts occur rather quickly. Conditions that affect redundancies and/or deficiencies in our reserves may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate such loss reserve development to future periods.

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 more 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 a legal proceeding and the potential that an adverse outcome in a legal proceeding could have a material impact on our financial condition, results of operations and/or liquidity, such estimates are considered to be critical accounting estimates. See Note 9 to the Condensed Consolidated Financial Statements for information concerning the Company’s commitments and contingencies.

Deferred Policy Acquisition Costs

Costs of acquiring insurance business that vary with, and are primarily related to, the production of new and renewal business are deferred and amortized over the period in which the related premiums are recognized. Such deferred costs principally consist of up-front commissions and premium taxes and are reported net of ceding commissions. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, anticipated investment income, anticipated losses and settlement expenses and certain other costs expected to be incurred as the premium is earned. Judgments as to the ultimate recoverability of such deferred costs are highly dependent upon estimated future losses associated with the unearned premium. If such deferred policy acquisition costs are estimated to be unrecoverable, they will be expensed in the period identified.

Federal Income Taxes

We accrue for federal income taxes based on amounts we believe we ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, we may be required to significantly change the provision for federal income taxes recorded in the condensed consolidated financial statements. Any such change could significantly affect the amounts reported in the condensed consolidated statements of operations.

We utilize the asset and liability method of accounting for income tax. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts more likely than not to be realized. In accordance with GAAP, the Company must also adjust its financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. For more information concerning our federal income taxes,

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

see Note 5 to the Condensed Consolidated Financial Statements.

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(e) and 15d-15(e) 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(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

BANCINSURANCE CORPORATION
AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits


Exhibits

	2.1		Agreement and Plan of Merger, dated August 10, 2010, by and among Bancinsurance Corporation, Fenist, LLC, and Fenist Acquisition Sub, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on August 12, 2010 (File No. 0-8738)).

	4.1		First Modification of Amended and Restated Credit Agreement effective June 17, 2010 by and between Bancinsurance Corporation and Fifth Third Bank (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 18, 2010 (File No. 0-8738)).

	4.2		Twelfth Amendment and Restatement of Note dated June 17, 2010 by and between Bancinsurance Corporation and Fifth Third Bank (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on June 18, 2010 (File No. 0-8738)).

	10.1		Summary of the Bancinsurance Corporation 2010 Fiscal Year Executive Officer Bonus Plan (as it relates to the named executive officers) (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 4, 2010 (File No. 0-8738)).

	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.


	Page No.

PART I — FINANCIAL INFORMATION:

Item 1. Financial Statements

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009 (unaudited)		3

Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009 (unaudited)		4

Condensed Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2010 and 2009 (unaudited)		6

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (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		41

PART II — OTHER INFORMATION AND SIGNATURES:

Item 1. Legal Proceedings		42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	Not Applicable

Item 3. Defaults Upon Senior Securities	Not Applicable

Item 5. Other Information	Not applicable

Item 6. Exhibits		42

Signatures		43

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1


	BANCINSURANCE CORPORATION
	(Registrant)

Date: August 16, 2010	By:	/s/ John S. Sokol
		John S. Sokol
		Chairman, Chief Executive Officer
		and President
		(Principal Executive Officer)

Date: August 16, 2010	By:	/s/ Matthew C. Nolan
		Matthew C. Nolan
		Vice President, Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer and
		Principal Accounting Officer)