UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2009

or

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

For the transition period from                      to                     

Commission file number 0-8738

BANCINSURANCE CORPORATION

(Exact name of registrant as specified in its charter)

Ohio		31-0790882
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
250 East Broad Street, Columbus, Ohio (Address of principal executive offices)		43215 (Zip Code)

Registrant’s telephone number, including area code
(614) 220-5200

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
NONE		NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON SHARES, WITHOUT PAR VALUE
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

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 Date File required to be submitted and posted pursuant to Rule 405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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 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

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 aggregate market value of the registrant’s common shares held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2009) was $7,647,426.

The number of outstanding common shares, without par value, of the registrant as of February 2, 2010 was 5,205,706.

 

 

BANCINSURANCE CORPORATION AND SUBSIDIARIES

2009 FORM 10-K

TABLE OF CONTENTS

		Page
PART I
Item 1. Business			3
Item 2. Properties			9
Item 3. Legal Proceedings			9
Item 4. Submission of Matters to a Vote of Security Holders			9
PART II
Item 5. Market for Registrant’s Common Shares, Related Shareholder Matters and Issuer Purchases of Equity Securities			10
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 8. Consolidated Financial Statements and Supplementary Data			29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			61
Item 9A(T). Controls and Procedures			61
Item 9B. Other Information			61
PART III
Item 10. Directors, Executive Officers and Corporate Governance			62
Item 11. Executive Compensation			64
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			71
Item 13. Certain Relationships and Related Transactions, and Director Independence			72
Item 14. Principal Accounting Fees and Services			74
PART IV
Item 15. Exhibits, Financial Statement Schedules			75
Exhibit 21
Exhibit 23(a)
Exhibit 23(b)
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

FORWARD-LOOKING INFORMATION

Certain statements made in this Annual Report on Form 10-K 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 Annual Report on Form 10-K, 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, the controlling interest of the Sokol family, litigation, 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.

PART I

ITEM 1. BUSINESS

GENERAL/OVERVIEW

Bancinsurance Corporation, an Ohio corporation formed in 1970, is an insurance holding company primarily engaged in the underwriting of specialized property/casualty insurance products through our wholly-owned subsidiary, Ohio Indemnity Company (“Ohio Indemnity”), an Ohio corporation. Our principal sources of revenue are premiums and ceded commissions for insurance policies and income generated from our investment portfolio. Ohio Indemnity is licensed to transact business in 49 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. In addition, our wholly-owned subsidiary, Ultimate Services Agency, LLC (“USA”), an Ohio limited liability company which we formed in July 2002, is a property/casualty insurance agency. We have two reportable business segments: (1) property/casualty insurance; and (2) insurance agency. Financial information for our business segments for the years ended December 31, 2009 and 2008 is included in Note 22 to the Consolidated Financial Statements included in this Annual Report on Form 10-K. 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.

General information about Bancinsurance is available on the Company’s website, www.bancinsurance.com. Unless specifically and expressly incorporated herein by reference, information on our website is not and should not be considered part of this Annual Report on Form 10-K.

PRODUCTS AND SERVICES

Ohio Indemnity Company

Our premiums written and premiums earned are derived primarily from three distinct product lines offered by Ohio Indemnity: (1) lender service; (2) unemployment compensation; and (3) waste industry.

Lender Service Products. Our lender service product line offers four types of products. First, ULTIMATE LOSS INSURANCE^® (“ULI”), a blanket vendor single interest coverage, is sold to lending institutions, such as banks, savings and loan associations, credit unions, automobile dealers and finance companies. ULI insures against damage to pledged collateral in cases where the collateral is not otherwise insured. Our standard ULI policy covers physical damage to the collateral in an amount not to exceed the lesser of the collateral’s fair market value or the outstanding loan balance. This blanket vendor single interest policy is generally written to cover the lending institution’s complete portfolio of collateralized personal property loans, which generally consists of automobile loans. We also offer supplemental insurance coverages, at additional premium cost, for losses resulting from unintentional errors in lien filings and conversion, confiscation and skip risks. Conversion risk coverage protects the lender from unauthorized and wrongful taking of the lender’s title to the collateral. Skip risk coverage protects the lender when a delinquent debtor disappears with the loan collateral. The premiums charged for ULI are based on claims experience, loan volumes and general market conditions. During 2009, we provided ULI coverage to approximately 300 lending institutions.

Second, creditor placed insurance (“CPI”) provides an alternative to our traditional blanket vendor single interest product. While both products cover the risk of damage to uninsured collateral in a lender’s automobile loan portfolio, CPI covers an automobile lender’s loan portfolio through tracking individual borrower’s insurance coverage. The lender purchases physical damage coverage for loan collateral after a borrower’s insurance has lapsed. The lender then charges the premium to the borrower. The National Association of Insurance Commissioners (“NAIC”) developed a “model act” for CPI in 1996 and several states have adopted its provisions. The model act helped to clarify program parameters that are acceptable to regulators. We believe our CPI product complies with the model act. During 2009, we provided CPI coverage to approximately 200 lending institutions.

Third, guaranteed auto protection insurance (“GAP”) pays the difference or “gap” between the amount owed by the customer on a lease or loan contract and the amount of primary insurance company coverage in the event a vehicle is damaged beyond repair or stolen and never recovered. The “gap” results from the way loans and leases amortize compared to depreciation patterns of vehicles. Leasing, low or no down payment loans, long-term loans (60-84 months) and low trade-in prices contribute to such “gap” amounts. GAP insurance policies insure lenders, lessors and auto dealers who waive “gap” amounts and elect to purchase GAP insurance to cover the risk assumed by making the waiver. We offer two primary forms of GAP insurance products. First, voluntary GAP insurance policies are primarily sold to lenders and lessors who in turn sell such policies directly to the borrower when a vehicle is purchased or leased. Second, blanket GAP insurance policies are sold to lessors who typically waive “gap” amounts on all of their leases. During 2009, we provided GAP coverage to approximately 375 lenders, lessors and auto dealers.

Fourth, equipment physical damage insurance (“EPD”) is an all risk policy written to cover agricultural, construction and commercial equipment vehicles. EPD was introduced in 2007 and offers insurance protection for financed equipment purchases. This policy protects both lenders and consumers against the risk of physical damage or theft of their financed equipment and is available for the term of the loan or an annual basis. During 2009, we provided EPD coverage for an equipment manufacturer, which was then ceded to its producer-owned reinsurance company (“PORC”).

Unemployment Compensation Products. 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. 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. During 2009, we provided UC insurance coverage to approximately 100 customers.

Waste Industry Products. 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 three quota share reinsurance arrangements. First, 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 waste surety bonds with liability limits up to $1.2 million from two insurance carriers. Second, effective August 1, 2007, we entered into a 5% quota share reinsurance arrangement whereby we assumed 5% of 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, 2008. For the August 1, 2009 renewal, our participation was changed to 12.5%. Third, in addition to assuming business, we also write on a direct basis 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. During 2009, we provided WIP coverage to approximately 100 customers.

Ohio Indemnity is currently listed on the United States Treasury Department’s listing of approved surety companies (the “Treasury Listing”). The Treasury Listing is required for all surety companies who issue or reinsure surety bonds naming the United States government or any branch or agency of the United States government as the obligee. The Treasury Listing also establishes a company’s

maximum net loss exposure amount on any one surety bond based on its capital and surplus. Many governmental entities, both federal and non-federal, that issue landfill licenses and permits will accept surety bonds only from insurance companies that are on the Treasury Listing. Ohio Indemnity’s Treasury Listing is reviewed annually and was last updated on July 1, 2009 with a maximum net exposure, after reinsurance, in any single surety bond of $4.5 million. If Ohio Indemnity’s Treasury Listing were revoked, or if its surety bond limit were reduced, it would eliminate or reduce the Company’s ability to write and assume business under our WIP and UC product lines. This could have a material adverse effect on our business, financial condition and/or operating results.

Other Specialty Products. 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. For more information concerning one of the vehicle service contract programs, see “Automobile Service Contract Program” in Note 15 to the Consolidated Financial Statements and “Overview-Automobile Service Contract Program” in Item 7 below.

In addition, from 2001 until the end of the second quarter of 2004, we participated in a bail and immigration bond program. This program was discontinued in the second quarter of 2004. For more information concerning this program, see “Discontinued Bond Program” in Note 15 to the Consolidated Financial Statements and “Overview-Discontinued Bond Program” in Item 7 below.

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

Ultimate Services Agency, LLC

In July 2002, we formed Ultimate Services Agency, LLC, 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.

COMPETITION

The insurance business is highly competitive with over 3,000 property/casualty insurance companies in the United States. The majority of such property/casualty insurers are not engaged in the specialty lines of property/casualty insurance which we underwrite. Some of our competitors may: (1) offer more diversified insurance coverage; (2) have greater financial resources; (3) offer lower premiums; (4) have more complete and complex product lines; (5) have greater pricing flexibility; (6) have different marketing techniques; (7) have a higher financial rating; and/or (8) provide better agent compensation. Management believes that one of our competitive advantages is specializing in limited insurance lines. This specialization allows us to refine our underwriting and claims techniques, which in turn, provides agents and insureds with superior service.

Importance of Industry Ratings

Ohio Indemnity received an “A-” (Excellent) rating with a stable outlook from A.M. Best in October 2009. A.M. Best generally assigns ratings based on an insurance company’s ability to pay policyholder obligations (not based on protection of investors) and focuses on capital adequacy, loss and loss expense reserve adequacy and operating performance. If our performance in these areas declines, A.M. Best could downgrade our rating. A downgrade of our rating could cause our current or future insurance agents and insureds to choose other, more highly rated competitors. In addition, we believe that not having an “A-” rating or better could impact an agent’s or customer’s willingness to place business with Ohio Indemnity.

Reliance on General Agents and Major Customers

During 2009, approximately $63.3 million (86.5%) of our gross premiums written were distributed among five general agents and three major customers as follows (dollars in millions):

Type		Gross Premiums Written				% of Total
Customer		$	24.3				33.3	%
General Agent			9.3				12.8
General Agent			6.5				8.8
Customer			6.2				8.5
General Agent			4.5				6.1
Customer			4.4				6.0
General Agent			4.3				5.8
General Agent			3.8				5.2
TOTAL		$	63.3				86.5	%

The above customers are not obligated to buy the Company’s insurance products and the above agents are not obligated to promote the Company’s insurance products and may sell competitors’ insurance products. As a result, our business depends in part on our ability to

offer insurance products and services that meet the requirements of these customers, these agents and the customers of these agents and on the marketing efforts of these agents. In addition, these relationships may be discontinued, or if they do continue, they may not remain profitable for us. A loss of all or substantially all the business produced by one or more of these customers and/or agents could have a material adverse effect on our business, financial condition and/or operating results.

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 October 1, 2003, we entered into a producer-owned reinsurance arrangement with a CPI customer whereby 100% of that customer’s premiums (along with the associated risk) were ceded to its PORC. For this reinsurance arrangement, we have obtained collateral in the form of a trust from the reinsurer to secure our obligations. Under the provisions of the reinsurance agreement, the collateral must be equal to or greater than 102% of the reinsured reserves and we have immediate access to such collateral if necessary. Effective April 1, 2008, the policy related to this arrangement was cancelled. Under this arrangement, we ceded premiums earned of $24,177 and $1,958,377 for the years ended December 31, 2009 and 2008, respectively.

Effective January 1, 2005, we entered into a producer-owned reinsurance arrangement with a GAP 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. Under this arrangement, we ceded premiums earned of $4,857,697 and $4,657,167 for the years ended December 31, 2009 and 2008, respectively.

Effective January 1, 2007, we entered into a producer-owned reinsurance arrangement with an EPD customer whereby 100% of that customer’s premiums (along with the associated risk) were ceded to its PORC. For this reinsurance arrangement, we have obtained collateral in the form of funds held and a letter of credit to secure our obligations. Under the provisions of the reinsurance agreement, the collateral must be equal to or greater than 102% of the reinsured reserves and we have immediate access to such collateral if necessary. Under this arrangement, we ceded premiums earned of $17,244,926 and $11,785,400 for the years ended December 31, 2009 and 2008, respectively.

Under our WIP product line, we assume, write on a direct basis, and cede certain waste, contract and escrow surety bond business under various reinsurance arrangements described above. Under this program, we assumed premiums earned of $4,695,769 and $5,292,338 for the years ended December 31, 2009 and 2008, respectively, and ceded premiums earned of $2,594,267 and $2,438,384 for the years ended December 31, 2009 and 2008, respectively.

In addition to the reinsurance arrangements discussed above, we have other reinsurance arrangements, including two lender service PORC quota share reinsurance arrangements, one UC facultative reinsurance arrangement, and three reinsurance arrangements for our vehicle service contract programs (for more information concerning one of our vehicle service contract programs, see “Automobile Service Contract Program” in Note 15 to the Consolidated Financial Statements and “Overview-Automobile Service Contract Program” in Item 7 below). Under these arrangements, we ceded premiums earned of $554,078 and $618,788 for the years ended December 31, 2009 and 2008, respectively.

From 2001 until the end of the second quarter of 2004, we also participated in a bail and immigration bond reinsurance program. This program was discontinued in the second quarter of 2004. For more information concerning this program, see “Overview-Discontinued Bond Program” in Item 7 below and “Discontinued Bond Program” in Note 15 to the Consolidated Financial Statements.

REGULATION

Insurance Company Regulation

Ohio Indemnity, as an Ohio property/casualty insurance corporation, is subject to the regulatory supervision of the Department. In addition, Ohio Indemnity is subject to regulation in each jurisdiction in which it is licensed to write business.

Such regulation relates to, among other matters: licensing of insurers and their agents; authorized lines of business; capital and surplus requirements; rate and form approvals; claims practices; mandated participation in shared markets; reserve requirements; insurer solvency; investment criteria; underwriting limitations; affiliate transactions; dividend limitations; changes in control; and a variety of other financial and non-financial components of our business.

All insurance companies must file annual financial statements (prepared in accordance with statutory accounting rules) in states where they are authorized to do business and are subject to regular and special examinations by the regulatory agencies of those states. In December 2006, the Department initiated its financial examination of Ohio Indemnity covering the period from October 1, 2002 through December 31, 2006. On July 8, 2007, the Department issued its examination report. No adjustments to Ohio Indemnity’s previously filed statutory financial statements were required as a result of the examination.

Numerous states require deposits of assets by insurance companies to protect policyholders. Such deposits must consist of securities which comply with standards established by the particular state’s insurance department. As of December 31, 2009, we have securities with an amortized cost of $5,026,215 deposited with eleven state insurance departments. The deposits, typically required by a state’s insurance department on admission to do insurance business in such state, may be increased periodically as mandated by applicable statutory or regulatory requirements.

Ohio Insurance Holding Company System Regulation

We are also subject to the Ohio Insurance Holding Company System Regulatory Act, as amended (the “Ohio Insurance Holding Company Act”), which requires that notice of the proposed payment of any dividend or other distribution by Ohio Indemnity be given to the Ohio Superintendent of Insurance (the “Ohio Superintendent”) within five business days of its declaration and at least ten days prior to payment. If such dividend or distribution is paid from other than earned surplus or the dividend or distribution, together with any other dividends or distributions made within the preceding 12 months, exceeds the greater of: (1) 10% of Ohio Indemnity’s statutory surplus as of the immediately preceding December 31, or (2) the statutory net income of Ohio Indemnity for the immediately preceding calendar year, notice of the proposed dividend or distribution must be given to the Ohio Superintendent at least 30 days prior to payment, and the Ohio Superintendent may disapprove the dividend or distribution within the 30 day period following receipt of such notice. During 2010, the maximum amount of dividends that may be paid to Bancinsurance by Ohio Indemnity without prior approval is limited to $5,300,961.

Pursuant to the Ohio Insurance Holding Company Act, no person may acquire, directly or indirectly, 10% or more of the outstanding voting securities of Bancinsurance or Ohio Indemnity, unless the Ohio Superintendent has approved such acquisition. The determination of whether to approve any such acquisition is based on a variety of factors, including an evaluation of the acquirer’s financial condition, the competence of its management and whether competition in Ohio would be reduced. In addition, under the Ohio Insurance Holding Company Act, certain other material transactions involving Ohio Indemnity and its affiliates must be disclosed to the Ohio Superintendent not less than 30 days prior to the effective date of the transaction. The Ohio Superintendent may elect not to approve such transaction within such 30-day period if it does not meet the required standards. Transactions requiring approval by the Ohio Superintendent include: sales, purchases, or exchanges of assets; loans and extensions of credit; and investments not in compliance with statutory guidelines. Ohio Indemnity is also required under the Ohio Insurance Holding Company Act to file periodic and updated statements reflecting the current status of its holding company system, the existence of any related-party transactions and certain financial information relating to any person who directly or indirectly controls (presumed to exist with 10% voting control) Ohio Indemnity. We believe that we are in compliance with the Ohio Insurance Holding Company Act and the related regulations.

National Association of Insurance Commissioners

All states have adopted the financial reporting form of the NAIC, which form is typically referred to as the NAIC “annual statement.” In addition, most states, including Ohio, generally defer to NAIC with respect to statutory accounting practices and procedures. In this regard, the NAIC has a substantial degree of practical influence and is able to accomplish quasi-legislative initiatives through amendments to the NAIC annual statement and applicable statutory accounting practices and procedures. The Department requires that insurance companies domiciled in the State of Ohio prepare their statutory basis financial statements in accordance with the NAIC Accounting Practices and Procedures Manual.

The NAIC applies a risk-based capital test to property/casualty insurers. Ohio also applies the NAIC risk-based capital test. The risk-based capital 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 December 31, 2009.

SEC Investigation

As previously reported, on February 14, 2005, the Company received notification from the SEC that it was conducting an informal, non-public inquiry regarding the Company. On March 29, 2005, the Company was notified by the SEC that the informal, non-public inquiry had been converted into a formal private investigation. On October 23, 2007, the Company and certain of its current officers (Chief Executive Officer, Chief Financial Officer and Vice President of Specialty Products) each received a “Wells Notice” (the “Notice”) from the staff of the SEC indicating that the staff was considering recommending that the Commission bring a civil action against each of them for possible violations of the federal securities laws. The Notice provided the Company and each officer the opportunity to present their positions to the staff before the staff recommends whether any action should be taken by the Commission.

On November 16, 2009, the Commission filed settled enforcement actions against the Company and the Chief Executive Officer that resolve the SEC investigation with respect to them. The settlement relates to one accounting matter in 2003 and first quarter of 2004: reserving for the Company’s since-discontinued bond program. Under the terms of its settlement with the SEC, the Company consented, without admitting or denying the allegations in the complaint filed by the Commission, to the entry of a final judgment permanently enjoining the Company from violating Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. No fines, civil penalties or other sanctions were assessed against the Company. Under the terms of his settlement, the Chief Executive Officer consented, without admitting or denying the allegations in the complaint filed by the Commission, to the entry of a final judgment permanently enjoining him from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and from aiding and abetting any violation of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. He also agreed to pay a $60,000 civil penalty. On November 25, 2009, the settlements were approved by the United States District Court for the District of Columbia, and became final upon entry by the Court of the final judgment against the Company and the Chief Executive Officer.

On February 3, 2010, the Company was informed that the staff of the SEC had completed its investigation as to the Chief Financial Officer and Vice President of Specialty Products and does not intend to recommend to the Commission any enforcement action against either officer.

Pursuant to separate undertaking agreements dated November 12, 2007 between the Company and each officer who received the Notice, the Company agreed to advance reasonable legal fees and expenses incurred by each officer in connection with the SEC investigation. The undertaking agreements required each officer to repay the amounts advanced if it was ultimately determined, in accordance with Article Five of the Company’s Amended and Restated Code of Regulations (the “Regulations”), that the officer did not act in good faith or in a manner he reasonably believed to be in or not opposed to the best interests of the Company with respect to the matters covered by the SEC investigation. The Company’s board of directors has determined that none of these officers is required to repay any amounts advanced to him pursuant to his undertaking agreement for legal fees and expenses incurred in connection with the SEC investigation. The undertaking agreements are accounted for as guarantee liabilities as more fully described in Note 4 to the Consolidated Financial Statements.

For the years ended December 31, 2009 and 2008, the Company incurred expenses of $23,616 and $3,289,462, respectively, related to the SEC investigation. For 2009, the $23,616 of expenses consisted of (1) $171,036 of Company expenses and (2) a $147,420 net decrease in the Company’s guarantee liability associated with the undertaking agreements as the Company reduced its guarantee liability to zero at December 31, 2009 based on the events described above. For 2008, the $3,289,462 of expenses consisted of (1) $2,314,644 of Company expenses and (2) a $974,818 net increase in the Company’s guarantee liability related to the undertaking agreements.

See “Business Outlook-Expenses” and “Liquidity and Capital Resources” in Item 7 below, Note 4 to the Consolidated Financial Statements and Items 13 and 14 for additional information regarding the Company’s legal costs associated with the SEC investigation.

EMPLOYEES

As of February 2, 2010, we employed 33 full-time employees and no part-time employees. None of our employees are represented by a collective bargaining agreement, and we are not aware of any efforts to unionize our employees.

SERVICE MARKS

Our service marks “ULTIMATE LOSS INSURANCE,” “UTIMATE GAP” and “UCASSURE” are registered with the United States Patent and Trademark Office and the State of Ohio. While these service marks are important to us, we do not believe our business is materially dependent on any one of them.

ITEM 2. PROPERTIES

As of February 2, 2010, we leased approximately 13,300 square feet in Columbus, Ohio for our headquarters pursuant to a lease that commenced on January 1, 2009 and expires on December 31, 2015.

ITEM 3. LEGAL PROCEEDINGS

Highlands Arbitration. See “Overview-Discontinued Bond Program” in Item 7 below and “Discontinued Bond Program” in Note 15 to the Consolidated Financial Statements for information concerning the Highlands arbitration.

SEC Investigation. See “Regulation-SEC Investigation” in Item 1 above, “Business Outlook-Expenses” and “Liquidity and Capital Resources” in Item 7 below, Note 4 to the Consolidated Financial Statements and Items 13 and 14 for information concerning the SEC investigation.

In addition, we are involved in other 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 litigation is 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

MARKET INFORMATION

The Company’s common shares are currently dually quoted on the OTC Bulletin Board and in the “pink sheets” in the over-the-counter market under the symbol “BCIS.” The following table sets forth the reported high and low sales prices for the Company’s common shares on the OTC Bulletin Board and in the “pink sheets” for each quarterly period within the fiscal years ended December 31, 2008 and 2009.

Period		High Price				Low Price
Quarterly period ended March 31, 2008		$	5.20			$	4.30
Quarterly period ended June 30, 2008			5.10				4.25
Quarterly period ended September 30, 2008			6.00				4.50
Quarterly period ended December 31, 2008			6.00				3.25

Period		High Price				Low Price
Quarterly period ended March 31, 2009		$	4.50			$	3.51
Quarterly period ended June 30, 2009			5.00				3.00
Quarterly period ended September 30, 2009			4.00				3.40
Quarterly period ended December 31, 2009			6.50				3.45

These prices may reflect inter-dealer prices without retail mark-up, markdown or commissions and may not represent actual transactions.

The trading volume for the Company’s common shares has historically been relatively limited and a consistently active trading market for our common shares may not occur on the OTC Bulletin Board and in the “pink sheets.”

On February 2, 2010, the last reported sales price for the Company’s common shares on the OTC Bulletin Board and in the “pink sheets” was $5.00.

HOLDERS

The number of holders of record of the Company’s common shares as of February 2, 2010 was approximately 600.

DIVIDENDS

On November 13, 2009, Bancinsurance Corporation’s board of directors declared a cash dividend of $0.50 per share (approximately $2.6 million in the aggregate) payable on December 14, 2009 to holders of record of its common shares as of the close of business on November 30, 2009. Bancinsurance Corporation has not historically paid cash dividends and did not declare or pay any other cash dividends on its common shares during the fiscal years ended December 31, 2008 and 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 and 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.

For a description of the restrictions on payment of dividends to us from Ohio Indemnity, see “Regulation-Ohio Insurance Holding Company System Regulation” in Item 1 above, “Liquidity and Capital Resources” in Item 7 below and Note 11 to the Consolidated Financial Statements.

REPURCHASE OF COMMON SHARES

There were no purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10(b)-18(a)(3) under the Securities Exchange Act of 1934, as amended) of our common shares during the fourth quarter of the 2009 fiscal year.

OVERVIEW

Bancinsurance 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. These segments are described in more detail below.

Products and Services

A discussion of our principal products and services is set forth in Item 1 above under the caption “Products and Services” and is incorporated herein by reference.

Discontinued Bond Program

Beginning in 2001 and continuing into the second quarter of 2004, we participated as a reinsurer in a program covering bail and immigration bonds issued by four insurance carriers and produced by a bail bond agency (collectively, the “discontinued bond program” or the “program”). The liability of the insurance carriers was reinsured to a group of reinsurers, including us. We assumed 15% of the business from 2001 through 2003 and 5% of the business during the first half of 2004. This program was discontinued in the second quarter of 2004.

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

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

During 2004 and 2005, we entered into arbitrations with the following four insurance carriers that participated in the discontinued bond program: 1) Aegis Security Insurance Company (“Aegis”); 2) Sirius America Insurance Company (“Sirius”); 3) Harco National Insurance Company (“Harco”); and 4) Highlands Insurance Company (“Highlands”), which had been placed in receivership in 2003. During 2006, the arbitrations with Aegis, Sirius and Harco concluded. For Aegis and Sirius, we entered into written settlement agreements with these insurance carriers resolving all disputes between us and these carriers relating to the discontinued bond program. These settlement agreements also relieved us from any potential future liabilities with respect to bonds issued by Aegis and Sirius.

For Harco, in August 2006, the Harco arbitration panel issued its Final Award and Order ordering each of the reinsurers participating in the arbitration, including us, to pay its proportionate share of past and future claims paid by Harco, subject to certain adjustments, offsets and credits (the “Final Order”). On January 11, 2010, the Company entered into a written settlement agreement with Harco resolving all matters between the Company and Harco relating to the discontinued bond program and the Final Order. Pursuant to the settlement agreement, the Company agreed to pay $1,450,000 to Harco to resolve the entire matter, including any potential future liabilities with respect to bonds issued by Harco. As of December 31, 2008, the Company had reserved $1,858,574 for Harco. As a result of the settlement, the Company reduced its reserve to $1,450,000 at December 31, 2009 which resulted in an increase to pre-tax income of $408,574 ($269,659 after tax) during 2009.

For Highlands, in October 2009, the Company reached an agreement in principle with Highlands to resolve all matters between the Company and Highlands relating to the discontinued bond program. Pursuant to the settlement agreement, the Company agreed to pay $3,000,000 to Highlands to resolve the entire matter, including any potential future liabilities with respect to bonds issued by Highlands. Because Highlands is currently in receivership, the settlement agreement was subject to the approval of the Texas receivership court. On December 22, 2009, the Texas receivership court approved the settlement agreement, and on December 23, 2009, the Company entered into the written settlement agreement with Highlands. As of December 31, 2008, the Company had reserved $4,780,885 for Highlands. As a result of the settlement, the Company reduced its reserve to $3,000,000 at December 31, 2009 which resulted in an increase to pre-tax income of $1,780,886 ($1,175,385 after tax) during 2009.

Pursuant to the Harco and Highlands settlement agreements, in January 2010, the Company paid $1,450,000 to Harco and $3,000,000 to Highlands. These payments did not have a material impact on the Company’s liquidity. 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.

Recently Issued Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168 (Codification reference ASC 105), “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” SFAS No. 168 sets forth the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative nongovernmental Generally Accepted Accounting Principles (“GAAP”). The Codification was launched on July 1, 2009 and is the official source of authoritative, nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), EITF, and related literature. After the Codification was launched on July 1, 2009, only one level of authoritative U.S. GAAP exists, other than guidance issued by the SEC. All other accounting literature excluded from the Codification will be considered non-authoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Company has included references to the Codification in the notes to the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157 (Codification reference ASC 820), “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. It applies to other pronouncements that require or permit fair value measurements but does not require any new fair value measurements. The statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS No. 157 establishes a fair value hierarchy (i.e., Levels 1, 2 and 3) to increase consistency and comparability in fair value measurements and disclosures. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2 (Codification reference ASC 820), “Effective Date of FASB Statement No. 157” (“FSP SFAS 157-2”), which permits a one-year deferral of the application of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS No. 157 and FSP SFAS 157-2 for financial assets and liabilities effective January 1, 2008, which did not have a material impact on the Company’s consolidated financial statements. The Company adopted SFAS No. 157 for non-financial assets and non-financial liabilities effective January 1, 2009, which did not have a material impact on the Company’s consolidated financial statements. In October 2008, the FASB issued FSP 157-3 (Codification reference ASC 820), “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP SFAS 157-3”), which clarifies the application of SFAS No. 157 in a market that is not active. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 163 (Codification reference ASC 944), “Accounting for Financial Guarantee Insurance Contracts.” SFAS No. 163 clarifies how SFAS No. 60 (Codification reference ASC 944), “Accounting and Reporting by Insurance Enterprises,” applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. SFAS No. 163 also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management activities, which are effective the first period beginning after issuance of SFAS No. 163. The adoption of SFAS No. 163 did not have a material impact on the Company’s consolidated financial statements.

In January 2009, the FASB issued FSP EITF 99-20-1 (Codification reference ASC 325), “Amendments to the Impairment Guidance of EITF Issue No. 99-20.” This FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. This FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115 (Codification reference ASC 320), “Accounting for Certain Investments in Debt and Equity Securities,” and other related guidance. This FSP is effective for interim and annual reporting periods ending after December 15, 2009. The Company adopted this FSP effective December 31, 2009, which did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP FAS 141(R)-1 (Codification reference ASC 805), “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” This FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS No. 5 (Codification reference ASC 450), “Accounting for Contingencies” and FASB Interpretation No. 14 (Codification reference ASC 450), “Reasonable Estimation of the Amount of a Loss.” Further, this FSP removed the subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS No. 141(R) (Codification reference ASC 805). The requirements of this FSP carry forward without

significant revision the guidance on contingencies of SFAS No. 141, “Business Combinations,” which was superseded by SFAS No. 141(R). This FSP also eliminates the requirement to disclose an estimate of the range of possible outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB requires that entities include only the disclosures required by SFAS No. 5. The Company adopted this FSP effective January 1, 2009, which did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB also issued the following three Staff Positions, each of which was adopted by the Company on April 1, 2009 without a material impact on the Company’s consolidated financial statements:

•

FSP FAS 157-4 (Codification reference ASC 820), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). This FSP supersedes FSP FAS 157-3 (Codification reference ASC 820), “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” This FSP provides additional guidance on: (1) estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to the normal market activity for the asset or liability, and (2) identifying transactions that are not orderly. This FSP must be applied prospectively and retrospective application is not permitted.

•

FSP FAS 115-2 and FAS 124-2 (Codification reference ASC 320), “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). This FSP provides new guidance on the recognition and presentation of other-than-temporary impairments (“OTTI”) for available for sale and held to maturity fixed maturities (equities are excluded). An impaired security is not recognized as an impairment if management does not intend to sell the impaired security and it is more likely than not it will not be required to sell the security before the recovery of its amortized cost basis. If management concludes a security is other-than-temporarily impaired, this FSP requires that the difference between the fair value and the amortized cost of the security be presented as an OTTI charge in the statements of operations, with an offset for any noncredit-related loss component of the OTTI charge to be recognized in other comprehensive income. Accordingly, only the credit loss component of the OTTI amount will have an impact on the Company’s results of operations. This FSP also requires extensive new interim and annual disclosure for both fixed maturities and equities to provide further disaggregated information as well as information about how the credit loss component of the OTTI charge was determined and requiring a roll forward of such amount for each reporting period.

•

FSP FAS 107-1 and APB 28-1 (Codification reference ASC 825), “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). This FSP extends the disclosure requirements under SFAS No. 107 (Codification reference ASC 825), “Disclosures about Fair Value of Financial Instruments,” to interim financial statements and it amends APB Opinion 28 (Codification reference ASC 270), “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods.

In May 2009, the FASB issued SFAS No. 165 (Codification reference ASC 855), “Subsequent Events.” SFAS No. 165 sets standards for the disclosure of events that occur after the balance-sheet date, but before financial statements are issued or are available to be issued. SFAS No. 165 sets forth the following: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The Company adopted SFAS No. 165 effective April 1, 2009. The Company uses the date of the filing of its periodic report with the SEC as the date through which subsequent events have been evaluated, which is the same date as the date the financial statements are issued. The adoption of SFAS No. 165 did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued two other 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 December 31, 2009, which did not have a material impact on the Company’s 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, as well as 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 as well

as 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 consolidated financial statements.

Reinsurance Transactions

A discussion of our reinsurance transactions is set forth in Item 1 above under the caption “Reinsurance” and is incorporated herein by reference.

Automobile Service Contract Program

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

On August 24, 2007, we drew on the $4.3 million letter of credit, of which approximately $2.7 million was attributable to our obligations in connection with the Provider that is in bankruptcy and approximately $1.6 million was attributable to our obligations in connection with the Provider that is not in bankruptcy, and we subsequently obtained an additional $0.5 million from the Provider that is not in bankruptcy to further secure our insurance obligations. On December 2, 2008, the Bankruptcy Court entered a ruling approving a settlement and release agreement between us and the Provider that is in bankruptcy. Under the terms of this settlement and release agreement, we released from the collateral attributable to the Provider that is in bankruptcy and held by us approximately $1.0 million to that Provider’s bankruptcy estate during the fourth quarter of 2008. In exchange for the release of this collateral, the bankruptcy trustee, on behalf of the Provider that is in bankruptcy, agreed to release us from any claims by such Provider and any third party, other than those defined contract claims that are scheduled on the settlement and release agreement (the “scheduled claims”). We believe the collateral retained by us attributable to such Provider is sufficient to pay for the approximately $0.7 million in estimated liability for the scheduled claims as of December 31, 2009. As a result of the settlement and release agreement, the $0.7 million liability associated with the Provider that is in bankruptcy is reported as “reserve for unpaid losses and loss adjustment expenses” in our accompanying balance sheet.

As of December 31, 2009, the Provider that is not in bankruptcy has not defaulted on its obligations under the service contracts. As of December 31, 2009, the total cash held by us as collateral for such Provider was approximately $2.1 million, which funds are currently reported as “restricted short-term investments” in our accompanying balance sheet. As the collateral held by us is greater than the estimated claim obligations for service contracts issued by this Provider, the entire $2.1 million is reported as a liability in our accompanying balance sheet within “funds held for account of others.”

Because we believe our estimated liability for claims under this program is fully collateralized and our loss exposure is 100% reinsured, we do not believe the events described above will have a material adverse impact on us. However, if the Provider that is not in bankruptcy defaults on its obligations, and if our actual liability for claims under this program exceeds the collateral held by us and if we are unable to collect on the reinsurance, then this program could have a material adverse effect on our business, financial condition and/or operating results.

SEC Investigation

A discussion of the SEC investigation is set forth in Item 1 above under the caption “Regulation-SEC Investigation,” and is incorporated herein by reference.

SUMMARY RESULTS

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

		Period-to-Period Increase (Decrease)
		2008-2009
		Amount				% Change
Net premiums earned		$	(4,079,330	)			(8.5	)%
Net investment income			149,249				3.8
Net realized gains on investments			720,829				299.9
Other-than-temporary impairments on investments			534,564				(14.4	)
Management fees			(210,075	)			(57.0	)
Total revenues			(2,900,913	)			(5.9	)
Losses and LAE			(2,578,928	)			(10.5	)
Discontinued bond program losses and LAE			(2,087,556	)			2,048.6
Policy acquisition costs			(603,696	)			(5.2	)
Other operating expenses			209,003				2.7
SEC investigation expenses			(3,265,846	)			(99.3	)
Interest expense			(416,836	)			(33.8	)
Income before federal income taxes			5,842,946				1,127.8
Net income			3,707,427				272.3

Net income for 2009 was $5,068,730, or $0.99 per diluted share, compared to $1,361,303, or $0.27 per diluted share, for 2008. The most significant factors that influenced this period-over-period comparison were (1) a $3.3 million ($2.2 million after tax) decrease in expenses related to the SEC investigation, (2) a $2.2 million ($1.4 million after tax) decrease in reserves for our discontinued bond program as a result of the Harco and Highlands settlements as discussed in “Overview-Discontinued Bond Program” above, (3) a $0.7 million ($0.5 million after tax) increase in net realized gains on investments and (4) a $0.5 million ($0.4 million after tax) decrease in other-than-temporary impairment charges on investments.

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

		2009				2008
GAAP:
Loss ratio			46.9	%			53.0	%
Expense ratio			42.7				40.3
Combined ratio			89.6	%			93.3	%
Statutory:
Loss ratio			47.3	%			54.0	%
Expense ratio			43.5				44.5
Combined ratio			90.8	%			98.5	%

RESULTS OF OPERATIONS

2009 Compared to 2008

Net Premiums Earned. Net premiums earned decreased 8.5%, or $4,079,330, to $44,083,446 in 2009 from $48,162,776 a year ago principally due to a decrease in premiums for our ULI and GAP product lines which was partially offset by an increase in premiums for our CPI product line.

ULI net premiums earned decreased 20.2%, or $4,652,906, to $18,394,135 in 2009 from $23,047,041 a year ago. Approximately $2.4 million of the decrease related to a large financial institution customer that exited the automobile lending market in the fourth quarter of 2008. The remaining decrease was principally due to a decline in lending volume for the majority of our ULI customers. We believe this decline in lending volume was primarily caused by the national decline in automobile sales when compared to a year ago.

Net premiums earned for CPI increased 148.9%, or $2,008,358, to $3,357,113 in 2009 from $1,348,755 a year ago primarily due to one of our CPI insurance agents placing more business with us.

Net premiums earned for GAP decreased 18.0%, or $1,755,982, to $8,003,877 in 2009 from $9,759,859 a year ago. Approximately $0.8 million of the decrease related to the cancellation of a poor performing GAP customer in the second quarter of 2008. The remaining decrease was principally due to a decline in lending volume for the majority of our GAP customers. We believe this decline in lending volume was primarily caused by the national decline in automobile sales when compared to a year ago.

Net premiums earned for UC products increased 10.8%, or $712,224, to $7,332,977 in 2009 from $6,620,753 a year ago primarily due to pricing increases and new customers added for our UCassure^® product combined with an increase in audit premium for our excess of loss product.

Net premiums earned for WIP decreased 5.1%, or $360,964, to $6,785,803 in 2009 from $7,146,767 a year ago primarily due to a decrease in escrow and contract surety bond premium which was partially offset by an increase in waste surety bond premium.

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

Net Investment Income. Net investment income increased 3.8%, or $149,249, to $4,047,706 in 2009 from $3,898,457 a year ago principally due to an increase in our average invested assets during 2009 when compared to a year ago.

Net Realized Gains on Investments. Net realized gains on investments increased 299.9%, or $720,829, to $961,197 in 2009 from $240,368 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 and tax consequences. During 2009, we recorded $961,197 of net realized gains on investments primarily due to sales of equity securities that had previously been written down as an other-than-temporary impairment and then had subsequent recovery in value. In order to utilize tax capital loss carrybacks prior to their expiration, we sold securities during 2009 that had previously been written down and then had subsequent recovery in value. Sales of these securities generated realized losses for tax purposes but generated realized gains for book purposes.

For more information concerning net realized gains on investments, see “Business Outlook” below.

Other-Than-Temporary Impairments on Investments. Other-than-temporary impairments on investments decreased 14.4%, or $534,654, to $3,168,291 in 2009 from $3,702,945 a year ago. The impairment charges recorded during 2009 were primarily due to the following: (1) $1,316,177 in impairment charges for four closed-end mutual funds whose fair values were adversely affected by the current market conditions; (2) $797,619 in impairment charges for equity securities of seven financial institutions whose fair values were adversely affected primarily by the credit markets; (3) $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; (4) $208,004 in impairment charges for two fixed maturity securities that were downgraded below investment grade; (5) $150,713 in impairment charges for ten fixed maturity securities that we intend to sell before their anticipated recovery in order to utilize capital loss carrybacks for tax purposes; and (6) $62,157 in impairment charges for an equity security of an insurance company whose fair value was adversely affected by the current market conditions.

For more information concerning impairment charges, see “Business Outlook” and “Critical Accounting Policies-Other-Than-Temporary Impairment of Investments” below and Note 2 to the Consolidated Financial Statements.

Management Fees. Our management fees decreased 57.0%, or $210,075, to $158,766 in 2009 from $368,841 a year ago primarily due to

an increase in benefit charges. Our current benefit charges may not necessarily correlate with the current national unemployment experience as the non-profit entities that utilize our UC coverage may have different factors that are affecting their unemployment rates. We expect management fees to vary from period to period depending on our customers’ unemployment levels and benefit charges. For more information concerning management fees, see “Business Outlook” below.

Losses and Loss Adjustment Expenses. Losses and LAE decreased 19.1%, or $4,666,484, to $19,788,113 in 2009 from $24,454,597 a year ago principally due to a decrease in ULI and discontinued bond program losses which was partially offset by an increase in CPI losses.

ULI losses and LAE decreased 24.1%, or $4,017,540, to $12,629,310 in 2009 from $16,646,850 a year ago primarily due to the decline in premium described above.

CPI losses and LAE increased 311.3%, or $1,198,866, to $1,583,959 in 2009 from $385,093 a year ago primarily due to the growth in premium described above.

GAP losses and LAE increased 4.2%, or $245,815, to $6,034,697 in 2009 from $5,788,882 a year ago. The increase in losses was primarily caused by an increase in both frequency and severity of losses for the majority of our GAP customers which was partially offset by a decrease in losses as a result of the decline in premium described above. We believe the increase in severity in 2009 was primarily related to an overall decline in used automobile values when compared to a year ago.

UC losses and LAE increased 56.2%, or $655,242, to $1,820,889 in 2009 from $1,165,647 a year ago. This increase in losses was primarily caused by a $973,075 increase in loss reserves for our UCassure^® product as a result of an increase in benefit charges during 2009 when compared to a year ago. This increase in losses was partially offset by a $440,000 decrease in losses as a result of the previously disclosed settlement of a dispute with a former UC customer in 2008.

WIP losses and LAE decreased 3.5%, or $19,461, to $534,631 in 2009 from $554,092 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. As a result, the decrease in WIP losses and LAE in 2009 was primarily related to the decline in net premiums earned.

Discontinued bond program losses and LAE decreased $2,087,556 to a benefit of $2,189,460 in 2009 compared to a benefit of $101,904 in 2008. The benefit in 2009 resulted from the settlement agreements with Highlands and Harco as described above in “Overview-Discontinued Bond Program.” The benefit in 2008 was primarily attributable to Harco providing sufficient information for us to estimate recoveries on their losses. See “Overview-Discontinued Bond Program” above and “Discontinued Bond Program” in Note 15 to the Consolidated Financial Statements for more information concerning losses and LAE for the discontinued bond program.

Other specialty products losses and LAE decreased $641,850 in 2009 compared to a year ago primarily due to favorable loss development for one of our automobile service contract programs that is in run off. See “Automobile Service Contract Program” above and “Automobile Service Contract Program” in Note 15 to the Consolidated Financial Statements for more information concerning this program.

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 decreased 5.2%, or $603,696, to $11,100,497 in 2009 from $11,704,193 a year ago primarily due to a decrease in commission expense for our ULI and GAP product lines as a result of the decline in premium described above. This decrease was partially offset by an increase in commission expense for our CPI product line primarily due to the growth in premium described above.

Other Operating Expenses. Other operating expenses increased 2.7%, or $209,003, to $8,012,125 in 2009 from $7,803,122 a year ago primarily due to an increase in compensation expense. The increase in compensation expense principally related an increase in equity-based compensation expense combined with an increase in non-equity incentive plan compensation expense.

SEC Investigation Expenses. SEC investigation expenses decreased 99.3%, or $3,265,846, to $23,616 in 2009 from $3,289,462 a year ago. See “SEC Investigation” above, “Business Outlook-Expenses” and “Liquidity and Capital Resources” below and Note 4 to the Consolidated Financial Statements for more information concerning the SEC investigation.

Interest Expense. Interest expense decreased 33.8%, or $416,836, to $815,419 in 2009 from $1,232,255 a year ago primarily due to declining interest rates on our trust preferred debt. See “Business Outlook” and “Liquidity and Capital Resources” below and Note 7 to the 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 effective federal income tax rate was 20.3% in 2009 compared to (162.7)% a year ago. This increase was primarily attributable to the ratio of tax-exempt investment income when compared to income from operations for each period. For more information concerning our federal income taxes, see Note 8 to the Consolidated Financial Statements.

GAAP Combined Ratio. For 2009, the combined ratio improved to 89.6% from 93.3% a year ago. The loss ratio improved to 46.9% in 2009 from 53.0% a year ago primarily due to the decrease in losses and LAE for the discontinued bond program combined with favorable loss development for one of our automobile service contract programs as described above. The expense ratio increased to 42.7% in 2009 from 40.3% a year ago primarily due to the amount of other operating expenses relative to the decrease in net premiums earned combined with a higher commission expense ratio given the decline in lender service business which has a lower commission structure when compared to our UC and WIP product lines.

BUSINESS OUTLOOK

Lender Service

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. In 2009, the automobile industry experienced its worst sales results in 16 years. Overall, U.S. new automobile sales were down approximately 21% in 2009 when compared to a year ago. As a result, many of our financial institution customers have experienced declines in lending volumes for automobiles during 2009. For ULI and GAP, our premium collections were down 22% and 28%, respectively, in 2009 compared to a year ago which is generally consistent with the decline in U.S. new automobile sales. 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 and certain of our ULI and EPD 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 have experienced an increase in loan defaults, bankruptcies and automobile repossessions. As the rate of loan defaults, bankruptcies and automobile repossessions increases for our ULI and CPI customers, we experience an increase in the frequency of losses for these product lines. As the national economy remains unstable and unemployment levels remain high, our financial institution customers could experience an increase in loan defaults, bankruptcies and automobile repossessions in the future. Incentives offered on new cars by dealers and manufacturers have depressed the value of the used car market. In addition, the higher level of gas prices has lowered the market value of less fuel-efficient vehicles. As used car prices decline, the “gap” between the value of the vehicle and the outstanding loan balance increases and thus the severity of our GAP losses increases. 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 our increased frequency and severity of losses was cancelling a poor performing GAP customer in the second quarter of 2008. During 2009 and 2008, this GAP customer had net premiums earned of approximately $1.6 million and $2.4 million, respectively, and its combined ratio was 139% and 134%, respectively. As of December 31, 2009, we had approximately $1.7 million of unearned premium for this customer that will be earned over approximately two years.

Effective January 1, 2007, we entered into a producer-owned reinsurance arrangement with an EPD customer whereby 100% of that customer’s premiums (along with the associated risk) were ceded to its PORC. For this reinsurance arrangement, we have obtained collateral in the form of funds held and a letter of credit to secure our obligations. Under the provisions of the reinsurance agreement, the collateral must be equal to or greater than 102% of the reinsured reserves and we have immediate access to such collateral if necessary. This program reduced our commission expense by $1.2 million in 2009 compared to $0.8 million in 2008. We expect this program to reduce our commission expense by approximately $1.4 million during fiscal year 2010. As of December 31, 2009, we had approximately $2.2 million of deferred ceded commissions for this program that will be earned over approximately four years.

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. During 2009, we experienced an increase in benefit charges for our UCassure^® product when compared to a year ago which resulted in a $973,075 increase in loss reserves this product during 2009. We expect that our excess of loss product will also experience an increase in benefit charges, especially considering its geographical concentration in California (approximately 35% of this business is in California). Given the current economic conditions, including high unemployment levels, we believe it is possible that we could continue to experience an 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% to 12.5% for one of the reinsurance arrangements under our WIP program. We estimate that this change in participation should increase our net premiums earned by approximately $1.0 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 December 31, 2009, our net loss and LAE reserves for the WIP program were approximately $2.9 million. For waste and contract surety bonds, as of December 31, 2009, 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 $1.6 million and $0.9 million, respectively.

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 concerning 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. These 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 these 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 December 31, 2009, our maximum net loss exposure related to the Disputed Contracts was approximately $9.0 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.

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 2009 when compared to a year ago which resulted in a decrease in interest expense of approximately $0.4 million for 2009 when compared to 2008. On December 30, 2009, we drew $3.0 million on our bank line of credit which was paid down on February 3, 2010. See “Liquidity and Capital Resources” below and Notes 5 and 7 to the Consolidated Financial Statements for more information concerning our trust preferred debt and revolving line of credit.

Investments

As of December 31, 2009, approximately 96% of our fixed maturity portfolio was invested in tax-exempt municipal bonds which consisted primarily of revenue issue bonds (approximately 93%) and general obligation bonds (approximately 7%). During 2009, market liquidity for such bonds improved considerably when compared to 2008. Trading desks at firms such as Bear Stearns, Lehman Brothers, Merrill Lynch, and Wachovia had previously played significant roles in supplying liquidity in the bond markets. With these brokers no longer in existence or merged into other entities and other financial institutions accumulating capital, the municipal bond markets witnessed a dramatic widening in bid/ask spreads and a decrease in trading volume during the second half of 2008. Municipal bond returns from September through December of 2008 were the worst of any such period in the past 20 years. Returns for municipal bonds improved

considerably during 2009 as municipal bond funds saw record positive cash flow in 2009, and considerable liquidity returned as bond traders made markets in more municipal securities, thereby enhancing demand. As a result, municipal bond prices improved as of December 31, 2009 when compared to December 31, 2008, and the gross unrealized loss for our fixed maturity portfolio decreased from $7.8 million at December 31, 2008 to $1.6 million at December 31, 2009. The fair value of our fixed maturity portfolio could also be impacted by credit rating actions and related financial uncertainty associated with insurance companies that guarantee the obligations of some of our bonds. While municipal credits continue to demonstrate relative credit quality stability, market conditions are still somewhat unsettled.

Many of the securities within our equity portfolio have also been negatively impacted by the current economic conditions. During 2009, we recorded approximately $3.2 million of impairment charges for our investment portfolio (approximately $2.2 million for equity securities and approximately $1.0 million for fixed maturity securities). A stock market rally that materialized in mid-March 2009 continued through the fourth quarter of 2009. As a result, our equity portfolio improved as of December 31, 2009 when compared to December 31, 2008, and the gross unrealized loss for our equity portfolio decreased from $1.4 million at December 31, 2008 to zero at December 31, 2009.

Based on the current economic conditions and our other-than-temporary impairment accounting policy, additional impairment charges within our investment portfolio are possible during fiscal year 2010. As disclosed in Note 2 to the 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 2 to the Consolidated Financial Statements, as of December 31, 2009, 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 2010 as they were at December 31, 2009, 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 2 to the Consolidated Financial Statements, all of these securities are investment grade and we would likely not have any material other-than-temporary impairment charge on these securities during fiscal year 2010 unless they were to fall below investment grade. 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 2 to the Consolidated Financial Statements.

During 2009, we recorded approximately $1.0 million of net realized gains on investments primarily due to sales of equity securities that had previously been written down as an other-than-temporary impairment and then had subsequent recovery in value. We generally decide whether to sell securities based upon investment opportunities and tax consequences. In order to utilize our tax capital loss carrybacks prior to their expiration, we sold securities during 2009 that had previously been written down and then had subsequent recovery in value. Sales of these securities generated realized losses for tax purposes but generated realized gains for book purposes. Due to the inherent uncertainties of the investment markets, we cannot predict with reasonable certainty the amount of net realized gains (losses) that will be recorded during fiscal year 2010; however, the amount of such net realized gains (losses) could be material to our results of operations.

Based on the factors discussed above and the current economic conditions, our outlook for 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 December 31, 2009, our capital structure consisted of trust preferred debt issued to affiliates, bank line of credit and shareholders’ equity and is summarized in the following table:

		2009				2008
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			3,000,000				2,500,000
Total debt obligations			18,465,000				17,965,000
Total shareholders’ equity			44,371,719				34,660,381
Total capitalization		$	62,836,719			$	52,625,381
Ratio of total debt obligations to total capitalization			29.4	%			34.1	%

In December 2002, we organized BIC Statutory Trust I (“BIC Trust I”), a Connecticut special purpose business trust, which issued $8,000,000 of floating rate trust preferred capital securities in an exempt private placement transaction. 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 (collectively, the “Trusts”) were formed for the sole purpose of issuing and selling the floating rate trust preferred capital securities and investing the proceeds from such securities in junior subordinated debentures of Bancinsurance Corporation. In connection with the issuance of the trust preferred capital securities, Bancinsurance Corporation issued junior subordinated debentures of $8,248,000 and $7,217,000 to BIC Trust I and BIC Trust II, respectively. The floating rate trust preferred capital securities and the junior subordinated debentures have substantially the same terms and conditions. Bancinsurance Corporation has fully and unconditionally guaranteed the obligations of the Trusts with respect to the floating rate trust preferred capital securities. The Trusts distribute the interest received from Bancinsurance Corporation on the junior subordinated debentures to the holders of their floating rate trust preferred capital securities to fulfill their dividend obligations with respect to such trust preferred capital securities. BIC Trust I’s floating rate trust preferred capital securities, and the junior subordinated debentures issued in connection therewith, pay dividends and interest, as applicable, on a quarterly basis at a rate equal to three month LIBOR plus four hundred basis points (4.26% and 6.21% at December 31, 2009 and 2008, 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 (4.30% and 5.51% at December 31, 2009 and 2008, 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 December 31, 2009, Bancinsurance Corporation was in compliance with all such covenants.

Bancinsurance Corporation also has a $10,000,000 unsecured revolving bank line of credit with a maturity date of June 30, 2010. At December 31, 2009 and December 31, 2008, the outstanding balance under the line of credit was $3,000,000 and $2,500,000, respectively. The line of credit provides for interest payable quarterly at an annual rate equal to the prime rate less 75 basis points (2.50% at December 31, 2009 and 2008). The terms of the revolving credit agreement contain various restrictive covenants. As of December 31, 2009, Bancinsurance Corporation was in compliance with all such covenants. We utilize the bank line of credit from time to time based on short-term cash flow needs, the then current prime rate, Ohio Indemnity’s capital position and the dividend limitations on Ohio Indemnity as discussed below. We are in the process of negotiating with our existing lender to replace our current credit facility. Given the changes in the credit markets since we entered into our existing credit facility, we believe that the terms of the new credit facility may not be as favorable as our existing credit facility. However, we do not believe that the change in terms, or in the event we are unable to enter into a new credit facility, will have a material adverse effect on our financial condition, results of operations or liquidity based on our historical use of the credit facility and expected cash flows from operating and investing activities.

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 December 31, 2009, we had approximately $48.6 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 2 to the Consolidated Financial Statements.

The following table sets forth our cash and short-term investment position at December 31, 2009 and 2008:

		2009				2008
Cash & short-term investments		$	9,893,374			$	11,439,101
Money market mutual fund(1)			670				49,096
Total cash & short-term investments		$	9,894,044			$	11,488,197

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 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 without being required to liquidate intermediate-term and long-term investments at a loss.

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 impact on our results of operations, financial condition and/or future liquidity.

As discussed in “Overview-Discontinued Bond Program” above and in “Discontinued Bond Program” in Note 15 to the Consolidated Financial Statements, discontinued bond program loss and LAE reserves were $4,450,000 at December 31, 2009. Pursuant to the Harco and Highlands settlement agreements, in January 2010, the Company paid $1,450,000 to Harco and $3,000,000 to Highlands. 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 projected cash flows and the low interest rate on the bank line of credit (2.50%) as compared to the average yield on our fixed income portfolio (4.80%), 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 paid off 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.

During 2008, Bancinsurance Corporation experienced a significant increase in expenses and cash outflows as a result of expenses associated with the SEC investigation. Based on management’s expectation that Bancinsurance Corporation would continue to incur significant expenses and have significant cash outflows related to the SEC investigation during 2008, Bancinsurance Corporation drew $2.5 million on its bank line of credit on March 31, 2008. Given the decrease in expenses associated with the SEC investigation during 2009, Bancinsurance Corporation paid down the entire $2.5 million balance on the bank line of credit during the second quarter of 2009. As discussed above, Bancinsurance Corporation borrowed $3.0 million on the bank line of credit during the fourth quarter of 2009 in anticipation of the Highlands settlement payment. Bancinsurance paid down the entire $3.0 million balance on the bank line of credit during the first quarter of 2010 using excess cash flows from the Company’s operating and investing activities. At December 31, 2009 and December 31, 2008, Bancinsurance Corporation had total cash and invested assets of $4.2 million and $3.8 million, respectively. This

increase in cash and invested assets was primarily due to Bancinsurance Corporation increasing its borrowings under its bank line of credit by $0.5 million during 2009. As a result of the Company’s and the Chief Executive Officer’s settlements with the SEC and the SEC staff’s completion of its investigation of the Chief Financial Officer and Vice President of Specialty Products, management expects that Bancinsurance Corporation’s future expenses will return to historical levels in 2010 and Bancinsurance Corporation will be able to meet its cash flow requirements from the sources described above. See “Regulation-SEC Investigation” in Item 1 above, “Business Outlook-Expenses” above, Note 4 to the Consolidated Financial Statements and Items 13 and 14 for more information regarding the SEC investigation.

On November 13, 2009, Bancinsurance Corporation’s board of directors declared a cash dividend of $0.50 per share (approximately $2.6 million in the aggregate) payable on December 14, 2009 to holders of record of its common shares as of the close of business on November 30, 2009. While Bancinsurance Corporation has not historically paid cash dividends, we paid this dividend after determining that, based on our then current capital levels in relation to our then current cash requirements, the dividend provided a return on capital to our shareholders without compromising our capital structure or materially impacting our liquidity. 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 and 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 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 October 26, 2009, Ohio Indemnity’s board of directors declared a cash dividend in an aggregate amount of $2.5 million that was paid to Bancinsurance Corporation during the fourth quarter of 2009. 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 of 2010. Of the $4.9 million dividend, $2.9 million required and received approval by the Department. These dividends did not have a material adverse impact on the Company’s liquidity. During 2010, the maximum amount of dividends that may be paid to Bancinsurance Corporation by Ohio Indemnity without such prior approval is $5,300,961. For more information concerning dividend restrictions see “Regulation-Ohio Insurance Holding Company System Regulation” in Item 1 above.

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 December 31, 2009.

Net cash provided by (used in) operating activities was $5,070,508 and $(5,064,235) during 2009 and 2008, respectively. The increase in cash provided by operating activities was primarily due to the following: (1) an approximately $4.6 million decrease in legal expenses paid during 2009 when compared to a year ago related to the SEC investigation; (2) an increase in net premiums collected of approximately $1.2 million primarily attributable to $4.5 million of retrospective premium adjustment payments that were made in 2008 compared to zero in 2009 and a $0.8 million increase in net premiums collected for our UC product line. These increases in premium were partially offset by a $4.1 million decrease in net premiums collected for our lender service product line; and (3) a decrease of approximately $3.7 million in net losses and policy acquisition costs paid during 2009 compared to a year ago primarily due to the decline in lender service premium.

Net cash provided by investing activities was $1,100,265 and $3,912,994 during 2009 and 2008, respectively. The decrease was primarily due to the use of certain investment proceeds to fund operating cash requirements during 2008, whereas during 2009, more excess cash from operations was used to purchase investments.

Net cash (used in) provided by financing activities was ($2,119,248) and $2,500,000 during 2009 and 2008, respectively. The cash received during 2008 was due to a $2,500,000 draw on our bank line of credit during that period. The cash used during 2009 was primarily due to a $2.6 million cash dividend paid to shareholders which was partially offset by a net increase in cash of $0.5 million from additional borrowings on our bank line of credit.

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 our overall operations.

CRITICAL ACCOUNTING POLICIES

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

Other-Than-Temporary Impairment of Investments

We continually monitor the difference between the book value and the estimated fair value of our investments, which involves judgment as to whether declines in value are temporary in nature. If we believe a decline in the value of a particular available for sale investment is temporary, we record the decline as an unrealized loss in our shareholders’ equity. If we believe the decline in any investment is “other-than-temporarily impaired,” we record the decline as a realized loss through the income statement. If our judgment changes in the future, we may ultimately record a realized loss for a security after having originally concluded that the decline in value was temporary. We begin to monitor a security for other-than-temporary impairment when its fair value to book value ratio falls below 80%. The following discussion summarizes our process and factors considered when evaluating a security for potential impairment.

Fixed 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 December 31, 2009, 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 2 to the Consolidated Financial Statements for information regarding our securities that were in an unrealized loss position at December 31, 2009 that 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 2 to the 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.

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

Assumed Business. Assumed reinsurance is a line of business with inherent volatility. Since the length of time required for the losses to be reported through the reinsurance process can be quite long, unexpected events are more difficult to predict. Our ultimate loss reserve estimates for assumed reinsurance are 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. However, it is possible that we may experience an increase in the frequency for ULI and CPI losses and an increase in the severity for GAP losses as discussed in “Business Outlook-Lender Service” above. Such extraordinary changes or claims emergence may impact the level of required reserves in ways that are not presently quantifiable. Thus, while we believe our reserve estimates are reasonable given the information currently available, actual emergence of losses could deviate materially from our estimates and from amounts recorded by us.

As of December 31, 2009, 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 development for each accident year. These selected factors are used to project the ultimate expected losses for each accident year. The validity of the results from using a loss development approach can be affected by many conditions, such as claim department processing changes, a shift between single and multiple payments per claim, legal changes or variations in our mix of business from year to year. Also, because the percentage of losses paid for immature years is often low, development factors are volatile. A small variation in the number of claims paid can have a leveraging effect that can lead to significant changes in estimated ultimate losses. Therefore, ultimate values for immature accident years may be based on alternative estimation techniques, such as 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 reserves on an undiscounted basis. Our reserves reflect anticipated salvage and subrogation included as a reduction to loss and LAE reserves. We do not provide coverage that could reasonably be expected to produce asbestos and/or environmental liability claims activity or material levels of exposure to claims-made extended reporting options.

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

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

Loss and LAE Reserves at Year End. As of December 31, 2009 and 2008, gross loss and LAE reserves by product line were split between incurred but not reported (“IBNR”) and case reserves as follows:

		December 31, 2009								December 31, 2008
		IBNR				Case				IBNR				Case
ULIL		$	836,000			$	146,796			$	1,087,000			$	101,182
ULIN			635,453				385,859				693,728				472,363
CPI			361,764				106,087				179,472				21,619
EPD			1,156,000				463,273				811,000				339,000
GAP			4,868,854				104,774				3,410,122				100,343
UC			1,965,624				—				1,747,893				—
WIP			4,077,757				—				3,262,742				—
Discontinued bond program			—				4,450,000				6,019,253				620,207
Vehicle service contracts			685,000				—				1,436,263				—
Other specialty products			—				—				17,418				—
Total		$	14,586,452			$	5,656,789			$	18,664,891			$	1,654,714

During 2009, reserves for incurred losses and LAE attributable to insured events of prior years decreased by approximately $4.5 million primarily as a result of re-estimation of unpaid losses and LAE on our discontinued bond program, lender service, other specialty and WIP product lines. An analysis of this change in reserves is provided below.

Our discontinued bond program experienced redundancies of approximately $2.2 million during 2009 as a result of the settlements with Highlands and Harco as discussed in “Overview-Discontinued Bond Program” above and in “Discontinued Bond Program” in Note 15 to the Consolidated Financial Statements.

One of our automobile service contract programs within other specialty products experienced reserve redundancies of approximately $0.6 million during 2009 primarily due to favorable run off of claims. See “Results of Operations” and “Automobile Service Contract Program” above and “Automobile Service Contract Program” in Note 15 to the Consolidated Financial Statements for more information concerning this program.

ULIN experienced reserve redundancies of approximately $0.5 million during 2009. The improvement in loss experience primarily related to the 2008 accident year. At December 31, 2009 and 2008, our ultimate selected loss ratio for the 2008 accident year was 59.9% and 65.3%, respectively. Changes in this key assumption occurred primarily during the first and second quarters of 2009 as the majority of our ULIN losses are settled within three to six months from the date of loss. When estimating the ultimate loss ratio at December 31, 2008, we selected an ultimate loss ratio for the 2008 accident year that was based on indicated loss information combined with historical development data. During the first six months of 2009, our 2008 accident year loss experience was more favorable than previously estimated at December 31, 2008. In accordance with GAAP, we recorded this change in reserves as a change in estimate during 2009.

ULIL experienced reserve redundancies of approximately $0.4 million during 2009. The improvement in loss experience primarily related to the 2008 accident year. At December 31, 2009 and 2008, our ultimate selected loss ratio for the 2008 accident year was 81.1% and 83.5%, respectively. Changes in this key assumption occurred primarily during the first quarter of 2009 as the majority of our ULIL losses are settled within three to six months from the date of loss. When estimating the ultimate loss ratio at December 31, 2008, we selected an ultimate loss ratio for the 2008 accident year that was equal to the then current indicated paid loss ratio. During the first quarter of 2009, our 2008 accident year loss experience was more favorable than previously estimated at December 31, 2008. In accordance with GAAP,

we recorded this change in reserves as a change in estimate during 2009. It should be noted that the ULIL product is subject to premium adjustments based on loss experience (i.e., experience-rated policies or retrospective-rated policies), and therefore this prior year loss development had no impact on net income.

Our WIP program experienced reserve redundancies of approximately $0.4 million during 2009 as we did not receive any material claims for this program during 2009. For more information concerning WIP losses and LAE, see “Results of Operations” and “Business Outlook” above.

The majority of our losses are short-tail in nature and adjustments to reserve amounts occur rather quickly. Conditions that affected the above redundancies in reserves may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate this redundancy to future periods.

For more information concerning losses and LAE, see “Business Outlook” above.

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 10 to the 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 litigation and the potential that an adverse outcome in a legal proceeding could have a material impact on our financial condition and/or results of operations, such estimates are considered to be critical accounting estimates. See Note 20 to the Consolidated Financial Statements for information concerning the Company’s commitments and contingencies. For more information, see Item 3-“Legal Proceedings.”

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 consolidated financial statements. Any such change could significantly affect the amounts reported in the consolidated statements of income.

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, see Note 8 to the Consolidated Financial Statements.

OFF-BALANCE SHEET TRANSACTIONS

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

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Bancinsurance Corporation

We have audited the accompanying consolidated balance sheet of Bancinsurance Corporation and subsidiaries (the “Company”) as of December 31, 2009, and the related consolidated statements of income, shareholders’ equity and cash flows for the year then ended. Our audit also included the financial statement schedules listed in the index at Item 15(a) pertaining to the 2009 fiscal year. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bancinsurance Corporation and subsidiaries at December 31, 2009 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Skoda Minotti
Mayfield Village, Ohio

February 26, 2010

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Bancinsurance Corporation

We have audited the accompanying consolidated balance sheet of Bancinsurance Corporation and subsidiaries (the “Company”) as of December 31, 2008, and the related consolidated statements of income, shareholders’ equity and cash flows for the year then ended. Our audit also included the financial statement schedules listed in the index at Item 15(a) pertaining to the 2008 fiscal year. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bancinsurance Corporation and subsidiaries at December 31, 2008 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Daszkal Bolton LLP
Boca Raton, Florida

February 25, 2009

BANCINSURANCE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

		Years ended December 31,
		2009				2008
Revenues:
Net premiums earned		$	44,083,446			$	48,162,776
Net investment income			4,047,706				3,898,457
Net realized gains on investments			961,197				240,368
Other-than-temporary impairments on investments			(3,168,291	)			(3,702,945	)
Management fees			158,766				368,841
Other income			17,992				34,232
Total revenues			46,100,816				49,001,729
Expenses:
Losses and loss adjustment expenses			21,977,573				24,556,501
Discontinued bond program losses and loss adjustment expenses (benefit)			(2,189,460	)			(101,904	)
Policy acquisition costs			11,100,497				11,704,193
Other operating expenses			8,012,125				7,803,122
SEC investigation expenses			23,616				3,289,462
Interest expense			815,419				1,232,255
Total expenses			39,739,770				48,483,629
Income before federal income taxes			6,361,046				518,100
Federal income tax expense (benefit)			1,292,316				(843,203	)
Net income		$	5,068,730			$	1,361,303
Net income per share:
Basic		$	0.99			$	0.27
Diluted		$	0.99			$	0.27
Weighted average common shares outstanding:
Basic			5,135,928				5,033,423
Diluted			5,138,010				5,047,394
Cash dividends declared per common share		$	0.50			$	—

See accompanying notes to consolidated financial statements.

BANCINSURANCE CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

		December 31,
		2009				2008
Assets
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value $5,294,900 in 2009 and $5,330,671 in 2008)		$	5,181,905			$	5,198,068
Available for sale:
Fixed maturities, at fair value (amortized cost $71,013,020 in 2009 and $67,022,560 in 2008)			71,573,049				59,675,070
Equity securities, at fair value (cost $5,774,207 in 2009 and $7,295,353 in 2008)			7,251,637				6,541,864
Short-term investments, at cost which approximates fair value			342,002				5,939,254
Restricted short-term investments, at cost which approximates fair value			3,410,069				3,886,635
Other invested assets			715,000				715,000
Total investments			88,473,662				81,955,891
Cash			9,551,372				5,499,847
Premiums receivable			4,614,787				5,278,710
Reinsurance recoverable			6,821,490				4,836,817
Prepaid reinsurance premiums			41,949,098				35,615,978
Deferred policy acquisition costs			3,723,961				4,535,805
Loans to affiliates			1,165,905				1,093,932
Accrued investment income			1,085,096				1,008,648
Net deferred tax asset			2,322,885				5,583,390
Other assets			1,071,642				1,244,583
Total assets		$	160,779,898			$	146,653,601

See accompanying notes to consolidated financial statements.

BANCINSURANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets, Continued

		December 31,
		2009				2008
Liabilities and Shareholders’ Equity
Reserve for unpaid losses and loss adjustment expenses		$	15,793,241			$	13,680,145
Discontinued bond program reserve for unpaid losses and loss adjustment expenses			4,450,000				6,639,460
Unearned premiums			62,185,040				58,201,957
Ceded reinsurance premiums payable			3,362,762				2,431,515
Experience rating adjustments payable			1,025,137				1,046,391
Retrospective premium adjustments payable			958,883				1,228,537
Funds held under reinsurance treaties			784,622				651,267
Funds held for account of others			3,410,071				3,886,635
Contract funds on deposit			2,062,992				2,677,244
Taxes, licenses and fees payable			294,821				336,413
Current federal income tax payable			140,183				131,171
Commissions payable			2,176,797				1,837,757
Other liabilities			1,298,630				1,279,728
Bank line of credit			3,000,000				2,500,000
Trust preferred debt issued to affiliates			15,465,000				15,465,000
Total liabilities		$	116,408,179			$	111,993,220
Commitments and contingencies
Shareholders’ equity:
Non-voting preferred shares:
Class A Serial Preference shares without par value; authorized 100,000 shares; no shares issued or outstanding			—				—
Class B Serial Preference shares without par value; authorized 98,646 shares; no shares issued or outstanding			—				—
Common shares without par value; authorized 20,000,000 shares; 6,170,341 shares issued at December 31, 2009 and 2008; 5,205,706 shares outstanding at December 31, 2009 and 5,082,574 shares outstanding at December 31, 2008			1,794,141				1,794,141
Additional paid-in capital			1,574,340				1,638,503
Accumulated other comprehensive (loss) income			1,344,720				(5,346,647	)
Retained earnings			44,438,576				41,972,699
			49,151,777				40,058,696
Less: Treasury shares, at cost (964,635 common shares at December 31, 2009 and 1,087,767 common shares at December 31, 2008)			(4,780,058	)			(5,398,315	)
Total shareholders’ equity			44,371,719				34,660,381
Total liabilities and shareholders’ equity		$	160,779,898			$	146,653,601

See accompanying notes to consolidated financial statements.

BANCINSURANCE CORPORATION AND SUBSIDIARIES

																		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, 2007		$	—			$	—			$	1,794,141			$	1,630,394			$	239,041			$	40,611,396			$	(5,818,050	)		$	38,456,922
Comprehensive income:
Net income			—				—				—				—				—				1,361,303				—				1,361,303
Unrealized losses, net of tax and reclassification adjustment			—				—				—				—				(5,585,688	)			—				—				(5,585,688	)
Total comprehensive loss																															(4,224,385	)
Equity-based compensation expense			—				—				—				395,054				—				—				—				395,054
84,624 common shares issued in connection with restricted stock awards			—				—				—				(419,735	)			—				—				419,735				—
Tax benefit related to vesting of restricted stock			—				—				—				32,790				—				—				—				32,790
Balance at 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			—				—				—				—				—				5,068,730				—				5,068,730
Unrealized gains, net of tax and reclassification adjustment			—				—				—				—				6,691,367				—				—				6,691,367
Total comprehensive income																															11,760,097
Cash dividends declared			—				—				—				—				—				(2,602,853	)			—				(2,602,853	)
Equity-based compensation expense			—				—				—				516,022				—				—				—				516,022
4,822 treasury shares repurchased			—				—				—				—				—				—				(16,395	)			(16,395	)
127,944 common shares issued in connection with restricted stock awards			—				—				—				(634,652	)			—				—				634,652				—
Tax benefit related to vesting of restricted stock			—				—				—				54,467				—				—				—				54,467
Balance at December 31, 2009		$	—			$	—			$	1,794,141			$	1,574,340			$	1,344,720			$	44,438,576			$	(4,780,058	)		$	44,371,719

See accompanying notes to consolidated financial statements.

BANCINSURANCE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

		Years ended December 31,
		2009				2008
Cash flows from operating activities:
Net income		$	5,068,730			$	1,361,303
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net realized gains on investments			(961,197	)			(240,368	)
Other-than-temporary impairments on investments			3,168,291				3,702,945
Net realized gains on disposal of property and equipment			(4,635	)			—
Depreciation and amortization			405,733				588,696
Equity-based compensation expense			516,022				395,054
Deferred federal income tax benefit			(186,563	)			(1,250,476	)
Change in assets and liabilities:
Premiums receivable			663,923				2,198,724
Reinsurance recoverable			(1,984,673	)			(994,620	)
Prepaid reinsurance premiums			(6,333,120	)			(9,099,182	)
Deferred policy acquisition costs			811,844				1,363,645
Other assets, net			(22,433	)			32,034
Reserve for unpaid losses and loss adjustment expenses			(76,364	)			2,935,859
Unearned premiums			3,983,083				5,315,429
Ceded reinsurance premiums payable			931,247				(2,231,665	)
Experience rating adjustments payable			(21,254	)			(948,196	)
Retrospective premium adjustments payable			(269,654	)			(2,987,890	)
Funds held under reinsurance treaties			133,355				(12,590	)
Funds held for account of others			(476,564	)			(2,828,300	)
Contract funds on deposit			(614,252	)			160,198
Taxes, license and fees payable			(41,592	)			(166,583	)
Commissions payable			339,040				(389,841	)
SEC investigation expense payable			(401,503	)			(1,599,497	)
Other liabilities, net			443,044				(368,914	)
Net cash provided by (used in) operating activities			5,070,508				(5,064,235	)
Cash flows from investing activities:
Proceeds from held to maturity fixed maturities due to redemption or maturity			1,574,433				1,255,000
Proceeds from available for sale fixed maturities sold, redeemed or matured			14,778,836				14,878,376
Proceeds from available for sale equity securities sold			12,742,881				12,318,746
Cost of held to maturity fixed maturities			(1,601,321	)			(1,293,250	)
Cost of available for sale fixed maturities			(19,755,219	)			(11,103,831	)
Cost of available for sale equity securities			(12,548,617	)			(9,522,920	)
Net change in short-term investments			5,597,252				(5,466,925	)
Net change in restricted short-term investments			476,566				2,828,300
Proceeds from collection of note receivable			—				300,000
Purchase of land, property and leasehold improvements			(164,546	)			(280,502	)
Net cash provided by investing activities			1,100,265				3,912,994
Cash flows from financing activities:
Acquisition of treasury shares			(16,395	)			—
Proceeds from bank line of credit			3,000,000				2,500,000
Payments on bank line of credit			(2,500,000	)			—
Cash dividends paid			(2,602,853	)			—
Net cash (used in) provided by financing activities			(2,119,248	)			2,500,000
Net increase in cash			4,051,525				1,348,759
Cash at beginning of year			5,499,847				4,151,088
Cash at end of year		$	9,551,372			$	5,499,847
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest		$	825,711			$	1,246,878
Federal income taxes		$	1,415,400			$	444,000

See accompanying notes to consolidated financial statements.

BANCINSURANCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements — December 31, 2009 and 2008

(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Organization

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.

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 49 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 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 was introduced in 2007 and offers insurance protection for financed equipment purchases. This policy protects both lenders and consumers against the risk of physical damage or theft of their financed equipment and is available for the term of the loan or an annual basis.

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. 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 three quota share reinsurance arrangements. First, 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 waste surety bonds with liability limits up to $1.2 million from two insurance carriers. Second, effective August 1, 2007, we entered into a 5% quota share reinsurance arrangement whereby we assumed 5% of 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, 2008. For the August 1, 2009 renewal, our participation was changed to 12.5%. Third, in addition to assuming business, we also write on a direct basis 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. For more information concerning one of the vehicle service contract programs, see “Automobile Service Contract Program” in Note 15.

In addition, from 2001 until the end of the second quarter of 2004, the Company participated in a bail and immigration bond reinsurance program. This program was discontinued in the second quarter of 2004. For a more detailed description of this program, see “Discontinued Bond Program” in Note 15.

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.

(b)

Basis of Financial Statement Presentation

Our accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) which vary in certain respects from accounting practices prescribed or permitted by the Department.

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

(c)

Recently Issued Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168 (Codification reference ASC 105), “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” SFAS No. 168 sets forth the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative nongovernmental GAAP. The Codification was launched on July 1, 2009 and is the official source of authoritative, nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), EITF, and related literature. After the Codification was launched on July 1, 2009, only one level of authoritative U.S. GAAP exists, other than guidance issued by the Securities and Exchange Commission (the “SEC”). All other accounting literature excluded from the Codification will be considered non-authoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Company has included references to the Codification in the notes to the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157 (Codification reference ASC 820), “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. It applies to other pronouncements that require or permit fair value measurements but does not require any new fair value measurements. The statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS No. 157 establishes a fair value hierarchy (i.e., Levels 1, 2 and 3) to increase consistency and comparability in fair value measurements and disclosures. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2 (Codification reference ASC 820), “Effective Date of FASB Statement No. 157” (“FSP SFAS 157-2”), which permits a one-year deferral of the application of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS No. 157 and FSP SFAS 157-2 for financial assets and liabilities effective January 1, 2008, which did not have a material impact on the Company’s consolidated financial statements. The Company adopted SFAS No. 157 for non-financial assets and

non-financial liabilities effective January 1, 2009, which did not have a material impact on the Company’s consolidated financial statements. In October 2008, the FASB issued FSP 157-3 (Codification reference ASC 820), “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP SFAS 157-3”), which clarifies the application of SFAS No. 157 in a market that is not active. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 163 (Codification reference ASC 944), “Accounting for Financial Guarantee Insurance Contracts.” SFAS No. 163 clarifies how SFAS No. 60 (Codification reference ASC 944), “Accounting and Reporting by Insurance Enterprises,” applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. SFAS No. 163 also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management activities, which are effective the first period beginning after issuance of SFAS No. 163. The adoption of SFAS No. 163 did not have a material impact on the Company’s consolidated financial statements.

In January 2009, the FASB issued FSP EITF 99-20-1 (Codification reference ASC 325), “Amendments to the Impairment Guidance of EITF Issue No. 99-20.” This FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. This FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115 (Codification reference ASC 320), “Accounting for Certain Investments in Debt and Equity Securities,” and other related guidance. This FSP is effective for interim and annual reporting periods ending after December 15, 2009. The Company adopted this FSP effective December 31, 2009, which did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP FAS 141(R)-1 (Codification reference ASC 805), “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” This FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS No. 5 (Codification reference ASC 450), “Accounting for Contingencies” and FASB Interpretation No. 14 (Codification reference ASC 450), “Reasonable Estimation of the Amount of a Loss.” Further, this FSP removed the subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS No. 141(R) (Codification reference ASC 805). The requirements of this FSP carry forward without significant revision the guidance on contingencies of SFAS No. 141, “Business Combinations,” which was superseded by SFAS No. 141(R). This FSP also eliminates the requirement to disclose an estimate of the range of possible outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB requires that entities include only the disclosures required by SFAS No. 5. The Company adopted this FSP effective January 1, 2009, which did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB also issued the following three Staff Positions, each of which was adopted by the Company on April 1, 2009 without a material impact on the Company’s consolidated financial statements:

•

FSP FAS 157-4 (Codification reference ASC 820), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). This FSP supersedes FSP FAS 157-3 (Codification reference ASC 820), “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” This FSP provides additional guidance on: (1) estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to the normal market activity for the asset or liability, and (2) identifying transactions that are not orderly. This FSP must be applied prospectively and retrospective application is not permitted.

•

FSP FAS 115-2 and FAS 124-2 (Codification reference ASC 320), “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). This FSP provides new guidance on the recognition and presentation of other-than-temporary impairments (“OTTI”) for available for sale and held to maturity fixed maturities (equities are excluded). An impaired security is not recognized as an impairment if management does not intend to sell the impaired security and it is more likely than not it will not be required to sell the security before the recovery of its amortized cost basis. If management concludes a security is other-than-temporarily impaired, this FSP requires that the difference between the fair value and the amortized cost of the security be presented as an OTTI charge in the statements of operations, with an offset for any noncredit-related loss component of the OTTI charge to be recognized in other comprehensive income. Accordingly, only the credit loss component of the OTTI amount will

have an impact on the Company’s results of operations. This FSP also requires extensive new interim and annual disclosure for both fixed maturities and equities to provide further disaggregated information as well as information about how the credit loss component of the OTTI charge was determined and requiring a roll forward of such amount for each reporting period.

•

FSP FAS 107-1 and APB 28-1 (Codification reference ASC 825), “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). This FSP extends the disclosure requirements under SFAS No. 107 (Codification reference ASC 825), “Disclosures about Fair Value of Financial Instruments,” to interim financial statements and it amends APB Opinion 28 (Codification reference ASC 270), “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods.

In May 2009, the FASB issued SFAS No. 165 (Codification reference ASC 855), “Subsequent Events.” SFAS No. 165 sets standards for the disclosure of events that occur after the balance-sheet date, but before financial statements are issued or are available to be issued. SFAS No. 165 sets forth the following: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The Company adopted SFAS No. 165 effective April 1, 2009. The Company uses the date of the filing of its periodic report with the SEC as the date through which subsequent events have been evaluated, which is the same date as the date the financial statements are issued. The adoption of SFAS No. 165 did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued two other 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 December 31, 2009, which did not have a material impact on the Company’s 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, as well as 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 as well as 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 consolidated financial statements.

(d)

Consolidation Policy

The accompanying financial statements include the Company’s accounts and the accounts of our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

(e)

Investments

Investments in held to maturity fixed maturities where we have the ability and intent to hold to maturity are carried at amortized cost. Investments in fixed maturities held as available for sale, which include bonds and redeemable preferred stock, are carried at fair value. The unrealized holding gain or loss, net of applicable deferred taxes and reclassification adjustment, is reflected in other comprehensive income.

Available for sale equity securities, which include common stock, non-redeemable preferred stock and mutual funds, are reported at fair value with unrealized gains or losses, net of applicable deferred taxes and reclassification adjustment, reflected in other comprehensive income. Short-term investments are reported at cost which approximates fair value. Other invested assets are reported at cost.

Realized gains and losses on disposal of investments are determined by the specific identification method. The carrying value of an investment is revised and the amount of revision is charged to net realized losses on investments when management determines

that a decline in the value of an investment is other-than-temporary.

For fixed maturity securities purchased at a premium or discount, amortization is calculated using the scientific (constant yield) interest method taking into consideration specified interest and principal provisions over the life of the security. Fixed maturity securities containing call provisions (where the security can be called away from the reporting entity at the issuer’s discretion) are amortized to the call or maturity value/date which produces the lowest asset value (yield to worst).

(f)

Recognition of Revenue

Ohio Indemnity’s insurance premiums and ceded commissions are earned over the terms of the related insurance policies and reinsurance contracts. For our ULI, GAP and EPD products, premiums and ceded commissions are earned over the contract period in proportion to the amount of insurance protection provided as the amount of insurance protection declines according to a predetermined schedule. For all other products, premiums and ceded commissions are earned pro rata over the contract period. The portion of premiums written applicable to the unexpired portion of insurance policies is recorded in the balance sheet as unearned premiums.

Management fees are recognized when earned based on the development of UC benefit charges.

Commission and fee revenues for USA are recognized when earned based on contractual rates and services provided.

(g)

Deferred Policy Acquisition Costs

Acquisition expenses, mainly commissions (net of ceded commissions) and premium taxes, related to unearned premiums are deferred and amortized over the period the coverage is provided. Anticipated losses and other expenses related to those premiums are considered in determining the recoverability of deferred acquisition costs.

(h)

Reserve for Unpaid Losses and Loss Adjustment Expenses

Loss and loss adjustment expense (“LAE”) reserves represent our best estimate of the ultimate net cost of all reported and unreported losses incurred through December 31. We do not discount loss and LAE reserves. The reserves for unpaid losses and LAE are estimated using individual case-basis valuations, statistical analyses and information received from ceding insurers under assumed reinsurance. Those estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, we believe the reserves for losses and LAE are adequate. The estimates are regularly reviewed and adjusted as necessary as experience develops or new information becomes known. Such adjustments are included in results of operations in the period such adjustments are made.

(i)

Reinsurance

In the ordinary course of business, we cede and assume reinsurance with other insurers and reinsurers. We report balances pertaining to reinsurance transactions “gross” on the balance sheet, meaning that reinsurance recoverable on unpaid losses and LAE and ceded unearned premiums are not deducted from insurance reserves but are recorded as assets (reinsurance recoverable and prepaid reinsurance premiums, respectively). See Note 15 for more information concerning the Company’s reinsurance transactions.

(j)

Experience Rating and Retrospective Premium Adjustments

Certain lender service policies are eligible for premium adjustments based on loss experience. For certain policies, return premiums are calculated and settled on an annual basis. These balances are presented in the accompanying balance sheets as retrospective premium adjustments payable. Certain other policies are eligible for an experience rating adjustment that is calculated and adjusted from period to period and settled upon cancellation of the policy. These balances are presented in the accompanying balance sheets as experience rating adjustments payable. These adjustments are included in the calculation of net premiums earned.

(k)

Restricted Short-Term Investments and Funds Held for Account of Others

The balances reflected in these accounts relate primarily to the Company’s automobile service contract programs. For these programs, the Company has obtained collateral in the form of cash and short-term investments to support its claim obligations under the programs. As of December 31, 2009 and 2008, the collateral held by the Company exceeded its estimated claim obligations. As a result, the restricted short-term investments and the funds held amounts are the same as any excess collateral remaining after the payment of all claim obligations would be returned to the respective service contract provider.

(l)

Contract Funds on Deposit

Pursuant to the terms of certain surety bonds issued by the Company that guarantee the payment of reimbursable unemployment compensation benefits, certain monies are held by the Company in contract funds on deposit and are used for the payment of benefit charges. The Company has agreements with cost containment service firms designed to control the unemployment

compensation costs of the employers enrolled in the program. Any remaining funds after the payment of all benefit charges are shared between the Company and the cost containment firms as management fees. Management fees are recognized when earned based on the development of benefit charges. Management fees of $158,766 and $368,841 were recognized in 2009 and 2008, respectively, as a result of this arrangement.

(m)

Depreciation and Amortization

Property, equipment and internally-developed computer software are stated at cost and depreciated using the straight-line method over the estimated useful life, ranging from three to five years. Leasehold improvements are capitalized and amortized over the remaining office lease term. Maintenance and repairs are charged directly to expense as incurred. As of December 31, 2009 and 2008, the carrying value of property, equipment, computer software and leasehold improvements, net of accumulated depreciation, was $461,272 and $588,696, respectively. These balances are presented in the accompanying balance sheets as other assets.

(n)

Federal Income Taxes

We file a consolidated federal income tax return with our subsidiaries. Accordingly, deferred tax liabilities and assets have been recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income taxes are recognized at prevailing income tax rates for temporary differences between financial statement and income tax basis of assets and liabilities for which income tax benefits will be realized in future years.

(o)

Cash and Cash Equivalents

Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less. Cash equivalents are stated at cost, which approximates fair value. The Company places its cash investments with high credit quality financial institutions.

(p)

Reclassification

Certain prior year amounts have been reclassified in order to conform to the 2009 presentation. One of the reclassifications included our presentation of deferred policy acquisition costs and deferred ceded commissions in the accompanying consolidated balance sheets. We had previously presented “deferred ceded commissions” as a separate liability line item within the balance sheet. Beginning in the third quarter of 2009, we began presenting “deferred policy acquisition costs,” which was previously an asset line item within the balance sheet, net of deferred ceded commissions. The reason for the change in balance sheet classification was to be more consistent with how other property and casualty insurance companies present their deferred policy acquisition costs as well as to be consistent with how policy acquisition costs are reported within our statements of income, which is net of ceded commissions.

(2)

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 December 31, 2009 and 2008 were as follows:

		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
Mutual funds			3,424,049				847,064				13,227				4,257,886
Total equities			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

		December 31, 2008
						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		$	2,306,533			$	43,350			$	—			$	2,349,883
Obligations of U.S. states, municipals and political subdivisions			2,891,535				99,232				9,979				2,980,788
Total held to maturity			5,198,068				142,582				9,979				5,330,671
Available for sale:
Fixed maturities:
Obligations of U.S. states, municipals and political subdivisions			64,840,650				275,143				7,597,616				57,518,177
Corporate and other taxable debt securities			1,800,360				—				161,717				1,638,643
Redeemable preferred stock			381,550				136,700				—				518,250
Total fixed maturities			67,022,560				411,843				7,759,333				59,675,070
Equity securities:
Banks, trusts and insurance companies			2,137,422				580,828				205,919				2,512,331
Industrial and miscellaneous			369,277				44,309				26,440				387,146
Mutual funds			4,788,654				—				1,146,267				3,642,387
Total equities			7,295,353				625,137				1,378,626				6,541,864
Total available for sale			74,317,913				1,036,980				9,137,959				66,216,934
Total		$	79,515,981			$	1,179,562			$	9,147,938			$	71,547,605

The amortized cost and estimated fair value of fixed maturity investments in held to maturity and available for sale securities at December 31, 2009, 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.

		December 31, 2009
		Held to Maturity								Available for Sale
		Amortized				Estimated				Amortized				Estimated
		cost				fair value				cost				fair value
Due in one year or less		$	2,771,703			$	2,808,989			$	915,342			$	918,897
Due after one year but less than five years			1,260,270				1,294,970				2,520,260				3,096,261
Due after five years but less than ten years			646,098				663,001				7,077,832				7,093,293
Due after ten years			503,834				527,940				60,499,586				60,464,598
Total		$	5,181,905			$	5,294,900			$	71,013,020			$	71,573,049