##### Table of Contents



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, 2006
 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
  Ohio
    
    31-0790882(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)250 East Broad Street, Columbus, Ohio
    
    43215(Address of principal executive offices)
    
    (Zip Code)
 (614) 220-5200
  Title of each class
    
    Name of each exchangeon which registeredNONE
    
    NONE
  COMMON SHARES, WITHOUT PAR VALUE
   o þ
  o þ
  þ o
 o
  o o þ
  o þ




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##### 



PagePART IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    8Item 2.
    
    Properties
    
    
    12Item 3.
    
    Legal Proceedings
    
    
    12Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5.
    
    Market for the Registrants Common Shares, Related
Shareholder Matters and Issuer Purchases of Equity Securities
    
    
    13Item 6.
    
    Selected Financial Data
    
    
    15Item 7.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 8.
    
    Consolidated Financial Statements and Supplementary Data
    
    
    34Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    60Item 9A.
    
    Controls and Procedures
    
    
    60Item 9B.
    
    Other Information
    
    
    60PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    61Item 11.
    
    Executive Compensation
    
    
    61Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters
    
    
    61Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    61Item 14.
    
    Principal Accounting Fees and Services
    
    
    61PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    62EX-21EX-23.AEX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



FORWARD-LOOKING INFORMATION
  
 PART I
 
 ITEM 1. BUSINESS
 GENERAL/OVERVIEW
   PRODUCTS AND SERVICES
 Ohio Indemnity Company
  Automobile Lender/Dealer Products ®
 3




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##### Table of Contents



Unemployment Compensation Products. ® ®
  Waste Industry Products
    4




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##### Table of Contents



American Legal Publishing Corporation
  Ultimate Services Agency, LLC
  SALE OF AFFILIATE
     COMPETITION
  REINSURANCE
   5




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##### Table of Contents



REGULATION
 Insurance Company Regulation
   6




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##### Table of Contents



Ohio Insurance Holding Company System Regulation
   National Association of Insurance Commissioners
   Other Regulatory Matters
 Broker Contingent Commission
 Federal Insurance Charter
 7




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##### Table of Contents



EMPLOYEES
  SERVICE MARKS
 BI BANCINSURANCE
CORPORATION
 
 ITEM 1A. RISK FACTORS
 RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
  Economic Factors Impacting our Specialty Insurance Products
  Concentration in Specialty Insurance Products
  Geographic Concentration
  Reinsurance Risk
  Possible Inadequacy of Loss Reserves
  8




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##### Table of Contents



Ability to Price the Risks We Underwrite Accurately
  
    
    the availability of sufficient reliable data and our ability to properly analyze available data;
    
    the uncertainties that inherently characterize estimates and assumptions;
    
    our selection and application of appropriate rating and pricing techniques; and
    
    changes in legal standards and claim settlement practices.
  Reliance on General Agents
  General Agents May Exceed Their Authority
  Risk of Fraud or Negligence with our Insurance Agents
  
    
    binding Ohio Indemnity and not reporting the policies and related premium to Ohio Indemnity;
    
    failing to accurately report premiums and/or claims to Ohio Indemnity;
    
    failing to obtain collateral and/or monitor insurance risk;
    
    failing to return commissions to Ohio Indemnity in situations where commissions have
been advanced and should be returned to Ohio Indemnity based on the financial performance
of the agents business; and
    
    financial hardship (i.e. liquidity problems, bankruptcy, liquidation, etc.) of the agent
which could lead to lost business and/or increased loss exposure for Ohio Indemnity.
  Importance of Industry Ratings
  9




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##### Table of Contents



Importance of Treasury Listing
  Regulation
 General
 Required Licensing
 Premium Rate Filings
 Risk-Based Capital
 Transactions Between Our Insurance Subsidiary and Affiliates
 10




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##### Table of Contents



Dependence on Our Insurance Subsidiary to Meet Our Obligations
  Severe Weather Conditions and Other Catastrophes
  Adverse Securities Market Conditions Can Impact Our Investment Portfolio
  
    
    credit risk, which is the risk that our investments will decrease in value due to
unfavorable changes in the financial prospects and/or a downgrade in the credit rating of
an entity in which we have invested;
    
    equity price risk, which is the risk that we will incur economic loss due to a decline in share prices; and
    
    interest rate risk, which is the risk that our investments may decrease in value due to changes in interest rates.
   Changes in Interest Rates Could Impact our Debt Securities
  Default on Debt Covenants Could Impact our Financial Condition
  Dependence on Key Executives
  Reliance on Information Technology and Telecommunications Systems
  11




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##### Table of Contents



Controlling Interest of the Sokol Family
  Ongoing SEC Investigation
   Litigation
  Automobile Service Contract Program
  
 ITEM 2. PROPERITES
  
 ITEM 3. LEGAL PROCEEDINGS
  12




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON SHARES, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 MARKET INFORMATION
  Period
    
    High Sale
    
    Low SaleJanuary 1, 2005 until February 22, 2005
    
    $
    7.44
    
    
    $
    7.04
 Period
    
    High Bid
    
    Low BidFebruary 22, 2005 until April 1, 2005
    
    $
    6.00
    
    
    $
    4.50Quarterly period ended June 30, 2005
    
    
    5.25
    
    
    
    4.75Quarterly period ended September 30, 2005
    
    
    4.30
    
    
    
    4.00Quarterly period ended December 31, 2005
    
    
    4.50
    
    
    
    4.25
 Period
    
    High Bid
    
    Low BidQuarterly period ended March 31, 2006
    
    $
    6.60
    
    
    $
    4.20Quarterly period ended June 30, 2006
    
    
    6.30
    
    
    
    6.00Quarterly period ended September 30, 2006
    
    
    6.14
    
    
    
    5.56Quarterly period ended December 31, 2006
    
    
    6.15
    
    
    
    5.50
  13




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PERFORMANCE GRAPH
  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
 
 Fiscal year ending December 31Cumulative Total Return12/01
    
    12/02
    
    12/03
    
    12/04
    
    12/05
    
    12/06Bancinsurance Corporation
    
    
    100.00
    
    
    
    98.99
    
    
    
    154.95
    
    
    
    147.88
    
    
    
    90.91
    
    
    
    122.22Nasdaq Composite Index
    
    
    100.00
    
    
    
    71.97
    
    
    
    107.18
    
    
    
    117.07
    
    
    
    120.50
    
    
    
    137.02S & P Property & Casualty Insurance Index
    
    
    100.00
    
    
    
    88.98
    
    
    
    112.48
    
    
    
    124.20
    
    
    
    142.98
    
    
    
    161.38
 HOLDERS
  DIVIDENDS
  14




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
  2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Income Statement DataNet premiums earned
    
    $
    49,106,653
    
    
    $
    51,716,945
    
    
    $
    50,064,185
    
    
    $
    50,071,966
    
    
    $
    42,590,321Net investment income
    
    
    3,845,064
    
    
    
    3,302,659
    
    
    
    2,164,115
    
    
    
    1,599,064
    
    
    
    1,236,138Net realized gains (losses) on investments
    
    
    55,719
    
    
    
    1,281,755
    
    
    
    1,094,174
    
    
    
    822,161
    
    
    
    (1,220,477
    )Codification and subscription fees
    
    
    2,255,558
    
    
    
    3,474,668
    
    
    
    4,005,415
    
    
    
    3,819,221
    
    
    
    3,324,037Management fees
    
    
    830,329
    
    
    
    713,697
    
    
    
    33,710
    
    
    
    114,094
    
    
    
    749,442Net realized gain on sale of affiliate
    
    
    2,511,891
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    81,428
    
    
    
    146,786
    
    
    
    43,123
    
    
    
    81,653
    
    
    
    197,278Total revenues
    
    
    58,686,642
    
    
    
    60,636,510
    
    
    
    57,404,722
    
    
    
    56,508,159
    
    
    
    46,876,739Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,481,858
    )Net income (loss)
    
    
    5,474,901
    
    
    
    6,294,074
    
    
    
    (8,500,620
    )
    
    
    3,909,817
    
    
    
    889,613Balance Sheet Data at Year EndTotal cash and investments
    
    $
    93,580,824
    
    
    $
    100,085,781
    
    
    $
    86,580,595
    
    
    $
    76,929,462
    
    
    $
    57,293,361Total assets
    
    
    122,288,506
    
    
    
    128,335,835
    
    
    
    117,060,472
    
    
    
    115,869,736
    
    
    
    72,703,204Notes payable
    
    
    
    
    
    
    27,119
    
    
    
    540,198
    
    
    
    53,276
    
    
    
    2,166,355Trust preferred debt issued to affiliates
    
    
    15,465,000
    
    
    
    15,465,000
    
    
    
    15,465,000
    
    
    
    15,465,000
    
    
    
    8,248,000Shareholders equity
    
    
    36,365,619
    
    
    
    30,079,626
    
    
    
    24,846,288
    
    
    
    33,365,028
    
    
    
    28,901,838Common shares outstanding
    
    
    4,980,700
    
    
    
    4,972,700
    
    
    
    4,972,700
    
    
    
    4,920,050
    
    
    
    5,000,291Per Common Share DataDiluted income (loss) before cumulative
effect of change in accounting principle
    
    $
    1.08
    
    
    $
    1.26
    
    
    $
    (1.72
    )
    
    $
    .77
    
    
    $
    .41Diluted net income (loss)
    
    
    1.08
    
    
    
    1.26
    
    
    
    (1.72
    )
    
    
    .77
    
    
    
    .16Year-end book value
    
    
    7.30
    
    
    
    6.05
    
    
    
    5.00
    
    
    
    6.78
    
    
    
    5.78GAAP RatiosLoss ratio
    
    
    53.2
    %
    
    
    45.8
    %
    
    
    95.1
    %
    
    
    66.1
    %
    
    
    67.0
    %Expense ratio
    
    
    44.7
    %
    
    
    47.8
    %
    
    
    34.6
    %
    
    
    26.0
    %
    
    
    24.4
    %Combined ratio
    
    
    97.9
    %
    
    
    93.6
    %
    
    
    129.7
    %
    
    
    92.1
    %
    
    
    91.4
    %Statutory RatiosLoss ratio
    
    
    53.2
    %
    
    
    45.8
    %
    
    
    95.1
    %
    
    
    66.1
    %
    
    
    67.0
    %Expense ratio
    
    
    43.3
    %
    
    
    50.9
    %
    
    
    33.3
    %
    
    
    25.9
    %
    
    
    25.0
    %Combined ratio
    
    
    96.5
    %
    
    
    96.7
    %
    
    
    128.4
    %
    
    
    92.0
    %
    
    
    92.0
    %Net premiums written to statutory surplus
    
    
    1.2
    x
    
    
    1.5
    x
    
    
    1.9
    x
    
    
    1.6
    x
    
    
    1.4
    x
 15




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 OVERVIEW
  Products and Services
 Property/Casualty Insurance
     16




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##### Table of Contents



Municipal Code Publishing
 Insurance Agency
 Sale of Affiliate
     Discontinued Bond Program
    Pending Arbitration
 17




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##### Table of Contents



Highlands Arbitration
 Arbitration Developments as of December 31, 2006
 Aegis Arbitration
 Sirius Arbitration.
 Harco Arbitration.
 Highlands Development.
 Loss and LAE Reserves
 December 31,
    
    
    December 31,2006
    
    
    2005Bail Bonds:Case reserves
    
    $
    0.9
    
    
    $
    12.1Incurred but not reported (IBNR) reserves
    
    
    4.2
    
    
    
    5.4Total bail bond reserves
    
    
    5.1
    
    
    
    17.5Immigration Bonds:Case reserves
    
    
    0.1
    
    
    
    0.7IBNR reserves
    
    
    1.2
    
    
    
    1.4Total immigration bond reserves
    
    
    1.3
    
    
    
    2.1Total loss and LAE reserves
    
    $
    6.4
    
    
    $
    19.6
 18




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##### Table of Contents



Recently Issued Accounting Standards
   Reinsurance Transactions
   19




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##### Table of Contents



SUMMARY RESULTS
  Period-to-Period Increase (Decrease)Years ended December 31,2005-2006
    
    2004-2005Amount
    
    % Change
    
    Amount
    % ChangeNet premiums earned
    
    $
    (2,610,292
    )
    
    
    (5.0
    )%
    
    $
    1,652,760
    
    
    
    3.3
    %Net realized gains (losses) on investments
    
    
    (1,226,036
    )
    
    
    (95.7
    )%
    
    
    187,581
    
    
    
    17.1
    %Net realized gain on sale of affiliate
    
    
    2,511,891
    
    
    
    100.0
    %
    
    
    
    
    
    
    Total revenues
    
    
    (1,949,868
    )
    
    
    (3.2
    )%
    
    
    3,231,788
    
    
    
    5.6
    %Losses and LAE
    
    
    2,238,623
    
    
    
    9.6
    %
    
    
    (23,901,695
    )
    
    
    (50.6
    )%Commissions, other insurance expenses, and general and
administrative expenses
    
    
    (2,245,089
    )
    
    
    (8.9
    )%
    
    
    6,932,467
    
    
    
    38.0
    %Income before federal income taxes
    
    
    (1,346,809
    )
    
    
    (16.5
    )%
    
    
    21,438,697
    
    
    
    161.6
    %Net income
    
    
    (819,173
    )
    
    
    (13.0
    )%
    
    
    14,794,694
    
    
    
    174.0
    %
    20




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##### Table of Contents



2006
    
    2005
    
    2004GAAP:Loss ratio
    
    
    53.2
    %
    
    
    45.8
    %
    
    
    95.1
    %Expense ratio
    
    
    44.7
    %
    
    
    47.8
    %
    
    
    34.6
    %Combined ratio
    
    
    97.9
    %
    
    
    93.6
    %
    
    
    129.7
    %Statutory:Loss ratio
    
    
    53.2
    %
    
    
    45.8
    %
    
    
    95.1
    %Expense ratio
    
    
    43.3
    %
    
    
    50.9
    %
    
    
    33.3
    %Combined ratio
    
    
    96.5
    %
    
    
    96.7
    %
    
    
    128.4
    %
 RESULTS OF OPERATIONS
 2006 Compared to 2005
 Net Premiums Earned
       Investment Income
  21




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Codification and Subscription Fees
 Management Fees
 Net Realized Gain on Sale of Affiliate
 Losses and Loss Adjustment Expenses
       Commissions, Other Insurance Operating Expenses and General and Administrative Expenses
 Codification and Subscription Expenses
 22




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##### Table of Contents



Interest Expense
 Federal Income Taxes
 GAAP Combined Ratio
 2005 Compared to 2004
 Net Premiums Earned
       Investment Income
  23




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##### Table of Contents



Codification and Subscription Fees.
 Management Fees
 Losses and Loss Adjustment Expenses
       Commissions, Other Insurance Operating Expenses and General and Administrative Expenses
 Codification and Subscription Expenses
 Interest Expense
 Federal Income Taxes
 GAAP Combined Ratio
 24




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##### Table of Contents



BUSINESS OUTLOOK
 Lender/Dealer Products
     Unemployment Compensation and Other Specialty Products
    Sale of Affiliate
  Expenses and Investments
   25




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  2006
    
    
    2005
    
    
    2004Trust preferred debt issued to BIC Statutory Trust I
    
    $
    8,248,000
    
    
    $
    8,248,000
    
    
    $
    8,248,000Trust preferred debt issued to BIC Statutory Trust II
    
    
    7,217,000
    
    
    
    7,217,000
    
    
    
    7,217,000Bank note payable
    
    
    
    
    
    
    
    
    
    
    500,000Total debt obligations
    
    
    15,465,000
    
    
    
    15,465,000
    
    
    
    15,965,000Total shareholders equity
    
    
    36,365,619
    
    
    
    30,079,626
    
    
    
    24,846,288Total capitalization
    
    $
    51,830,619
    
    
    $
    45,544,626
    
    
    $
    40,811,288Ratio of total debt obligations to total capitalization
    
    
    29.8
    %
    
    
    34.0
    %
    
    
    39.1
    %
    26




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##### Table of Contents



CONTRACTUAL OBLIGATIONS
  Payments Due By PeriodLess than
    
    
    1-3
    
    
    3-5
    
    
    More thanTotal
    
    
    1 year
    
    
    years
    
    

years
    
    
    5 yearsContractual Obligations:Trust preferred debt issued to affiliates(1)
    
    $
    15,465,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    15,465,000Operating leases
    
    
    453,952
    
    
    
    224,009
    
    
    
    229,943
    
    
    
    
    
    
    
    Loss and LAE reserves(2)
    
    
    13,823,240
    
    
    
    9,838,781
    
    
    
    3,984,459
    
    
    
    
    
    
    
    Total
    
    $
    29,742,192
    
    
    $
    10,062,790
    
    
    $
    4,214,402
    
    
    $
    
    
    
    $
    15,465,000
 27




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##### Table of Contents



(1)
    
    In accordance with the provisions of the debt agreements, the BIC Trust I and BIC Trust
II debt obligations are redeemable at par on December 4, 2007 and September 30, 2008,
respectively. The table above assumes payout at maturity date rather than redemption date.(2)
    
    Our loss and LAE reserves do not have contractual maturity dates; however, based on
historical payment patterns, we have included an estimate of when we expect our loss and
LAE reserves to be paid in the above table. The exact timing of the payment of claims
cannot be predicted with certainty. The actual payment amounts and the related timing of
those payments could differ significantly from these estimates. INFLATION
  CRITICAL ACCOUNTING ESTIMATES
  Other-Than-Temporary Impairment of Investments
   Fixed Maturities
 
    
    the length of time and extent to which the estimated fair value has been less than
book value;
    
    the degree to which any appearance of impairment is attributable to an overall change
in market conditions (e.g., interest rates);
    
    the degree to which an issuer is current or in arrears in making principal and
interest/dividend payments on the securities in question;
    
    the financial condition and future prospects of the issuer, including any specific
events that may influence the issuers operations and its ability to make future
scheduled principal and interest payments on a timely basis;
    
    the independent auditors report on the issuers most recent financial statements;
    
    buy/hold/sell recommendations of investment advisors and analysts;
    
    relevant rating history, analysis and guidance provided by rating agencies and analysts; and
    
    our ability and intent to hold the security for a period of time sufficient to allow
for recovery in the estimated fair value.
 Equity Securities
 
    
    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.
 28




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##### Table of Contents



Loss and Loss Adjustment Expense Reserves
   Assumed Business
   Direct Business
  
    
    ULI  limited liability (ULIL)
    
    ULI  non-limited liability (ULIN)
    
    CPI
    
    GAP
  29




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##### Table of Contents



Loss and LAE Reserves at Year End
 December 31, 2006
    
    
    December 31, 2005IBNR
    
    
    Case
    
    
    IBNR
    
    
    CaseULI  limited liability (ULIL)
    
    $
    1,451,145
    
    
    $
    77,358
    
    
    $
    1,655,241
    
    
    $
    245,840ULI  non-limited liability (ULIN)
    
    
    267,542
    
    
    
    558,024
    
    
    
    206,567
    
    
    
    1,146,213CPI
    
    
    241,706
    
    
    
    42,131
    
    
    
    233,212
    
    
    
    33,879GAP
    
    
    2,515,611
    
    
    
    40,000
    
    
    
    2,110,875
    
    
    
    184,766UC
    
    
    847,259
    
    
    
    
    
    
    
    1,057,716
    
    
    
    WIP
    
    
    1,358,717
    
    
    
    
    
    
    
    778,445
    
    
    
    Discontinued bond program
    
    
    5,483,867
    
    
    
    882,310
    
    
    
    6,827,179
    
    
    
    12,798,950Other specialty products
    
    
    57,570
    
    
    
    
    
    
    
    21,840
    
    
    
    3,500Total
    
    $
    12,223,417
    
    
    $
    1,599,823
    
    
    $
    12,891,075
    
    
    $
    14,413,148
      30




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##### Table of Contents



Codification and Subscription Revenue and Expense Recognition
  Equity-Based Compensation Expense
  Legal Matters
  OFF-BALANCE SHEET ARRANGEMENTS
  FORWARD-LOOKING INFORMATION
  31




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
  Investments
  Projected Cash FlowsDecember 31, 2006There-
    
    
    
    
    
    Estimated2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    after
    
    Total
    
    Fair ValueAssetsFixed maturity securities:Held to maturity
    
    $
    755,000
    
    
    $
    1,250,000
    
    
    $
    
    
    
    $
    1,250,000
    
    
    $
    775,000
    
    
    $
    690,000
    
    
    $
    4,720,000
    
    
    $
    4,850,986Available for sale
    
    $
    5,990,000
    
    
    $
    6,710,000
    
    
    $
    10,530,000
    
    
    $
    12,845,000
    
    
    $
    5,745,000
    
    
    $
    26,620,000
    
    
    $
    68,440,000
    
    
    $
    68,547,886Weighted-average interest rate:Fixed maturity securities
    
    
    4.08%
    
    
    
    4.58%
    
    
    
    4.30%
    
    
    
    4.66%
    
    
    
    4.80%
    
    
    
    4.82%
    
    
    
    4.62%
 Debt.
 32




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##### Table of Contents



Credit Risk
  Equity Risk
  33




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##### Table of Contents



ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 Report of Independent Registered Public Accounting Firm
 
    
  34




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##### Table of Contents



BANCINSURANCE CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 Years ended December 31,2006
    
    
    2005
    
    
    2004Revenues:Net premiums earned
    
    $
    49,106,653
    
    
    $
    51,716,945
    
    
    $
    50,064,185Net investment income
    
    
    3,845,064
    
    
    
    3,302,659
    
    
    
    2,164,115Net realized gains on investments
    
    
    55,719
    
    
    
    1,281,755
    
    
    
    1,094,174Codification and subscription fees
    
    
    2,255,558
    
    
    
    3,474,668
    
    
    
    4,005,415Management fees
    
    
    830,329
    
    
    
    713,697
    
    
    
    33,710Net realized gain on sale of affiliate
    
    
    2,511,891
    
    
    
    
    
    
    
    Other income
    
    
    81,428
    
    
    
    146,786
    
    
    
    43,123Total revenues
    
    
    58,686,642
    
    
    
    60,636,510
    
    
    
    57,404,722Expenses:Losses and loss adjustment expenses
    
    
    23,806,747
    
    
    
    22,912,887
    
    
    
    27,076,212Discontinued bond program losses and loss adjustment expenses
    
    
    1,767,496
    
    
    
    422,733
    
    
    
    20,161,103Commission expense
    
    
    12,041,054
    
    
    
    13,750,996
    
    
    
    11,285,050Other insurance operating expenses
    
    
    9,923,782
    
    
    
    9,989,798
    
    
    
    6,030,136Codification and subscription expenses
    
    
    1,936,384
    
    
    
    2,809,700
    
    
    
    3,551,544General and administrative expenses
    
    
    958,257
    
    
    
    1,427,388
    
    
    
    920,529Interest expense
    
    
    1,429,086
    
    
    
    1,152,363
    
    
    
    894,463Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    753,737Total expenses
    
    
    51,862,806
    
    
    
    52,465,865
    
    
    
    70,672,774Income (loss) before federal income taxes
    
    
    6,823,836
    
    
    
    8,170,645
    
    
    
    (13,268,052
    )Federal income tax expense (benefit)
    
    
    1,348,935
    
    
    
    1,876,571
    
    
    
    (4,767,432
    )Net income (loss)
    
    $
    5,474,901
    
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )Net income (loss) per share:Basic
    
    $
    1.10
    
    
    $
    1.27
    
    
    $
    (1.72
    )Diluted
    
    $
    1.08
    
    
    $
    1.26
    
    
    $
    (1.72
    )
 See accompanying notes to consolidated financial statements.
 35




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##### Table of Contents



BANCINSURANCE CORPORATION AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 December 31,2006
    
    
    2005AssetsInvestments:Held to maturity:Fixed maturities, at amortized cost (fair value $4,850,986 in 2006 and $4,856,624 in 2005)
    
    $
    4,793,584
    
    
    $
    4,821,629Available for sale:Fixed maturities, at fair value (amortized cost $67,934,779 in 2006 and $72,562,204 in 2005)
    
    
    68,547,886
    
    
    
    73,012,240Equity securities, at fair value (cost $8,277,307 in 2006 and $7,597,066 in 2005)
    
    
    9,400,247
    
    
    
    8,043,299Short-term investments, at cost which approximates fair value
    
    
    8,263,980
    
    
    
    8,964,738Other invested assets
    
    
    751,936
    
    
    
    715,000Total investments
    
    
    91,757,633
    
    
    
    95,556,906Cash
    
    
    1,823,191
    
    
    
    4,528,875Premiums receivable
    
    
    4,534,856
    
    
    
    5,403,960Accounts receivable, net
    
    
    
    
    
    
    674,357Reinsurance recoverables
    
    
    1,420,410
    
    
    
    1,235,043Prepaid reinsurance premiums
    
    
    9,278,559
    
    
    
    6,011,496Deferred policy acquisition costs
    
    
    9,454,410
    
    
    
    9,678,821Costs and estimated earnings in excess of billings on uncompleted codification contracts
    
    
    
    
    
    
    248,035Loans to affiliates
    
    
    963,389
    
    
    
    892,523Intangible assets, net
    
    
    
    
    
    
    771,013Accrued investment income
    
    
    1,133,757
    
    
    
    1,128,104Net deferred tax asset
    
    
    254,713
    
    
    
    485,461Other assets
    
    
    1,667,588
    
    
    
    1,721,241Total assets
    
    $
    122,288,506
    
    
    $
    128,335,835
 See accompanying notes to consolidated financial statements.
 36




---



##### Table of Contents



BANCINSURANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
 December 31,2006
    
    
    2005Liabilities and Shareholders EquityReserve for unpaid losses and loss adjustment expenses
    
    $
    7,457,063
    
    
    $
    7,678,094Discontinued bond program reserve for unpaid losses and loss adjustment expenses
    
    
    6,366,177
    
    
    
    19,626,129Unearned premiums
    
    
    37,248,196
    
    
    
    35,579,349Ceded reinsurance premiums payable
    
    
    1,779,022
    
    
    
    3,605,394Experience rating adjustments payable
    
    
    2,251,171
    
    
    
    2,302,850Retrospective premium adjustments payable
    
    
    3,550,981
    
    
    
    2,201,706Funds held under reinsurance treaties
    
    
    435,558
    
    
    
    735,341Contract funds on deposit
    
    
    3,741,508
    
    
    
    3,201,124Taxes, licenses and fees payable
    
    
    427,928
    
    
    
    386,936Current federal income tax payable
    
    
    266,791
    
    
    
    570,078Deferred ceded commissions
    
    
    1,752,278
    
    
    
    1,337,098Commissions payable
    
    
    2,081,825
    
    
    
    2,710,582Billings in excess of estimated earnings on uncompleted codification contracts
    
    
    
    
    
    
    75,108Notes payable
    
    
    
    
    
    
    27,119Other liabilities
    
    
    3,099,389
    
    
    
    2,754,301Trust preferred debt issued to affiliates
    
    
    15,465,000
    
    
    
    15,465,000Total liabilities
    
    
    85,922,887
    
    
    
    98,256,209Commitments and contingenciesShareholders 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,
2006 and 2005, 4,980,700 shares outstanding at December 31, 2006 and 4,972,700 shares outstanding
at December 31, 2005
    
    
    1,794,141
    
    
    
    1,794,141Additional paid-in capital
    
    
    1,554,355
    
    
    
    1,336,073Accumulated other comprehensive income
    
    
    1,142,957
    
    
    
    588,703Retained earnings
    
    
    37,607,687
    
    
    
    32,132,78642,099,140
    
    
    
    35,851,703Less: Treasury shares, at cost (1,189,641 common shares at December 31, 2006 and
1,197,641 common shares at December 31, 2005)
    
    
    (5,733,521
    )
    
    
    (5,772,077
    )Total shareholders equity
    
    
    36,365,619
    
    
    
    30,079,626Total liabilities and shareholders equity
    
    $
    122,288,506
    
    
    $
    128,335,835
 See accompanying notes to consolidated financial statements.
 37




---



##### Table of Contents



BANCINSURANCE CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Shareholders Equity
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    
    
    
    
    TotalPreferred Shares
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    Treasury
    
    
    shareholdersClass A
    
    
    Class B
    
    
    shares
    
    
    capital
    
    
    income
    
    
    earnings
    
    
    shares
    
    
    equityBalance at December 31, 2003
    
    
    
    
    
    
    
    
    
    $
    1,794,141
    
    
    $
    1,337,138
    
    
    $
    1,920,265
    
    
    $
    34,339,332
    
    
    $
    (6,025,848
    )
    
    $
    33,365,028Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,500,620
    )
    
    
    
    
    
    
    (8,500,620
    )Unrealized losses, net of tax and
reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (270,826
    )
    
    
    
    
    
    
    
    
    
    
    (270,826
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,771,446
    )56,250 shares issued in connection with
the exercise of stock options, net of tax
benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,065
    )
    
    
    
    
    
    
    
    
    
    
    253,771
    
    
    
    252,706Balance at December 31, 2004
    
    
    
    
    
    
    
    
    
    
    1,794,141
    
    
    
    1,336,073
    
    
    
    1,649,439
    
    
    
    25,838,712
    
    
    
    (5,772,077
    )
    
    
    24,846,288Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,294,074
    
    
    
    
    
    
    
    6,294,074Unrealized losses, net of tax and
reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,060,736
    )
    
    
    
    
    
    
    
    
    
    
    (1,060,736
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,233,338Balance at December 31, 2005
    
    
    
    
    
    
    
    
    
    
    1,794,141
    
    
    
    1,336,073
    
    
    
    588,703
    
    
    
    32,132,786
    
    
    
    (5,772,077
    )
    
    
    30,079,626Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,474,901
    
    
    
    
    
    
    
    5,474,901Unrealized gains, net of tax and
reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    554,254
    
    
    
    
    
    
    
    
    
    
    
    554,254Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,029,155Equity-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217,958
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217,9588,000 shares issued in connection with
the exercise of stock options, net of tax
benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    324
    
    
    
    
    
    
    
    
    
    
    
    38,556
    
    
    
    38,880Balance at December 31, 2006
    
    
    
    
    
    
    
    
    
    $
    1,794,141
    
    
    $
    1,554,355
    
    
    $
    1,142,957
    
    
    $
    37,607,687
    
    
    $
    (5,733,521
    )
    
    $
    36,365,619
 See accompanying notes to consolidated financial statements.
 38




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##### Table of Contents



BANCINSURANCE CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Years ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    5,474,901
    
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    753,737Net realized gains on investments
    
    
    (55,719
    )
    
    
    (1,281,755
    )
    
    
    (1,094,174
    )Net realized gain on sale of affiliate
    
    
    (2,511,891
    )
    
    
    
    
    
    
    Net realized (gains) losses on disposal of property and equipment
    
    
    
    
    
    
    658
    
    
    
    (183
    )Depreciation and amortization
    
    
    620,546
    
    
    
    621,282
    
    
    
    712,002Equity-based compensation expense
    
    
    217,958
    
    
    
    
    
    
    
    Deferred federal income tax (benefit) expense
    
    
    (54,777
    )
    
    
    1,697,332
    
    
    
    (2,350,920
    )Change in assets and liabilities:Premiums receivable
    
    
    869,104
    
    
    
    2,507,419
    
    
    
    2,750,387Accounts receivable, net
    
    
    138,209
    
    
    
    36,168
    
    
    
    282,568Reinsurance recoverables
    
    
    (185,367
    )
    
    
    708,559
    
    
    
    2,982,844Prepaid reinsurance premiums
    
    
    (3,267,063
    )
    
    
    (3,151,786
    )
    
    
    9,384,878Deferred policy acquisition costs
    
    
    224,411
    
    
    
    (2,454,826
    )
    
    
    (2,261,845
    )Other assets, net
    
    
    (338,709
    )
    
    
    3,304,895
    
    
    
    (3,070,832
    )Reserve for unpaid losses and loss adjustment expenses
    
    
    (13,480,983
    )
    
    
    (3,462,244
    )
    
    
    16,380,548Unearned premiums
    
    
    1,668,847
    
    
    
    7,860,201
    
    
    
    2,595,011Ceded reinsurance premiums payable
    
    
    (1,826,372
    )
    
    
    3,111,431
    
    
    
    (1,228,000
    )Experience rating adjustments payable
    
    
    (51,679
    )
    
    
    846,447
    
    
    
    (5,541,381
    )Retrospective premium adjustments payable
    
    
    1,349,275
    
    
    
    (5,074,519
    )
    
    
    1,905,952Funds held under reinsurance treaties
    
    
    (299,783
    )
    
    
    (518,455
    )
    
    
    (1,392,897
    )Contract funds on deposit
    
    
    540,384
    
    
    
    2,389,766
    
    
    
    (1,096,826
    )Deferred ceded commissions
    
    
    415,180
    
    
    
    302,167
    
    
    
    (190,007
    )Commissions payable
    
    
    (628,757
    )
    
    
    (1,312,229
    )
    
    
    1,361,832Other liabilities, net
    
    
    167,897
    
    
    
    2,388,583
    
    
    
    (3,724,270
    )Net cash provided by (used in) operating activities
    
    
    (11,014,388
    )
    
    
    14,813,168
    
    
    
    8,657,804Cash flows from investing activities:Proceeds from sale of affiliate, net
    
    
    4,306,901
    
    
    
    
    
    
    
    Proceeds from held to maturity fixed maturities due to redemption or maturity
    
    
    1,788,000
    
    
    
    170,000
    
    
    
    695,000Proceeds from available for sale fixed maturities sold, redeemed or matured
    
    
    26,169,278
    
    
    
    25,194,401
    
    
    
    16,143,330Proceeds from available for sale equity securities sold
    
    
    17,434,831
    
    
    
    22,441,671
    
    
    
    12,112,580Cost of investments purchased:Held to maturity fixed maturities
    
    
    (1,257,369
    )
    
    
    (98,699
    )
    
    
    (750,820
    )Available for sale fixed maturities
    
    
    (22,472,683
    )
    
    
    (44,709,564
    )
    
    
    (41,041,113
    )Available for sale equity securities
    
    
    (18,048,268
    )
    
    
    (20,211,925
    )
    
    
    (11,859,943
    )Net change in short-term investments
    
    
    700,758
    
    
    
    3,747,839
    
    
    
    16,192,103Other
    
    
    (351,624
    )
    
    
    (109,283
    )
    
    
    (60,006
    )Net cash provided by (used in) investing activities
    
    
    8,269,824
    
    
    
    (13,575,560
    )
    
    
    (8,568,869
    )Cash flows from financing activities:Proceeds from note payable to bank
    
    
    
    
    
    
    
    
    
    
    3,500,000Repayments of note payable to bank
    
    
    
    
    
    
    (500,000
    )
    
    
    (3,000,000
    )Proceeds from stock options exercised
    
    
    38,880
    
    
    
    
    
    
    
    252,705Net cash provided by (used in) financing activities
    
    
    38,880
    
    
    
    (500,000
    )
    
    
    752,705Net increase (decrease) in cash
    
    
    (2,705,684
    )
    
    
    737,608
    
    
    
    841,640Cash at beginning of year
    
    
    4,528,875
    
    
    
    3,791,267
    
    
    
    2,949,627Cash at end of year
    
    $
    1,823,191
    
    
    $
    4,528,875
    
    
    $
    3,791,267Supplemental disclosures of cash flow information:Cash paid (received) during the year for:Interest
    
    $
    1,421,673
    
    
    $
    1,137,200
    
    
    $
    886,115Federal income taxes
    
    $
    1,707,000
    
    
    $
    (4,079,067
    )
    
    $
    1,782,807
 See accompanying notes to consolidated financial statements.
 39




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##### Table of Contents



BANCINSURANCE CORPORATION AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2006, 2005 and 2004
 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 (a)
    
    OrganizationBancinsurance Corporation (Bancinsurance) is a specialty property insurance holding company
incorporated in the State of Ohio in 1970. Bancinsurance and its subsidiaries (collectively,
the Company) have two reportable business segments: (1) property/casualty insurance; and
(2) insurance agency. Until August 31, 2006, the Company also had a municipal code
publishing business segment. On August 31, 2006, the Company sold its municipal code
publishing segment as more fully described in Sale of Affiliate below. These segments are
described in more detail below.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 for insurance policies and income generated from our
investment portfolio. Ohio Indemnity, an Ohio corporation, is licensed in 48 states and the
District of Columbia. As such, Ohio Indemnity is subject to the regulations of The Ohio
Department of Insurance (the Department) and the regulations of each state in which it
operates. The majority of Ohio Indemnitys premiums are derived from three distinct product
lines: (1) automobile lender/dealer; (2) unemployment compensation; and (3) waste industry.Our automobile lender/dealer product line offers three types of products. First, ULTIMATE
LOSS INSURANCE® (ULI), a blanket vendor single interest coverage, is the primary product we
offer to financial institutions nationwide. This product insures banks and financial
institutions against damage to pledged collateral in cases where the collateral is not
otherwise insured. A ULI policy is generally written to cover a lenders complete portfolio
of collateralized personal property loans, typically automobile loans. Second, creditor
placed insurance (CPI) is an alternative to our traditional blanket vendor single interest
product. While both products cover the risk of damage to uninsured collateral in a lenders
automobile loan portfolio, CPI covers the portfolio through tracking individual borrowers
insurance coverage. The lender purchases physical damage coverage for loan collateral after
a borrowers insurance has lapsed. Third, our guaranteed auto protection insurance (GAP)
pays the difference or gap between the amount owed by the customer on a loan or lease and
the amount of primary insurance company coverage in the event a vehicle is damaged beyond
repair or stolen and never recovered. Our GAP product is sold to auto dealers, lenders and
lessors and provides coverage on either an individual or portfolio basis.Our unemployment compensation (UC) products are utilized by qualified entities that elect
not to pay the unemployment compensation taxes and instead reimburse state unemployment
agencies for benefits paid by the agencies to the entities former employees. Through our
UCassure® and excess of loss products, we indemnify the qualified entity for liability
associated with 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 bonded service program was discontinued at the
end of 2003 and replaced by our UCassure® program.Our waste industry products (WIP) consist of certain surety bonds produced and administered
by a general insurance agent. Under this program, the Company both assumes and cedes certain
waste surety bond business under two quota share reinsurance arrangements. In the second
quarter of 2004, the Company entered into a 50% quota share reinsurance arrangement whereby
the Company assumed 50% of all waste surety bonds with liability limits up to $4.0 million
from two insurance carriers. Effective January 1, 2005, the reinsurance arrangement was
amended whereby the Companys assumed participation was reduced from 50% to 25%. Effective
August 1, 2006, the reinsurance arrangement was further amended whereby the Company assumed
50% of all waste surety bonds with liability limits up to $1.2 million. In addition to
assuming business, the Company also writes on a direct basis waste surety bonds with
liability limits up to our Treasury limit ($3.6 million during 2006). The Company then cedes
50% of that business to an insurance carrier under a reinsurance arrangement. All surety
bonds written directly and assumed under this program are produced and administered by a
general insurance agent that is affiliated with one of the insurance carriers participating
in the program. The majority of the surety bonds under the program satisfy the
closure/post-closure financial responsibility obligations imposed on hazardous and solid
waste treatment, storage and disposal facilities pursuant to Subtitles C and D of the Federal
Resource Conservation and Recovery Act (RCRA). Closure/post-closure bonds cover future
costs to close and monitor a regulated site such as a landfill. All of the surety bonds are
indemnified by the principal and collateral is maintained on the majority of the bonds. The
indemnifications and collateralization of this program reduces the risk of loss.The Company has certain other specialty products which consist primarily of service contracts
and other surety products. In addition, from 2001 until the end of the second quarter of
2004, the Company participated in a bail and immigration bond program. This program was
discontinued in the second quarter of 2004. For a more detailed description of this program,
see Note 16 to the Consolidated Financial Statements.The Company sells its insurance products through multiple distribution channels, including
three managing general agents,
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approximately thirty-five independent agents and direct sales.Municipal Code Publishing. On August 31, 2006, the Company sold its
wholly-owned subsidiary, American Legal Publishing Corporation (ALPC), which codifies,
publishes, supplements and distributes ordinances for municipalities and counties nationwide
in addition to state governments. Ordinance codification is the process of collecting,
organizing and publishing legislation for state and local governments. ALPC also provides
information management services which include electronic publishing, document imaging and
internet hosting services. See Sale of Affiliate below for more information concerning
this transaction.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.Sale of AffiliateOn August 31, 2006, the Company entered into a Stock Purchase Agreement (the Agreement)
with A.L.P. Acquisition Co., Inc., an Ohio corporation (the Purchaser), whereby the Company
sold 100% of the issued and outstanding common shares of ALPC to the Purchaser for $4,620,000
subject to customary post-closing adjustments (the Sale). The Company received cash of
$4,150,000 and a promissory note in the principal amount of $470,000 (the Promissory Note)
from the Purchaser at the closing in connection with the Sale. On September 1, 2006, the
Purchaser made a principal payment to the Company on the Promissory Note in the amount of
$345,000, bringing the remaining principal balance of the Promissory Note to $125,000 which
is to be repaid in six monthly installments and bears interest at an annual rate of 8.0%. As
of December 31, 2006, the principal balance of the promissory note was $62,500.The Purchaser was organized by Steven G. Wolf, who has served as President of ALPC since 1984
and as a director of ALPC since 2000. Mr. Wolf and certain other employees of ALPC
collectively own a significant equity interest in the Purchaser.In conjunction with the Sale, on August 31, 2006, the Company also made an investment (the
Investment) in the Purchaser in the amount of $250,000, consisting of (1) a $137,500 cash
purchase of equity securities of the Purchaser and (2) a $112,500 loan to the Purchaser in
the form of a subordinated convertible promissory note (the Convertible Note). The
Convertible Note is to be repaid on August 31, 2016 (if not previously converted), bears
interest at an annual rate of 8.0% and is convertible at any time at the option of the
Company into additional equity securities of the Purchaser.In connection with the Sale and the Investment, the Company recorded a net realized gain of
approximately $2.5 million ($1.7 million after tax) for the year ended December 31, 2006.(b)
    
    Basis of Financial Statement PresentationOur 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)
    
    New Accounting StandardsIn June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, which prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. In accordance with FIN 48,
the Company must adjust its financial statements to reflect only those tax positions that are
more-likely-than-not to be sustained as of the adoption date. The effective date of FIN 48
for the Company is January 1, 2007. The adoption of FIN 48 is not expected to have a
material impact on the Companys Consolidated Financial Statements .In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements. This Statement defines fair value, establishes a framework
for measuring fair value in accordance with GAAP, and expands disclosures about fair value
measurements. The Statement clarifies the rule that fair value be based on the assumptions
that market participants would use when pricing an asset or liability, and establishes a fair
value hierarchy that prioritizes the framework and information used to develop those
assumptions. The Company is required to adopt the provisions of SFAS No. 157 for financial
statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS
No. 157 is not expected to have a material impact on the Companys Consolidated Financial
Statements .(d)
    
    Consolidation PolicyThe accompanying financial statements include the Companys accounts and our wholly-owned
subsidiaries. All significant intercompany transactions and balances have been eliminated in
consolidation.
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(e)
    
    InvestmentsInvestments 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 debt securities 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 or using the equity method.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)
    
    Accounts ReceivableAccounts receivable was comprised of ALPCs municipal code contract billings. We estimated
our allowance for doubtful accounts and bad debts based upon our assessment of the
collectibility of receivables and prior experience. On August 31, 2006, the Company sold its
municipal code publishing segment as more fully described above in Sale of Affiliate.(g)
    
    GoodwillAs part of its annual goodwill impairment testing in the fourth quarter of 2004, the Company
concluded that an impairment of goodwill existed at its property/casualty insurance segment.
The Company, with the assistance of an independent appraisal firm, determined that the
carrying value of the reporting segment exceeded the fair value of the reporting segment,
resulting in a non-cash impairment charge. The fair value of the reporting segment was
estimated using the expected present value of future cash flows. As a result of this
impairment, the Company a recorded non-cash impairment charge in the fourth quarter of 2004
in the aggregate amount of $753,737.(h)
    
    Intangible AssetIntangible assets represented databases acquired by ALPC and a non-compete agreement. The
databases were comprised of municipal code data and related files, which were amortized on a
straight-line basis over the estimated economic useful lives of twenty years. The
non-compete agreement was amortized on a straight-line basis over the contractual life of
five years, which ended August 31, 2006. On August 31, 2006, the Company sold its municipal
code publishing segment as more fully described above in Sale of Affiliate.(i)
    
    Recognition of RevenueOhio Indemnitys insurance premiums and ceded commissions are earned over the terms of the
related insurance policies and reinsurance contracts. For our ULI and GAP products, premiums
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 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.Revenue from ALPC municipal code contracts was recognized on the percentage-of-completion
method. Completion was measured based on the percentage of direct labor costs
incurred-to-date compared to estimated direct labor costs for each contract. While we used
available information to estimate total direct labor costs on each contract, actual
experience may vary from estimated amounts. Revenue from code supplements was recognized on
the completed-contract method because the typical supplement is completed in a few months.
On August 31, 2006, the Company sold its municipal code publishing segment as more fully
described above in Sale of Affiliate.Commission and fee revenues for USA are recognized when earned based on contractual rates and
services provided.(j)
    
    Deferred Policy Acquisition CostsAcquisition expenses, mainly 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.
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(k)
    
    Reserve for Unpaid Losses and Loss Adjustment ExpensesLoss 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 reports
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.(l)
    
    ReinsuranceIn 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 recoverables on unpaid losses and LAE and ceded unearned
premiums are not deducted from insurance reserves but are recorded as assets. Ceded
reinsurance transactions for the Company include quota share arrangements for certain
lender/dealer producers. The Company also participates in a waste surety bond program and
certain other surety bond programs under several quota share arrangements in which the
Company assumes and cedes business. In addition, the Company cedes certain service contract
business under a reinsurance arrangement. Lastly, the Company assumed bail and immigration
bond business through the second quarter of 2004 after which the program was discontinued.
See Note 16 to the Consolidated Financial Statements for more information concerning the
Companys reinsurance transactions.(m)
    
    Experience Rating and Retrospective Premium AdjustmentsCertain ULI 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.(n)
    
    Contract Funds on DepositPursuant 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 $830,329, $713,697 and $33,710 were
recognized in 2006, 2005 and 2004, respectively, as a result of this arrangement.(o)
    
    Depreciation and AmortizationReal estate is stated at cost and depreciated using the straight-line method over thirty-nine
years. 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, 2006 and 2005, property, equipment, computer software and leasehold
improvements, net of accumulated depreciation, was $636,966 and $484,525, respectively.
These balances are presented in the accompanying balance sheets as other assets.(p)
    
    Federal Income TaxesWe 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.(q)
    
    Cash and Cash EquivalentsCash 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.(r)
    
    Equity-Based CompensationPrior to the first quarter of 2006, the Company accounted for equity-based awards under the
intrinsic value method, which followed the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Therefore, no compensation expense was recognized
in net income, as all options granted had an exercise price equal to the fair value of the
underlying stock on the date of grant. The following table illustrates the effect on net
income and income per share if the Company had adopted the fair value recognition provisions
of SFAS No. 123(R), Share-Based Payment, for 2005 and 2004:
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December 31,
    
    
    December 31,2005
    
    
    2004Net income (loss), as reported
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )Deduct: Total equity-based compensation expense
determined under fair value based method for all awards,
net of related tax effects
    
    
    (84,641
    )
    
    
    (88,662
    )Pro forma net income (loss)
    
    $
    6,209,433
    
    
    $
    (8,589,282
    )Net income (loss) per common share:Basic, as reported
    
    $
    1.27
    
    
    $
    (1.72
    )Basic, pro forma
    
    $
    1.25
    
    
    $
    (1.74
    )Diluted, as reported
    
    $
    1.26
    
    
    $
    (1.72
    )Diluted, pro forma
    
    $
    1.24
    
    
    $
    (1.74
    )
 See Note 11 to the Consolidated Financial Statements for more information concerning
equity-based compensation.
 (s)
    
    ReclassificationCertain prior year amounts have been reclassified in order to conform to the 2006
presentation.
 (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 were as follows:
 December 31, 2006Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueHeld to maturity:Fixed maturities:US Treasury securities and obligations of
US Government corporations and agencies
    
    $
    1,356,518
    
    
    $
    
    
    
    $
    1,049
    
    
    $
    1,355,469Obligations of states and political
subdivisions
    
    
    3,437,066
    
    
    
    74,614
    
    
    
    16,163
    
    
    
    3,495,517Total held to maturity
    
    
    4,793,584
    
    
    
    74,614
    
    
    
    17,212
    
    
    
    4,850,986Available for sale:Fixed maturities:Obligations of states and political
subdivisions
    
    
    63,871,649
    
    
    
    825,611
    
    
    
    70,349
    
    
    
    64,626,911Corporate securities
    
    
    4,063,130
    
    
    
    4,981
    
    
    
    147,136
    
    
    
    3,920,975Total fixed maturities
    
    
    67,934,779
    
    
    
    830,592
    
    
    
    217,485
    
    
    
    68,547,886Equity securities
    
    
    8,277,307
    
    
    
    1,244,046
    
    
    
    121,106
    
    
    
    9,400,247Total available for sale
    
    
    76,212,086
    
    
    
    2,074,638
    
    
    
    338,591
    
    
    
    77,948,133Total
    
    $
    81,005,670
    
    
    $
    2,149,252
    
    
    $
    355,803
    
    
    $
    82,799,119
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December 31, 2005Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueHeld to maturity:Fixed maturities:US Treasury securities and obligations of
US Government corporations and agencies
    
    $
    1,149,676
    
    
    $
    
    
    
    $
    16,348
    
    
    $
    1,133,328Obligations of states and political
subdivisions
    
    
    3,671,953
    
    
    
    69,590
    
    
    
    18,247
    
    
    
    3,723,296Total held to maturity
    
    
    4,821,629
    
    
    
    69,590
    
    
    
    34,595
    
    
    
    4,856,624Available for sale:Fixed maturities:US Treasury securities and obligations of
US Government corporations and agencies
    
    
    4,126,893
    
    
    
    
    
    
    
    32,627
    
    
    
    4,094,266Obligations of states and political
subdivisions
    
    
    64,245,160
    
    
    
    681,930
    
    
    
    124,876
    
    
    
    64,802,214Corporate securities
    
    
    4,190,151
    
    
    
    
    
    
    
    74,391
    
    
    
    4,115,760Total fixed maturities
    
    
    72,562,204
    
    
    
    681,930
    
    
    
    231,894
    
    
    
    73,012,240Equity securities
    
    
    7,597,066
    
    
    
    889,141
    
    
    
    442,908
    
    
    
    8,043,299Total available for sale
    
    
    80,159,270
    
    
    
    1,571,071
    
    
    
    674,802
    
    
    
    81,055,539Total
    
    $
    84,980,899
    
    
    $
    1,640,661
    
    
    $
    709,397
    
    
    $
    85,912,163
  December 31, 2006Held to Maturity
    
    
    Available for SaleAmortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimatedcost
    
    
    fair value
    
    
    cost
    
    
    fair valueDue in one year or less
    
    $
    582,006
    
    
    $
    577,386
    
    
    $
    879,397
    
    
    $
    884,546Due after one year but less than five years
    
    
    2,625,791
    
    
    
    2,645,385
    
    
    
    3,154,123
    
    
    
    3,158,397Due after five years but less than ten years
    
    
    378,798
    
    
    
    369,701
    
    
    
    10,491,782
    
    
    
    10,461,312Due after ten years
    
    
    1,206,989
    
    
    
    1,258,514
    
    
    
    53,409,477
    
    
    
    54,043,631Total
    
    $
    4,793,584
    
    
    $
    4,850,986
    
    
    $
    67,934,779
    
    
    $
    68,547,886
  2006
    
    
    2005
    
    
    2004Fixed maturities
    
    $
    3,251,113
    
    
    $
    2,732,635
    
    
    $
    1,826,432Equity securities
    
    
    577,851
    
    
    
    555,414
    
    
    
    236,528Short-term investments
    
    
    302,620
    
    
    
    239,643
    
    
    
    225,190Other
    
    
    42,914
    
    
    
    34,531
    
    
    
    25,926Expenses
    
    
    (329,434
    )
    
    
    (259,564
    )
    
    
    (149,961
    )Net investment income
    
    $
    3,845,064
    
    
    $
    3,302,659
    
    
    $
    2,164,115
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2006
    
    
    2005
    
    
    2004Gross realized gains:Fixed maturities
    
    $
    86,955
    
    
    $
    157,808
    
    
    $
    55,923Equity securities
    
    
    76,801
    
    
    
    1,388,129
    
    
    
    1,781,330Other
    
    
    
    
    
    
    
    
    
    
    983Total gains
    
    
    163,756
    
    
    
    1,545,937
    
    
    
    1,838,236Gross realized losses:Fixed maturities
    
    
    97,945
    
    
    
    157,109
    
    
    
    69,659Equity securities
    
    
    2,687
    
    
    
    107,073
    
    
    
    138,916Other
    
    
    95
    
    
    
    
    
    
    
    Other-than-temporary impairments
    
    
    7,310
    
    
    
    
    
    
    
    535,487Total losses
    
    
    108,037
    
    
    
    264,182
    
    
    
    744,062Net realized gains
    
    $
    55,719
    
    
    $
    1,281,755
    
    
    $
    1,094,174Changes in unrealized gains (losses) on available for sale
investments:Fixed maturities
    
    $
    163,072
    
    
    $
    (282,487
    )
    
    $
    437,009Equity securities
    
    
    676,707
    
    
    
    (1,324,689
    )
    
    
    (847,352
    )Net change in unrealized gains (losses)
    
    $
    839,779
    
    
    $
    (1,607,176
    )
    
    $
    (410,343
    )
  Less Than 12 Months
    
    
    12 Months or Greater
    
    
    TotalEstimated
    
    
    Gross
    
    
    Estimated
    
    
    Gross
    
    
    Estimated
    
    
    Grossfair
    
    
    unrealized
    
    
    fair
    
    
    unrealized
    
    
    fair
    
    
    unrealizedAt December 31, 2006
    
    value
    
    
    loss
    
    
    value
    
    
    loss
    
    
    value
    
    
    lossFixed maturities:U.S. Treasury securities and obligations of
U.S. Government corporations and agencies
    
    $
    1,255,719
    
    
    $
    975
    
    
    $
    99,750
    
    
    $
    74
    
    
    $
    1,355,469
    
    
    $
    1,049Obligations of states and political subdivisions
    
    
    11,102,504
    
    
    
    52,735
    
    
    
    4,562,504
    
    
    
    33,777
    
    
    
    15,665,008
    
    
    
    86,512Corporate securities
    
    
    883,640
    
    
    
    1,360
    
    
    
    2,017,955
    
    
    
    145,776
    
    
    
    2,901,595
    
    
    
    147,136Total fixed maturities
    
    
    13,241,863
    
    
    
    55,070
    
    
    
    6,680,209
    
    
    
    179,627
    
    
    
    19,922,072
    
    
    
    234,697Equity securities
    
    
    1,109,875
    
    
    
    15,558
    
    
    
    2,947,643
    
    
    
    105,548
    
    
    
    4,057,518
    
    
    
    121,106Total
    
    $
    14,351,738
    
    
    $
    70,628
    
    
    $
    9,627,852
    
    
    $
    285,175
    
    
    $
    23,979,590
    
    
    $
    355,803
 Less Than 12 Months
    
    
    12 Months or Greater
    
    
    TotalEstimated
    
    
    Gross
    
    
    Estimated
    
    
    Gross
    
    
    Estimated
    
    
    Grossfair
    
    
    unrealized
    
    
    fair
    
    
    unrealized
    
    
    fair
    
    
    unrealizedAt December 31, 2005
    
    value
    
    
    loss
    
    
    value
    
    
    loss
    
    
    value
    
    
    lossFixed maturities:U.S. Treasury securities and obligations of
U.S. Government corporations and agencies
    
    $
    4,193,047
    
    
    $
    32,627
    
    
    $
    1,034,547
    
    
    $
    16,348
    
    
    $
    5,227,594
    
    
    $
    48,975Obligations of states and political subdivisions
    
    
    17,398,953
    
    
    
    112,464
    
    
    
    1,709,875
    
    
    
    30,659
    
    
    
    19,108,828
    
    
    
    143,123Corporate securities
    
    
    3,865,760
    
    
    
    74,391
    
    
    
    
    
    
    
    
    
    
    
    3,865,760
    
    
    
    74,391Total fixed maturities
    
    
    25,457,760
    
    
    
    219,482
    
    
    
    2,744,422
    
    
    
    47,007
    
    
    
    28,202,182
    
    
    
    266,489Equity securities
    
    
    4,793,807
    
    
    
    403,593
    
    
    
    708,780
    
    
    
    39,315
    
    
    
    5,502,587
    
    
    
    442,908Total
    
    $
    30,251,567
    
    
    $
    623,075
    
    
    $
    3,453,202
    
    
    $
    86,322
    
    
    $
    33,704,769
    
    
    $
    709,397
  46




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##### Table of Contents



At December 31, 2006, investments having a carrying value of $4,538,220 were on deposit with
various state insurance departments to meet their respective regulatory requirements.(3)
    
    DEFERRED POLICY ACQUISITION COSTSChanges in deferred policy acquisition costs for the year ended December 31 are summarized as
follows:
 2006
    
    
    2005
    
    
    2004Deferred, January 1
    
    $
    9,678,821
    
    
    $
    7,223,995
    
    
    $
    4,962,150Additions:Commissions
    
    
    8,893,883
    
    
    
    10,215,611
    
    
    
    7,124,437Premium tax
    
    
    587,637
    
    
    
    604,559
    
    
    
    397,168Total additions
    
    
    9,481,520
    
    
    
    10,820,170
    
    
    
    7,521,605Amortization to expense
    
    
    9,705,931
    
    
    
    8,365,344
    
    
    
    5,259,760Deferred, December 31
    
    $
    9,454,410
    
    
    $
    9,678,821
    
    
    $
    7,223,995
 (4)
    
    UNCOMPLETED CONTRACTSRevenues earned on uncompleted codification contracts by ALPC were $0 and $1,452,739 and
billings to date on those contracts were $0 and $1,279,812 at December 31, 2006 and 2005,
respectively. The excess of costs and estimated earnings over billings were $0 and $248,035 at
December 31, 2006 and 2005, respectively. On August 31, 2006, the Company sold its municipal
code publishing segment as more fully described above in Note 1 to the Consolidated Financial
Statements.(5)
    
    GOODWILL AND INTANGIBLE ASSETSAs part of its annual goodwill impairment testing in the fourth quarter of 2004, the Company
concluded that an impairment of goodwill existed at its property/casualty insurance segment. The
Company performed impairment testing in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. The Company, with the assistance of an independent appraisal firm,
determined that the carrying value of the reporting segment exceeded the fair value of the
reporting segment, resulting in a non-cash impairment charge. The fair value of the reporting
segment was estimated using the expected present value of future cash flows. As a result of
this impairment, the Company recorded a non-cash impairment charge in the fourth quarter of 2004
in the aggregate amount of $753,737.Intangible assets as of December 31 were as follows:
 December 31, 2006
    
    
    December 31, 2005Accumulated
    
    
    Sale of
    
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    
    amortization
    
    
    affiliate
    
    
    Net
    
    
    Cost
    
    
    amortization
    
    
    NetAmortizing intangibles:Databases
    
    $
    1,008,773
    
    
    $
    (287,505
    )
    
    $
    (721,268
    )
    
    $
    
    
    
    $
    1,008,773
    
    
$
    (253,879
    )
    
    $
    754,894Noncompete agreement
    
    
    120,394
    
    
    
    (120,328
    )
    
    
    (66
    )
    
    
    
    
    
    
    120,394
    
    
    
    (104,275
    )
    
    
    16,119Total intangible assets
    
    $
    1,129,167
    
    
$
    (407,833
    )
    
    $
    (721,334
    )
    
    $
    
    
    
    $
    1,129,167
    
    
$
    (358,154
    )
    
    $
    771,013
 Amortization expense related to amortizable intangible assets was $49,679, $74,518 and
$74,517 during 2006, 2005 and 2004, respectively. On August 31, 2006, the Company sold its
municipal code publishing segment as more fully described above in Note 1 to the Consolidated
Financial Statements.(6)
    
    NOTES PAYABLEWe have a $10,000,000 unsecured revolving line of credit with a maturity date of June 30, 2009
with no outstanding balance at December 31, 2006 and December 31, 2005. The revolving line of
credit provides for interest payable quarterly at an annual rate equal to the prime rate less 75
basis points. The Company utilizes the line of credit from time to time based on short-term
cash flow needs. The terms of the revolving credit agreement contain various restrictive
covenants. As of December 31, 2006, the Company was in compliance with all such covenants. The
bank that provides the line of credit is also a policyholder of the Company.
 47




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##### Table of Contents



(7)
    
    LEASE EXPENSESWe routinely lease premises for use as administrative offices, vehicles and office equipment
under operating leases for varying periods. Management expects that in the normal course of
business, leases will be renewed or replaced by other leases. Effective January 2001, we
entered into a new lease for our Columbus, Ohio office space. Under its provisions, no cash
payments were due until April 1, 2002. Rent expense is recognized evenly over the lease term
ending December 31, 2008. Rental expenses under operating leases were $251,768, $265,852 and
$274,300 for the years ended December 31, 2006, 2005 and 2004, respectively.The future minimum lease payments required under operating leases for the next five fiscal
years are as follows:
 2007
    
    $
    224,0092008
    
    
    229,9432009
    
    
    2010
    
    
    2011
    
    
    $
    453,952
 (8)
    
    TRUST PREFERRED DEBT ISSUED TO AFFILIATESIn 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. 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. BIC
Trust I and BIC Trust II were formed for the sole purpose of issuing and selling the floating
rate trust preferred capital securities and investing the proceeds from such securities in
junior subordinated debentures of the Company. In connection with the issuance of the trust
preferred capital securities, the Company issued junior subordinated debentures of $8,248,000
and $7,217,000 to BIC Trust I and BIC Trust II, respectively. The floating rate trust preferred
capital securities and the junior subordinated debentures have substantially the same terms and
conditions. The Company has fully and unconditionally guaranteed the obligations of BIC Trust I
and BIC Trust II with respect to the floating rate trust preferred capital securities. BIC
Trust I and BIC Trust II distribute the interest received from the Company on the junior
subordinated debentures to the holders of their floating rate trust preferred capital securities
to fulfill their dividend obligations with respect to such trust preferred securities. BIC
Trust Is floating rate trust preferred capital securities, and the junior subordinated
debentures issued in connection therewith, pay dividends and interest, as applicable, on a
quarterly basis at a rate equal to three month LIBOR plus four hundred basis points (9.37% and
8.44% at December 31, 2006 and 2005, respectively), are redeemable at par on or after December
4, 2007 and mature on December 4, 2032. BIC Trust IIs floating rate trust preferred capital
securities, and the junior subordinated debentures issued in connection therewith, pay dividends
and interest, as applicable, on a quarterly basis at a rate equal to three month LIBOR plus four
hundred and five basis points (9.41% and 8.58% at December 31, 2006 and 2005, respectively), are
redeemable at par on or after September 30, 2008 and mature on September 30, 2033. Interest on
the junior subordinated debentures is charged to income as it accrues. Interest expense related
to the junior subordinated debentures for the years ended December 31, 2006, 2005 and 2004 was
$1,427,241, $1,148,431and $862,256, respectively. The terms of the junior subordinated
debentures contain various restrictive covenants. As of December 31, 2006, the Company was in
compliance with all such covenants.In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities, which requires the consolidation of certain entities considered to be
variable interest entities (VIEs). An entity is considered to be a VIE when it has equity
investors who lack the characteristics of having a controlling financial interest, or its
capital is insufficient to permit it to finance its activities without additional subordinated
financial support. Consolidation of a VIE by an investor is required when it is determined that
the investor will absorb a majority of the VIEs expected losses if they occur, receive a
majority of the VIEs expected residual returns if they occur, or both. In accordance with FIN
46, BIC Trust I and BIC Trust II are not included in the Companys consolidated financial
statements. If they were included in the Companys consolidated financial statements, there
would be no change to net income, only changes in the presentation of the financial statements.(9)
    
    FEDERAL INCOME TAXESDeferred income taxes at December 31 reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and such amounts as measured
on an income tax basis. Temporary differences which give rise to the net deferred tax asset at
December 31 are as follows:
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##### Table of Contents



2006
    
    
    2005Deferred tax assets:Unpaid loss and LAE reserves
    
    $
    216,931
    
    
    $
    417,169Unearned premium reserves
    
    
    1,901,935
    
    
    
    2,010,614Net operating loss carryforward
    
    
    
    
    
    
    733,158Alternative minimum tax
    
    
    868,235
    
    
    
    508,562Other-than-temporary impairment of investments
    
    
    5,872
    
    
    
    3,386Deferred ceded commissions
    
    
    595,774
    
    
    
    454,613Contingent liabilities
    
    
    437,308
    
    
    
    Other
    
    
    312,494
    
    
    
    256,579Total deferred tax assets
    
    
    4,338,549
    
    
    
    4,384,081Deferred tax liabilities:Net unrealized gains on available for sale securities
    
    
    (590,257
    )
    
    
    (304,732
    )Deferred policy acquisition costs
    
    
    (3,214,499
    )
    
    
    (3,290,799
    )Accrued dividends receivable
    
    
    (27,142
    )
    
    
    (10,321
    )Other
    
    
    (251,938
    )
    
    
    (292,768
    )Total deferred tax liabilities
    
    
    (4,083,836
    )
    
    
    (3,898,620
    )Net deferred tax asset
    
    $
    254,713
    
    
    $
    485,461
 Net deferred tax assets and liabilities and federal income tax expense in future years
can be materially affected by changes in enacted tax rates or by unexpected adverse events.The provision for federal income taxes for the period ended December 31 consists of the
following:
 2006
    
    
    2005
    
    
    2004Current expense (benefit)
    
    $
    1,403,712
    
    
    $
    179,239
    
    
    $
    (2,416,512
    )Deferred expense (benefit)
    
    
    (54,777
    )
    
    
    1,697,332
    
    
    
    (2,350,920
    )Federal income tax expense (benefit)
    
    $
    1,348,935
    
    
    $
    1,876,571
    
    
    $
    (4,767,432
    )
 The difference between income taxes provided at our effective tax rate and the 34%
federal statutory rate for the period ended December 31 is as follows:
 2006
    
    
    2005
    
    
    2004Federal income tax at statutory rate
    
    $
    2,320,104
    
    
    $
    2,778,019
    
    
    $
    (4,511,138
    )Dividends received deduction and tax exempt interest
    
    
    (927,798
    )
    
    
    (842,952
    )
    
    
    (566,581
    )Business meals and entertainment
    
    
    21,330
    
    
    
    21,914
    
    
    
    35,042Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    256,271Other
    
    
    (64,701
    )
    
    
    (80,410
    )
    
    
    18,974Federal income tax expense (benefit)
    
    $
    1,348,935
    
    
    $
    1,876,571
    
    
    $
    (4,767,432
    )
 As of December 31, 2006, the Company does not have any uncertain tax positions under FIN
48. As a result, there are no unrecognized tax benefits as of December 31, 2006. The Companys
1999 through 2005 federal tax returns still remain subject to examination by the Internal
Revenue Service.(10)
    
    BENEFIT PLANSThe Ohio Indemnity Company Employee 401(k) and Profit Sharing Plan (the 401(k) Plan) is
available to full-time employees who meet the 401(k) Plans eligibility requirements. Under
the 401(k) Plan, we match 100% of the qualified employees contribution up to 3% of salary and
50% of the qualified employees contribution between 3% and 5% of salary. The total cost of
the matching contribution was $130,075, $126,640 and $224,548 for the years ended December 31,
2006, 2005 and 2004, respectively.(11)
    
    EQUITY-BASED COMPENSATIONThe Company maintains two equity compensation plans (collectively, the Plans) for the benefit
of certain of its officers, directors, employees, consultants and advisors. During the first
quarter of 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, applying the
modified prospective method. SFAS No. 123(R) requires all equity-based payments to employees
and directors, including grants of stock options, to be recognized in net income based on the
grant date fair value of the award. Under the modified prospective method, the Company is
required to record equity-based compensation expense for all awards granted after the
 49




---



##### Table of Contents



date of
adoption and for the nonvested portion of previously granted awards outstanding as of the date
of adoption. The results for
prior periods have not been restated.The Company has stock options outstanding and exercisable at December 31, 2006 under two equity
compensation plans, each of which has been approved by our shareholders.The 1994 Stock Option Plan (the 1994 Stock Option Plan) provided for the grants of options,
covering up to an aggregate of 500,000 common shares, with a 100,000 common share maximum for
any one participant. Key employees, officers and directors of, and consultants and advisors
to, the Company were eligible to participate in the 1994 Stock Option Plan. The 1994 Stock
Option Plan is administered by the Companys Compensation Committee which determined to whom
and when options were granted along with the terms and conditions of the options. Under the
1994 Stock Option Plan, options for 266,500 common shares were outstanding at December 31, 2006
and expire at various dates from 2007 to 2013 and range in option price per share from $3.88 to
$6.25. Of the options for 266,500 common shares outstanding, 32,000 have been granted to our
non-employee directors and 234,500 have been granted to employees. All of the options
outstanding were granted to employees and directors for compensatory purposes. No new options
can be granted under the 1994 Stock Option Plan and the plan remains in effect only with
respect to the outstanding options.The 2002 Stock Incentive Plan (the 2002 Plan) provides for awards, including grants of
options, covering up to an aggregate of 600,000 common shares. Key employees, officers and
directors of, and consultants and advisors to, the Company are eligible to participate in the
2002 Plan. The 2002 Plan is administered by the Compensation Committee which determines to
whom and when awards will be granted as well as the terms and conditions of the awards. Under
the 2002 Plan, options for 561,000 common shares were outstanding at December 31, 2006 and
expire at various dates from 2012 to 2016 and range in option price per share from $4.50 to
$8.00. Of the options for 561,000 common shares outstanding, 12,000 have been granted to our
non-employee directors and 549,000 have been granted to employees. All of the options
outstanding were granted to employees and directors for compensatory purposes. As of December
31, 2006, there were 35,000 shares available for future grant under the 2002 Plan.All stock options (1) are granted with an exercise price equal to the market price of the
Companys common shares on the date of grant; (2) have a 10-year contractual term; (3) with
respect to officers and employees, vest and become exercisable at the rate of 20% per year over
a five-year period; and (4) with respect to non-employee directors, vest and become exercisable
after one full year of continuous service.The fair value of options granted by the Company during 2006 was estimated on the date of grant
using the Black-Scholes option pricing model (Black-Scholes model). The Black-Scholes model
incorporates ranges of assumptions such as risk-free rate, expected life, expected volatility
and dividend yield. The risk-free rate was based on the United States Treasury strip curve at
the time of the grant with a term approximating that of the expected option life. The Company
analyzed 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 were
based on historical volatility over a period of time using the expected term of the option
grant (6 years) and using weekly stock prices of the Company; however, the Company excluded
from its historical volatility the period from February 4, 2005 through January 25, 2006 (the
period in which shareholders could not obtain current financial information for the Company and
could not rely on the Companys 2003, 2002, and 2001 financial statements) as the Company
believes that its stock price during that period is not relevant in evaluating the expected
volatility of its common shares in the future. A 0% dividend yield was used in the
Black-Scholes model based on historical dividends. The following table provides the range of
assumptions used for options valued during the years ended December 31:
 2006
    
    2005(1)
    
    2004Risk-free interest rate
    
    
    4.94%5.01
    %
    
    
    
    
    
    
    3.88%4.26
    %Expected life
    
    6 years
        
    
    
    
    
    6 yearsExpected volatility
    
    
    32.01%32.10
    %
    
    
    
    
    
    
    27.10%27.42
    %Dividend yield
    
    
    0
    %
    
    
    
    
    
    
    0
    %
 
 (1)
    
    There were no options granted during 2005. The compensation expense recognized for all equity-based awards is net of forfeitures and is
recognized over the awards service period. In accordance with Staff Accounting Bulletin
(SAB) No. 107, the Company recorded equity-based compensation expense for the year ended
December 31, 2006 in the amount of $217,958 ($143,852 net of tax), which is classified within
other insurance operating expenses to correspond with the same line item as cash compensation
paid to employees. During 2006, the Company received cash of $38,880 from the exercise of
stock options and realized a tax benefit of $3,101 from such option exercises.
 50




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##### Table of Contents



The following table summarizes all stock option activity for the Company under the Plans from
January 1, 2006 through December 31, 2006:
 Weighted-averageexercise price
    
    Weighted-average
    
    AggregateShares
    
    per common share
    
    contractual life (years)
    
    intrinsic valueOutstanding at January 1, 2006
    
    
    613,500
    
    
    $
    5.33Granted
    
    
    232,000
    
    
    
    6.00Exercised
    
    
    (8,000
    )
    
    
    4.86Expired
    
    
    (2,000
    )
    
    
    3.38Cancelled
    
    
    (8,000
    )
    
    
    5.33Outstanding at December 31, 2006
    
    
    827,500
    
    
    $
    5.52
    
    
    
    6.25
    
    
    $
    438,575Vested and exercisable at December 31, 2006
    
    
    443,100
    
    
    $
    5.09
    
    
    
    4.31
    
    
    $
    425,376
 The aggregate intrinsic value represents the total pretax intrinsic value, based on the
Companys last reported bid quotation for the common shares in the Pink Sheets as of December
31, 2006 ($6.05), which would have been received by the option holders had all option holders
exercised their options as of that date.The weighted-average grant-date fair value of options granted during the years ended December
31, 2006, 2005 and 2004 was $2.48, $0 and $2.50, respectively. The total intrinsic value of
options exercised during the years ended December 31, 2006, 2005 and 2004 was $9,120, $0 and
$172,857, respectively.The following table summarizes nonvested stock option activity for the Company under the Plans
from January 1, 2006 through December 31, 2006:
 Weighted-averagegrant date fair valueShares
    
    per common shareNonvested at January 1, 2006
    
    
    236,600
    
    
    $
    2.05Granted
    
    
    232,000
    
    
    
    2.48Vested
    
    
    (82,200
    )
    
    
    1.96Expired
    
    
    
    
    
    
    Cancelled
    
    
    (2,000
    )
    
    
    1.70Nonvested at December 31, 2006
    
    
    384,400
    
    
    $
    2.33
 As of December 31, 2006, the total compensation cost related to nonvested stock options
not yet recognized was $771,528. The weighted-average period over which this cost is expected
to be recognized is approximately 3.4 years.The following table summarizes weighted-average information by range of exercise prices for
stock options outstanding and exercisable at December 31, 2006:
 Options Outstanding
    
    
    Options ExercisableNumber
    
    
    Weighted-average
    
    
    Weighted-average
    
    
    Number
    
    
    Weighted-averageoutstanding
    
    
    remaining
    
    
    exercise
    
    
    exercisable
    
    
    exerciseRange of Exercise Prices
    
    at 12/31/06
    
    
    contractual life (years)
    
    
    price
    
    
    at 12/31/06
    
    
    price$3.875
    
    
    25,000
    
    
    
    0.00
    
    
    $
    3.88
    
    
    
    25,000
    
    
    $
    3.884.00 - 4.82
    
    
    236,000
    
    
    
    3.72
    
    
    
    4.57
    
    
    
    213,400
    
    
    
    4.585.00 - 5.375
    
    
    193,500
    
    
    
    5.30
    
    
    
    5.23
    
    
    
    141,100
    
    
    
    5.256.00 - 6.25
    
    
    244,000
    
    
    
    9.20
    
    
    
    6.00
    
    
    
    12,000
    
    
    
    6.087.04 - 8.00
    
    
    129,000
    
    
    
    7.93
    
    
    
    7.11
    
    
    
    51,600
    
    
    
    7.11Total ($3.875 - $8.00)
    
    
    827,500
    
    
    
    6.25
    
    
    $
    5.52
    
    
    
    443,100
    
    
    $
    5.09
 (12)
    
    STATUTORY RESTRICTIONSGenerally, Ohio Indemnity is restricted by the insurance laws of the State of Ohio as to
amounts that can be transferred to its parent in the form of dividends, loans, or advances
without the approval of the Department. Under these restrictions, during 2007, dividends,
loans or advances in excess of $4,915,331 will require the approval of the Department.Ohio Indemnity is subject to a risk-based capital test applicable to property/casualty
insurers. The risk-based capital test serves as a benchmark of an insurance enterprises
solvency by state insurance regulators by establishing statutory surplus targets which will
require certain company level or regulatory level actions. Ohio Indemnitys total adjusted
capital was in excess of all required action levels at December 31, 2006.
 51




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##### Table of Contents



(13)
    
    STATUTORY SURPLUS AND NET INCOMEOhio Indemnity is statutorily required to file financial statements with state and other
regulatory authorities. The accounting principles used to prepare such statutory financial
statements follow prescribed or permitted accounting practices as defined in the National
Association of Insurance Commissioners Accounting Practices and Procedures Manual, which
principles may differ from GAAP. Permitted statutory accounting practices encompass all
accounting practices not so prescribed, but allowed by the Department. Ohio Indemnity has no
permitted statutory accounting practices.As of and for the period ended December 31, Ohio Indemnitys statutory surplus and net income
determined in accordance with statutory accounting practices differed from shareholders equity
and net income determined in accordance with GAAP by the following:
 Shareholders Equity/Surplus
    
    
    Net Income (Loss)2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004Statutory
    
    $
    40,458,732
    
    
    $
    34,782,737
    
    
    $
    30,879,673
    
    
    $
    4,915,331
    
    
    $
    5,780,803
    
    
    $
    (11,300,632
    )Reconciling items:Non-admitted assets
    
    
    103,002
    
    
    
    744,219
    
    
    
    586,668
    
    
    
    
    
    
    
    
    
    
    
    Deferred policy acquisition costs
    
    
    9,454,410
    
    
    
    9,678,821
    
    
    
    7,223,995
    
    
    
    (224,411
    )
    
    
    2,454,826
    
    
    
    2,261,845Deferred ceded commissions
    
    
    (1,579,168
    )
    
    
    (994,459
    )
    
    
    (465,457
    )
    
    
    (584,709
    )
    
    
    (529,002
    )
    
    
    (94,134
    )Deferred taxes
    
    
    (2,886,036
    )
    
    
    (3,105,697
    )
    
    
    (2,539,073
    )
    
    
    (108,099
    )
    
    
    (1,570,402
    )
    
    
    2,004,269Unrealized gain on available for sale fixed
maturities
    
    
    613,108
    
    
    
    450,037
    
    
    
    709,323
    
    
    
    
    
    
    
    
    
    
    
    Provision for reinsurance
    
    
    3,000
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subsequent capital contribution from parent
    
    
    
    
    
    
    
    
    
    
    (4,200,000
    )
    
    
    
    
    
    
    
    
    
    
    GAAP
    
    $
    46,167,048
    
    
    $
    41,565,658
    
    
    $
    32,195,129
    
    
    $
    3,998,112
    
    
    $
    6,136,225
    
    
    $
    (7,128,652
    )
 (14)
    
    OTHER COMPREHENSIVE INCOME (LOSS)The components of other comprehensive income (loss) and the related federal income tax effects
for the years ended December 31, are as follows:
 Year ended December 31, 2006Pre-tax
    
    
    Income tax
    
    
    Net-of-taxamount
    
    
    expense (benefit)
    
    
    amountNet unrealized holding gains on securities:Unrealized holding gains arising during 2006
    
    $
    895,498
    
    
    $
    304,469
    
    
    $
    591,029Less: reclassification adjustments for gains realized in net income
    
    
    55,719
    
    
    
    18,944
    
    
    
    36,775Net unrealized holding gains
    
    
    839,779
    
    
    
    285,525
    
    
    
    554,254Other comprehensive income
    
    $
    839,779
    
    
    $
    285,525
    
    
    $
    554,254
 Year ended December 31, 2005Pre-tax
    
    
    Income tax
    
    
    Net-of-taxamount
    
    
    expense (benefit)
    
    
    amountNet unrealized holding gains (losses) on securities:Unrealized holding losses arising during 2005
    
    $
    (325,421
    )
    
    $
    (110,643
    )
    
    $
    (214,778
    )Less: reclassification adjustments for gains realized in net income
    
    
    1,281,755
    
    
    
    435,797
    
    
    
    845,958Net unrealized holding losses
    
    
    (1,607,176
    )
    
    
    (546,440
    )
    
    
    (1,060,736
    )Other comprehensive loss
    
    $
    (1,607,176
    )
    
    $
    (546,440
    )
    
    $
    (1,060,736
    )
 Year ended December 31, 2004Pre-tax
    
    
    Income tax
    
    
    Net-of-taxamount
    
    
    expense (benefit)
    
    
    amountNet unrealized holding gains (losses) on securities:Unrealized holding gains arising during 2004
    
    $
    1,017,968
    
    
    $
    346,109
    
    
    $
    671,859Less: reclassification adjustments for gains realized in net income
    
    
    1,428,311
    
    
    
    485,626
    
    
    
    942,685Net unrealized holding losses
    
    
    (410,343
    )
    
    
    (139,517
    )
    
    
    (270,826
    )Other comprehensive loss
    
    $
    (410,343
    )
    
    $
    (139,517
    )
    
    $
    (270,826
    )
 52




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(15)
    
    RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSESActivity in the reserve for unpaid losses and LAE is summarized as follows (dollars in
thousands):
 2006
    
    
    2005
    
    
    2004Balance at January 1
    
    $
    27,304
    
    
    $
    30,766
    
    
    $
    14,386Less reinsurance recoverables
    
    
    1,235
    
    
    
    1,944
    
    
    
    4,926Net Balance at January 1
    
    
    26,069
    
    
    
    28,822
    
    
    
    9,460Incurred related to:Current year
    
    
    25,438
    
    
    
    27,033
    
    
    
    52,620Prior years
    
    
    136
    
    
    
    (3,697
    )
    
    
    (5,383
    )Total incurred
    
    
    25,574
    
    
    
    23,336
    
    
    
    47,237Paid related to:Current year
    
    
    20,730
    
    
    
    20,678
    
    
    
    23,690Prior years
    
    
    18,510
    
    
    
    5,411
    
    
    
    4,185Total paid
    
    
    39,240
    
    
    
    26,089
    
    
    
    27,875Net Balance at December 31
    
    
    12,403
    
    
    
    26,069
    
    
    
    28,822Plus reinsurance recoverables
    
    
    1,420
    
    
    
    1,235
    
    
    
    1,944Balance at December 31
    
    $
    13,823
    
    
    $
    27,304
    
    
    $
    30,766Reserve for unpaid losses and LAE
    
    $
    7,457
    
    
    $
    7,678
    
    
    $
    11,563Discontinued bond program reserve for unpaid losses and LAE
    
    
    6,366
    
    
    
    19,626
    
    
    
    19,203Total reserve for unpaid losses and LAE
    
    $
    13,823
    
    
    $
    27,304
    
    
    $
    30,766
 As a result of changes in estimates of insured events in prior years, the provision for
unpaid loss and LAE increased (decreased) by approximately $136,000, $(3,697,000) and
$(5,383,000) for the years ended December 31, 2006, 2005 and 2004, respectively. The increase
in 2006 was due to unfavorable loss development for the discontinued bond program which was
partially offset by favorable loss development in our automobile lender/dealer and waste
industry product lines. The decrease in 2005 and 2004 was attributed primarily to favorable
loss development in the Companys ULI product line.For more information concerning loss and LAE reserves for the discontinued bond program, see
Note 16 to the Consolidated Financial Statements.(16)
    
    REINSURANCEThe Company assumes and cedes reinsurance with other insurers and reinsurers. Such
arrangements serve to enhance the Companys capacity to write business, provide greater
diversification, align business partners with the Companys interests, and/or limit the
Companys maximum loss arising from certain risks. Although reinsurance does not discharge the
original insurer from its primary liability to its policyholders, it is the practice of
insurers for accounting purposes to treat reinsured risks as risks of the reinsurer. The
primary insurer would reassume liability in those situations where the reinsurer is unable to
meet the obligations it assumed under the reinsurance agreement. The ability to collect
reinsurance is subject to the solvency of the reinsurers and/or collateral provided under the
contract.Several of our lender/dealer insurance producers have formed sister reinsurance companies,
commonly referred to as a producer-owned reinsurance company (PORC). The primary reason for
an insurance producer to form a PORC is to realize the underwriting profits and investment
income from the insurance premiums generated by that producer. In return for ceding business
to the PORC, the Company receives a ceding commission, which is based on a percentage of the
premiums ceded. Such arrangements align business partners with the Companys interests while
preserving valued customer relationships. All of the Companys lender/dealer ceded reinsurance
transactions are PORC arrangements.Effective January 1, 2003, the Company entered into a producer-owned reinsurance arrangement
with a new lender/dealer producer whereby 100% of that producers premiums (along with the
associated risk) was ceded to its PORC. This reinsurance arrangement was cancelled effective
December 31, 2003. For this reinsurance arrangement, the Company has obtained collateral in
the form of a letter of credit from the reinsurer to secure its obligations. Under the
provisions of the reinsurance agreement, the collateral must be equal to or greater than 102%
of the reinsured reserves and the Company has immediate access to such collateral if necessary.
Under this arrangement, the Company ceded premiums earned of $67,969, $115,790 and $4,435,659
for the years ended December 31, 2006, 2005 and 2004, respectively.Effective October 1, 2003, the Company entered into a producer-owned reinsurance arrangement
with an existing lender/dealer customer whereby 100% of that customers premiums (along with
the associated risk) was ceded to its PORC. For this reinsurance arrangement, the Company has
obtained collateral in the form of a trust from the reinsurer to secure its obligations. Under
the provisions of the reinsurance agreement, the collateral must be equal to or greater than
102% of the reinsured reserves and the Company has immediate access to such collateral if
necessary. Under this arrangement, the Company ceded premiums earned of $2,266,090, $1,727,303
and $894,717 for the years ended December 31, 2006, 2005 and 2004, respectively.
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Beginning in the second quarter of 2004, the Company entered into a quota share reinsurance
arrangement with certain insurance carriers whereby the Company assumed and ceded 50% of
certain waste surety bond business. Effective January 1, 2005, the reinsurance arrangement was
amended whereby the Companys assumed participation was reduced from 50% to 25%. Effective
August 1, 2006, the reinsurance arrangement was further amended whereby the Companys assumed
participation was increased from 25% to 50%. Under this program, the Company assumed premiums
earned of $3,283,690, $4,302,509 and $1,980,492 during 2006, 2005 and 2004, respectively.
Also, the Company ceded premiums earned of $1,235,624, $679,563 and $131,051 for the years
ended December 31, 2006, 2005 and 2004, respectively.Effective January 1, 2005, the Company entered into a producer-owned reinsurance arrangement
with a guaranteed auto protection insurance agent whereby 100% of that agents premiums (along
with the associated risk) were ceded to its PORC. For this reinsurance arrangement, the
Company has obtained collateral in the form of a letter of credit to secure its obligations.
Under the provisions of the reinsurance agreement, the collateral must be equal to or greater
than 102% of the reinsured reserves and the Company has immediate access to such collateral if
necessary. Under this arrangement, the Company ceded premiums earned of $1,987,640, $734,435
and $0 for the years ended December 31, 2006, 2005 and 2004, respectively.In addition to the above, the Company has other reinsurance arrangements including two
automobile lender/dealer PORC quota share arrangements, several quota share arrangements for
certain contract and escrow surety bond business and a reinsurance arrangement for a vehicle
service contract program. Under these arrangements, the Company ceded premiums earned of
$708,430, $927,455 and $1,113,639 for the years ended December 31, 2006, 2005 and 2004,
respectively. Also, the Company assumed premiums earned of $60,535, $0 and $0 for the years
ended December 31, 2006, 2005 and 2004, respectively.From 2001 until the end of the second quarter of 2004, the Company participated in a bail and
immigration bond program. This program was discontinued in the second quarter of 2004. For a
more detailed description of this program, see Discontinued Bond Program below.A reconciliation of direct to net premiums, on both a written and earned basis, for the year
ended December 31 is as follows:
 2006
    
    
    2005
    
    
    2004Premiums
    
    
    Premiums
    
    
    Premiums
    
    
    Premiums
    
    
    Premiums
    
    
    Premiumswritten
    
    
    earned
    
    
    written
    
    
    earned
    
    
    written
    
    
    earnedDirect
    
    $
    55,542,460
    
    
    $
    52,583,987
    
    
    $
    56,013,503
    
    
    $
    51,743,182
    
    
    $
    56,234,221
    
    
    $
    54,069,958Assumed
    
    
    3,122,782
    
    
    
    3,114,813
    
    
    
    3,580,422
    
    
    
    4,218,416
    
    
    
    4,301,004
    
    
    
    2,569,293Ceded
    
    
    (9,859,208
    )
    
    
    (6,592,147
    )
    
    
    (7,396,438
    )
    
    
    (4,244,653
    )
    
    
    (2,126,555
    )
    
    
    (6,575,066
    )$
    48,806,034
    
    
    $
    49,106,653
    
    
    $
    52,197,487
    
    
    $
    51,716,945
    
    
    $
    58,408,670
    
    
    $
    50,064,185
 The amounts of recoveries pertaining to reinsurance that were deducted from losses and LAE
incurred for the years ended December 31, 2006, 2005 and 2004 were $3,390,786, $1,789,439 and
$2,465,643, respectively. For the years ended December 31, 2006, 2005 and 2004, ceded
reinsurance decreased commission expense incurred by $1,494,873, $1,054,259 and $597,927,
respectively.Discontinued Bond ProgramBeginning in 2001 and continuing into the second quarter of 2004, the Company participated as a
reinsurer in a program covering bail and immigration bonds issued by four insurance carriers
and produced by a bail bond agency (collectively, the discontinued bond program or the
program). The liability of the insurance carriers was reinsured to a group of reinsurers,
including the Company. The Company assumed 15% of the business from 2001 through 2003 and 5%
of the business during the first half of 2004. This program was discontinued in the second
quarter of 2004.Based on the design of the program, the bail bond agency was to obtain and maintain collateral
and other security and to provide funding for bond losses. The bail bond agency and its
principals were responsible for all losses as part of their program administration. The
insurance carriers and, in turn, the reinsurers were not required to pay losses unless there
was a failure of the bail bond agency. As the bonds were to be 100% collateralized, any losses
paid by the reinsurers were to be recoverable through liquidation of the collateral and
collections from third party indemnitors.In the second quarter of 2004, the Company came to believe that the discontinued bond program
was not being operated as it had been represented to the Company by agents of the insurance
carriers who had solicited the Companys participation in the program, and the Company began
disputing certain issues with respect to the program, including but not limited to: 1)
inaccurate/incomplete disclosures relating to the program; 2) improper supervision by the
insurance carriers of the bail bond agency in administering the program; 3) improper
disclosures by the insurance carriers through the bail bond agency and the reinsurance
intermediaries during life of the program; and 4) improper premium and claims administration.
Consequently, during the second quarter of 2004, the Company ceased paying claims on the
program and retained outside legal counsel to review and defend its rights under the program.
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Pending Arbitration. During 2004 and 2005, the Company entered into arbitrations with
all four insurance carriers that participated in the discontinued bond program. As discussed
below, during 2006, arbitrations with three of the insurance carriers concluded. The following
is a description of the last pending arbitration proceeding as of December 31, 2006:Highlands Arbitration. Highlands Insurance Company (Highlands), one of the insurance
carriers, was placed in receivership during 2003 (which receivership remains pending). On
August 31, 2005, Highlands Receiver demanded arbitration against the Company and other
reinsurers, including The Philadelphia Contributionship for the Insurance of Houses from Loss
by Fire, American Healthcare Insurance Company and various Lloyds Syndicates. In November
2005, the Company responded to this demand by seeking rescission of the reinsurance agreement,
monetary damages for claims that were paid by the Company under the agreement and other
appropriate relief. Highlands is seeking to recover certain of its losses from the Company
under the reinsurance agreement. No arbitration panel has yet been constituted.Arbitration Developments as of December 31, 2006.Aegis Arbitration.During 2004, the Company entered into an arbitration proceeding with Aegis
Security Insurance Company (Aegis), one of the insurance carriers. Through this arbitration,
the Company was seeking rescission of the reinsurance agreements, monetary damages for the
claims that were paid by the Company under the agreements and other appropriate relief. Aegis
was seeking to recover certain of its losses from the Company under the reinsurance agreements.
On January 18, 2006, the Company entered into a settlement agreement with Aegis resolving all
disputes between the Company and Aegis relating to the discontinued bond program. The
settlement also relieved the Company from any potential future liabilities with respect to
bonds issued by Aegis. As a result of this settlement agreement, the Company recorded reserve
redundancies of approximately $0.2 million during 2006.Sirius Arbitration.During 2004, the Company entered into an arbitration proceeding with
Sirius America Insurance Company (Sirius), one of the insurance carriers. Through this
arbitration, the Company was seeking rescission of the reinsurance agreement, monetary damages
for claims that were paid by the Company under the agreement and other appropriate relief.
Sirius was seeking to recover certain of its losses from the Company under the reinsurance
agreement. On July 26, 2006, the Company entered into a settlement agreement with Sirius
resolving all disputes between the Company and Sirius relating to the discontinued bond
program. The settlement also relieved the Company from any potential future liabilities with
respect to bonds issued by Sirius. As a result of this settlement agreement, the Company
recorded reserve deficiencies of approximately $0.1 million during 2006.Harco Arbitration. During 2004, the Company entered into an arbitration proceeding with Harco
National Insurance Company (Harco), one of the insurance carriers. Through this arbitration,
the Company was seeking rescission of the reinsurance agreement and other appropriate relief.
Harco was seeking to recover certain of its losses from the Company under the reinsurance
agreement. The arbitration hearing concluded in July 2006. In August 2006, the arbitration
panel issued its Final Decision and Order ordering each of the reinsurers participating in the
arbitration, including the Company, to pay its proportionate share of past and future claims
paid by Harco, subject to certain adjustments, offsets and credits (the Final Order). Based
on the Final Order and the most recent loss reports provided by Harco, the Company recorded
reserve deficiencies of approximately $2.0 million and return premiums of approximately $0.3
million during 2006.Highlands Development.During the third quarter of 2006, the Company received information
indicating that Highlands and the U.S. Department of Homeland Security (DHS) reached a global
settlement concerning Highlands immigration bond obligations, which settlement is subject to
the approval of the court in which the receivership is pending. Based on this information, the
Company recorded reserve redundancies of approximately $0.1 million during 2006.Loss and LAE Reserves. As of December 31, 2006, the Company recorded its loss and LAE
reserves for the discontinued bond program based primarily on loss reports received by the
Company from Harco and Highlands. The following compares our loss and LAE reserves for the
discontinued bond program at December 31, 2006 and December 31, 2005 (dollars in millions):
 December 31,
    
    
    December 31,2006
    
    
    2005Bail Bonds:Case reserves
    
    $
    0.9
    
    
    $
    12.1Incurred but not reported (IBNR) reserves
    
    
    4.2
    
    
    
    5.4Total bail bond reserves
    
    
    5.1
    
    
    
    17.5Immigration Bonds:Case reserves
    
    
    0.1
    
    
    
    0.7IBNR reserves
    
    
    1.2
    
    
    
    1.4Total immigration bond reserves
    
    
    1.3
    
    
    
    2.1Total loss and LAE reserves
    
    $
    6.4
    
    
    $
    19.6
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The decrease in loss and LAE reserves from $19.6 million at December 31, 2005 to $6.4 million
at December 31, 2006 was primarily due to loss payments made by the Company during 2006 in
connection with the Aegis and Sirius settlements and the Harco Final Order.Discontinued bond program losses and LAE were $1.8 million, $0.4 and $20.2 million during the
years ended December 31, 2006, 2005 and 2004, respectively. The 2006 loss of $1.8 million was
primarily attributable to the Harco Final Order combined with our increase in Harcos reported
losses. The $0.4 million loss recorded during 2005 was primarily attributable to an increase
in reported losses from Harco which was partially offset by a decrease in losses for Aegis due
to a favorable ruling by the Aegis arbitration panel.We believe there is potential for the Company to mitigate its ultimate liability to Highlands
through the arbitration proceeding with Highlands; however, because of the subjective nature
inherent in assessing the final outcome of this arbitration, management cannot estimate the
probability of an adverse or favorable outcome as of December 31, 2006. In addition, while
outside counsel believes we have legal defenses under the reinsurance agreement, they are
unable to assess whether an adverse outcome is probable or remote in the arbitration as of
December 31, 2006. In accordance with SFAS No. 5 Accounting for Contingencies, the Company
is reserving to its best estimate of the ultimate liability on the program at December 31, 2006
without any adjustment for positive arbitration outcome or a potential settlement amount with
Highlands. If the Company obtains information to determine an estimate of a final arbitration
value or estimate a settlement value, the Company will record changes in its reserves, if any,
in the period that an estimate is made in accordance with SFAS No. 60. The Company does not
intend to pay for any of the Highlands losses unless and until the arbitration is settled on a
mutually agreeable basis and/or a final binding judgment is made as to the Companys ultimate
liability.Given the uncertainties of the outcome of the Highlands arbitration, uncertainties in the
future loss information provided by Harco and Highlands, and the inherent volatility in assumed
reinsurance, actual losses incurred for the discontinued bond program could be materially
different from our estimated reserves. As a result, future loss development on the discontinued
bond program could have a material effect on the Companys results of operations and/or
financial condition.(17)
    
    RELATED PARTIESIn 1994, we entered into a Split-Dollar Insurance Agreement with a bank, as trustee, for the
benefit of an officer and his spouse. The bank has acquired a second-to-die policy on the
lives of the insureds, in the aggregate face amount of $2,700,000. At December 31, 2006 and
2005, we had loaned the trustee $932,653 and $860,934, respectively, under this agreement for
payment of insurance premiums, which is included in loans to affiliates in the accompanying
balance sheet. Amounts loaned by the Company to the trustee are to be repaid, in full, without
interest, from any of the following sources: (1) cash surrender value of the underlying
insurance policies; (2) death benefits; and/or (3) the sale of 15,750 common shares of the
Company contributed by the officer to the trust.In February 2000, we entered into a Split-Dollar Insurance Agreement for the benefit of another
officer in the face amount of $1,000,000. All premiums paid by the Company in accordance with
this agreement are to be repaid, in full, without interest, upon the death, retirement or
termination of the officer. The Company had paid premiums of $30,000 relating to this
agreement; however, the Company is no longer paying premiums under the agreement. At December
31, 2006 and 2005, $30,000 was included in loans to affiliates in the accompanying balance
sheet for payment of insurance premiums in accordance with this agreement.We share Bancinsurances executive offices with certain of our consolidated subsidiaries.
Certain expenses are allocated among them pursuant to cost sharing agreements.(18)
    
    CONCENTRATIONSThe Company has the following concentrations of net premiums earned with one managing general
agent within our property/casualty insurance business segment for the years ended December 31:
 2006
    
    2005
    
    2004Product  Customer TypeLender/Dealer-Managing General Agent
    
    $
    7,474,823
    
    
    $
    10,078,546
    
    
    $
    11,081,680
 (19)
    
    FAIR VALUE OF FINANCIAL INSTRUMENTSThe following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate fair value:Cash and short-term investments:The carrying amounts are reasonable estimates of fair value.Fixed maturities and equity securities:Fair values are based upon quoted market prices or
dealer quotes for comparable securities.Trust preferred debt issued to affiliates:Fair value is estimated using discounted cash flow
calculations based on interest rates currently being offered for similar obligations with
maturities consistent with the obligation being valued. As the interest rate adjusts
regularly, the carrying amount is a reasonable estimate of fair value.
 56




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The carrying amount and estimated fair value of financial instruments subject to disclosure
requirements were as follows at December 31:
 2006
    
    2005Carrying
    
    Estimated
    
    Carrying
    
    Estimatedamount
    
    fair value
    
    amount
    
    fair valueAssets:Held to maturity fixed maturities
    
    $
    4,793,584
    
    
    $
    4,850,986
    
    
    $
    4,821,629
    
    
    $
    4,856,624Available for sale fixed maturities
    
    
    68,547,886
    
    
    
    68,547,886
    
    
    
    73,012,240
    
    
    
    73,012,240Available for sale equity securities
    
    
    9,400,247
    
    
    
    9,400,247
    
    
    
    8,043,299
    
    
    
    8,043,299Short-term investments
    
    
    8,263,980
    
    
    
    8,263,980
    
    
    
    8,964,738
    
    
    
    8,964,738Cash
    
    
    1,823,191
    
    
    
    1,823,191
    
    
    
    4,528,875
    
    
    
    4,528,875Liabilities:Trust preferred debt issued to affiliates
    
    
    15,465,000
    
    
    
    15,465,000
    
    
    
    15,465,000
    
    
    
    15,465,000
 (20)
    
    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)Our results of operations have varied, and in the future may vary, from quarter to quarter,
principally because of fluctuations in our underwriting results and/or realized gain (loss)
activity. Consequently, quarterly results are not necessarily indicative of full year results,
nor are they comparable to the results of other quarters. The following table sets forth
certain unaudited quarterly consolidated financial and operating data:
 2006First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterTotal revenues
    
    $
    13,088,556
    
    
    $
    15,030,251
    
    
    $
    16,294,028
    
    
    $
    14,273,807Income before federal income taxes
    
    
    2,059,882
    
    
    
    1,851,635
    
    
    
    2,832,145
    
    
    
    80,174Net income
    
    
    1,493,383
    
    
    
    1,440,606
    
    
    
    2,104,531
    
    
    
    436,381Net income per common share:Basic
    
    
    .30
    
    
    
    .29
    
    
    
    .42
    
    
    
    .09Diluted
    
    
    .30
    
    
    
    .28
    
    
    
    .42
    
    
    
    .08
 2005First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterTotal revenues
    
    $
    14,556,205
    
    
    $
    15,953,712
    
    
    $
    15,719,332
    
    
    $
    14,407,261Income (loss) before federal income taxes
    
    
    (934,721
    )
    
    
    2,966,904
    
    
    
    1,960,225
    
    
    
    4,178,237Net income (loss)
    
    
    (461,383
    )
    
    
    2,140,092
    
    
    
    1,501,631
    
    
    
    3,113,734Net income (loss) per common share:Basic
    
    
    (.09
    )
    
    
    .43
    
    
    
    .30
    
    
    
    .63Diluted
    
    
    (.09
    )
    
    
    .43
    
    
    
    .30
    
    
    
    .62
 (21)
    
    LITIGATIONAs discussed in Note 16 to the Consolidated Financial Statements, the Company is a party to the
Highlands arbitration proceeding arising from claims made under a reinsurance contract relating
to the discontinued bond program. In addition, the Aegis, Sirius and Harco arbitrations were
resolved during 2006. See Note 16 to the Consolidated Financial Statements for additional
information concerning the discontinued bond program arbitrations.In October 2006, the Company commenced arbitration against Ernst & Young LLP (E&Y), the
Companys former independent registered public accounting firm, in accordance with the terms of
the engagement letter between the Company and E&Y. In the arbitration, the Company alleges that
E&Y improperly withdrew the Companys audit reports for the 2001 through 2003 fiscal years. The
Company is seeking monetary damages in excess of $21 million. E&Y has counterclaimed, seeking
to recover in excess of $475,000 from the Company for unpaid invoices and additional costs. No
arbitration panel has yet been constituted. The Company does not believe this dispute will have
a material adverse effect on our financial condition or liquidity.In addition, the Company is involved in various other lawsuits and legal proceedings arising in
the ordinary course of business, some of which involve claims for substantial amounts. We
provide accruals for these items to the extent that we deem the losses probable and reasonably
estimable. The outcome of litigation is subject to numerous uncertainties. While the ultimate
resolution of these legal proceedings could be material to the Companys results of operations
in a future quarter or annual period, in the opinion of Companys management, none would likely
have a material adverse effect on the Companys financial condition or liquidity.
 57




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##### Table of Contents



(22)
    
    SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
 2006
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    5,474,901
    
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )Income (loss) available to common shareholders,
assuming dilution
    
    $
    5,474,901
    
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )Weighted-average common shares outstanding
    
    
    4,976,010
    
    
    
    4,972,700
    
    
    
    4,950,437Dilutive effect of outstanding options
    
    
    87,394
    
    
    
    34,638
    
    
    
    Diluted common shares
    
    
    5,063,404
    
    
    
    5,007,338
    
    
    
    4,950,437Basic net income (loss) per common share
    
    $
    1.10
    
    
    $
    1.27
    
    
    $
    (1.72
    )Diluted net income (loss) per common share
    
    $
    1.08
    
    
    $
    1.26
    
    
    $
    (1.72
    )
 (23)
    
    SEGMENT INFORMATIONAs described in Note 1 to the Consolidated Financial Statements, the Company has three
reportable business segments: (1) property/casualty insurance; (2) municipal code publishing
(through August 31, 2006); and (3) insurance agency. There are intersegment management and
commission fees. The allocations of certain general expenses within segments are based on a
number of assumptions, and the reported operating results would change if different assumptions
were applied. Depreciation and capital expenditures are not considered material. Segment
results for the years ended December 31, 2006, 2005 and 2004 are as follows:
 December 31, 2006Municipal
    
    
    
    
    
    ReportableProperty/Casualty
    
    Code
    
    Insurance
    
    SegmentInsurance
    
    Publishing(1)
    
    Agency
    
    TotalRevenues from external customers
    
    $
    49,787,642
    
    
    $
    2,255,558
    
    
    $
    
    
    
    $
    52,043,200Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    1,349,987
    
    
    
    1,349,987Interest revenue
    
    
    3,942,687
    
    
    
    
    
    
    
    2,202
    
    
    
    3,944,889Interest expense
    
    
    559
    
    
    
    1,286
    
    
    
    
    
    
    
    1,845Depreciation and amortization
    
    
    417,254
    
    
    
    68,130
    
    
    
    
    
    
    
    485,384Segment profit
    
    
    4,805,033
    
    
    
    317,366
    
    
    
    1,344,110
    
    
    
    6,466,509Federal income tax expense
    
    
    806,676
    
    
    
    114,251
    
    
    
    456,998
    
    
    
    1,377,925Segment assets
    
    
    118,717,764
    
    
    
    
    
    
    
    254,064
    
    
    
    118,971,828(1)
 As discussed in Note 1 to the Consolidated Financial Statements , the
Company sold ALPC, its municipal code publishing segment, on August 31, 2006. The municipal
code publishing segment in the above table includes results through August 31, 2006.December 31, 2005Municipal
    
    
    
    
    
    ReportableProperty/Casualty
    
    Code
    
    Insurance
    
    SegmentInsurance
    
    Publishing
    
    Agency
    
    TotalRevenues from external customers
    
    $
    53,618,930
    
    
    $
    3,474,917
    
    
    $
    22,387
    
    
    $
    57,116,234Intersegment revenues
    
    
    4,410
    
    
    
    
    
    
    
    1,188,678
    
    
    
    1,193,088Interest revenue
    
    
    3,257,818
    
    
    
    
    
    
    
    3,847
    
    
    
    3,261,665Interest expense
    
    
    126
    
    
    
    1,921
    
    
    
    
    
    
    
    2,047Depreciation and amortization
    
    
    380,403
    
    
    
    94,602
    
    
    
    
    
    
    
    475,005Segment profit
    
    
    7,624,590
    
    
    
    665,794
    
    
    
    1,203,673
    
    
    
    9,494,057Federal income tax expense
    
    
    1,488,365
    
    
    
    248,826
    
    
    
    408,797
    
    
    
    2,145,988Segment assets
    
    
    123,381,430
    
    
    
    2,077,332
    
    
    
    319,571
    
    
    
    125,778,333
 58




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##### Table of Contents



December 31, 2004Municipal
    
    
    
    
    
    ReportableProperty/Casualty
    
    Code
    
    Insurance
    
    SegmentInsurance
    
    Publishing
    
    Agency
    
    TotalRevenues from external customers
    
    $
    51,126,855
    
    
    $
    4,005,415
    
    
    $
    68,080
    
    
    $
    55,200,350Intersegment revenues
    
    
    5,880
    
    
    
    
    
    
    
    377,893
    
    
    
    383,773Interest revenue
    
    
    2,266,867
    
    
    
    
    
    
    
    349
    
    
    
    2,267,216Interest expense
    
    
    (262
    )
    
    
    1,921
    
    
    
    
    
    
    
    1,659Depreciation and amortization
    
    
    376,016
    
    
    
    93,410
    
    
    
    
    
    
    
    469,426Segment profit (loss)
    
    
    (11,569,336
    )
    
    
    503,702
    
    
    
    402,592
    
    
    
    (10,663,042
    )Federal income tax expense (benefit)
    
    
    (4,440,684
    )
    
    
    180,608
    
    
    
    136,212
    
    
    
    (4,123,864
    )Segment assets
    
    
    107,524,584
    
    
    
    2,687,373
    
    
    
    729,932
    
    
    
    110,941,889
  2006
    
    
    2005
    
    
    2004RevenuesTotal revenues for reportable segments
    
    $
    57,338,076
    
    
    $
    61,570,987
    
    
    $
    57,851,339Parent company gain (loss)
    
    
    2,698,553
    
    
    
    258,611
    
    
    
    (62,844
    )Elimination of intersegment revenues
    
    
    (1,349,987
    )
    
    
    (1,193,088
    )
    
    
    (383,773
    )Total consolidated revenues
    
    $
    58,686,642
    
    
    $
    60,636,510
    
    
    $
    57,404,722ProfitTotal profit (loss) for reportable segments
    
    $
    6,466,509
    
    
    $
    9,494,057
    
    
    $
    (10,663,042
    )Parent company gain (loss), net of intersegment eliminations
    
    
    357,327
    
    
    
    (1,323,412
    )
    
    
    (2,605,010
    )Total consolidated net income (loss) before income taxes
    
    $
    6,823,836
    
    
    $
    8,170,645
    
    
    $
    (13,268,052
    )AssetsTotal assets for reportable segments
    
    $
    118,971,828
    
    
    $
    125,778,333
    
    
    $
    110,941,889Parent company assets
    
    
    6,492,158
    
    
    
    3,771,162
    
    
    
    11,096,804Elimination of intersegment receivables
    
    
    (3,175,480
    )
    
    
    (1,213,660
    )
    
    
    (4,978,221
    )Total consolidated assets
    
    $
    122,288,506
    
    
    $
    128,335,835
    
    
    $
    117,060,472
 (24)
    
    SUBSEQUENT EVENTSDuring 2003, the Company began issuing insurance policies which guarantee the performance of
two automobile service contract providers (the Providers). The Providers are owned and
managed by a common group. The Company issues insurance policies for business produced by the
Providers in five states. Our insurance policy guarantees the fulfillment of the Providers
obligation under the service contract. Under the program, the Providers carry the related
assets and reserves and are responsible for the premiums and claims administration. The
Company is obligated to pay a claim only if a Provider fails to do so. Under a reinsurance
arrangement, the Company cedes 100% of this business to another insurance carrier. In
addition, the Company obtained collateral in the form of a letter of credit to secure its
obligations under the program. In February 2007, the Company was notified that one of the
Providers entered into an assignment for the benefit of creditors liquidation and that no new
business is being produced by that Provider. The Company, with the assistance of its outside
actuary, has estimated its potential exposure under the program to be
approximately $3.0 million as of December 31, 2006. Because our estimated potential exposure is fully collateralized by a $4.3
million letter of credit and the loss exposure is 100% reinsured, we
do not believe
this event will have a material adverse impact to the Company. However, if the Company is
required to pay claims under the program and it is unable to draw on the letter of credit and
cannot collect on the reinsurance, then this program could have a material adverse effect on
our business, financial condition and/or operating results.Effective January 1, 2007, the Company entered into a producer-owned reinsurance arrangement
with a new CPI customer whereby 100% of that customers premiums (along with the associated
risk) were ceded to its PORC. For this program, the CPI coverage is voluntary and is primarily
for tractors and residential/commercial mowers as opposed to automobiles. The Company receives
a ceding commission based on a percentage of the premiums ceded. For this reinsurance
arrangement, the Company obtains collateral in the form of funds held and a letter of credit to
secure its obligations. Under the provisions of the reinsurance agreement, the collateral must
be equal to or greater than 102% of the reinsured reserves and the Company has immediate access
to such collateral if necessary.
 59




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
          
 ITEM 9A. CONTROLS AND PROCEDURES
   
 ITEM 9B. OTHER INFORMATION
  60




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
 EQUITY COMPENSATION PLAN INFORMATION
  (a)
    
    
    (b)
    
    
    (c)Number of securitiesNumber of securities to
    
    
    Weighted-average
    
    
    remaining available for futurebe issued upon exercise
    
    
    exercise price of
    
    
    issuance under equityof outstanding options,
    
    
    outstanding options,
    
    
    compensation plans (excludingPlan category
    
    warrants and rights
    
    
    warrants and rights
    
    

securities
reflected in column (a))Equity compensation plans
approved by security holders
    
    
    827,500
    
    
    $
    5.52
    
    
    
    35,000Equity compensation plans
not approved by security holders
    
    None
    
    
    None
    
    
    NoneTotal
    
    
    827,500
    
    
    $
    5.52
    
    
    
    35,000
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  61




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  Page inthisReport(1) Financial StatementsThe following financial statements, which are included in Item 8 of Part II of this report:Report of Independent Registered Public Accounting Firm
    
    
    34Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004
    
    
    35Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    36Consolidated Statements of Shareholders Equity for the years ended December 31, 2006, 2005 and 2004
    
    
    38Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    39Notes to Consolidated Financial Statements
    
    
    40(2) Financial Statement SchedulesThe following financial statement schedules are included in this Item 15 of Part IV of this report:Schedule I  Summary of investments  other than investments in related parties
    
    
    65Schedule II  Condensed financial information of Bancinsurance Corporation (Parent Company Only)
    
    
    66
 All other schedules are omitted because of the absence of conditions under which they are
required or the required information is given in the consolidated financial statements or
notes thereto.
 (3)
    
    ExhibitsThe following exhibits required by Item 601 of Regulation S-K are filed as part of this
report. For convenience of reference, the exhibits are listed according to the numbers
appearing in the Exhibit Table to Item 601 of Regulation S-K.
 3(a)
    
    Amended and Restated Articles of Incorporation of Bancinsurance Corporation
(reference is made to Exhibit 3(a) of Form 10-K for the fiscal year ended December 31,
1984 (file number 0-8738), which is incorporated herein by reference).3(b)
    
    Certificate of Amendment to the Amended and Restated Articles of
Incorporation of Bancinsurance Corporation dated March 10, 1993 (reference is made to
Exhibit 3(b) of Form 10-K for the fiscal year ended December 31, 2001 (file number
0-8738), which is incorporated herein by reference).3(c)
    
    Amended and Restated Articles of Incorporation of Bancinsurance Corporation
(reflecting amendments through March 10, 1993) (for SEC reporting purposes only)
(reference is made to Exhibit 3(c) of Form 10-K for the fiscal year ended December 31,
2001 (file number 0-8738), which is incorporated herein by reference).3(d)
    
    Amended and Restated Code of Regulations of Bancinsurance Corporation
(reference is made to Exhibit 3(b) of Form 10-K for the fiscal year ended December 31,
1984 (file number 0-8738), which is incorporated herein by reference).4(a)
    
    Credit Agreement dated January 25, 1993 by and between Bancinsurance
Corporation and The Fifth Third Bank of Columbus, Ohio (reference is made to Exhibit
4(a) of Form 10-K for the fiscal year ended December 31, 2001 (file number 0-8738),
which is incorporated herein by reference).4(b)
    
    First Amendment to Credit Agreement dated November 5, 1993 by and between
Bancinsurance Corporation and The Fifth Third Bank of Columbus, Ohio (reference is
made to Exhibit 4(b) of Form 10-K for the fiscal year ended December 31, 2001 (file
number 0-8738), which is incorporated herein by reference).4(c)
    
    Second Amendment to Credit Agreement dated October 19, 1994 by and between
Bancinsurance Corporation and The Fifth Third Bank of Columbus, Ohio (reference is
made to Exhibit 4(c) of Form 10-K for the fiscal year ended December 31, 2001 (file
number 0-8738), which is incorporated herein by reference).
 62




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##### Table of Contents



4(d)
    
    Third Amendment to Credit Agreement dated November 24, 1999 by and between
Bancinsurance Corporation and The Fifth Third Bank of Columbus, Ohio (reference is
made to Exhibit 4(d) of Form 10-K for the fiscal year ended December 31, 2001 (file
number 0-8738), which is incorporated herein by reference).4(e)
    
    Fourth Amendment to Credit Agreement dated December 11, 2000 by and between
Bancinsurance Corporation and The Fifth Third Bank of Columbus, Ohio (reference is
made to Exhibit 4(e) of Form 10-K for the fiscal year ended December 31, 2001 (file
number 0-8738), which is incorporated herein by reference).4(f)
    
    Fifth Amendment to Credit Agreement dated July 1, 2002 by and between
Bancinsurance Corporation and The Fifth Third Bank of Columbus, Ohio (reference is
made to Exhibit 4(f) of Form 10-Q for the fiscal quarter ended June 30, 2002 (file
number 0-8738), which is incorporated herein by reference).4(g)
    
    Sixth Amendment to Credit Agreement dated October 20, 2003 by and between
Bancinsurance Corporation and The Fifth Third Bank of Columbus, Ohio (reference is
made to Exhibit 4(a) of Form 10-Q for the fiscal quarter ended September 30, 2003
(file number 0-8738), which is incorporated herein by reference).4(h)
    
    Indenture dated as of December 4, 2002 by and between Bancinsurance
Corporation and State Street Bank and Trust Company of Connecticut, National
Association (reference is made to Exhibit 4(g) of Form 10-K for the fiscal year ended
December 31, 2002 (file number 0-8738), which is incorporated herein by reference).4(i)
    
    Amended and Restated Declaration of Trust dated as of December 4, 2002 by and
among Bancinsurance Corporation, State Street Bank and Trust Company of Connecticut,
National Association, John Sokol, Si Sokol and Sally Cress (reference is made to
Exhibit 4(h) of Form 10-K for the fiscal year ended December 31, 2002 (file number
0-8738), which is incorporated herein by reference).4(j)
    
    Guarantee Agreement dated as of December 4, 2002 by and between Bancinsurance
Corporation and State Street Bank and Trust Company of Connecticut, National
Association (reference is made to Exhibit 4(i) of Form 10-K for the fiscal year ended
December 31, 2002 (file number 0-8738), which is incorporated herein by reference).4(k)
    
    Indenture dated as of September 30, 2003 by and between Bancinsurance
Corporation and JPMorgan Chase Bank (reference is made to Exhibit 4(b) of Form 10-Q
for the fiscal quarter ended September 30, 2003 (file number 0-8738), which is
incorporated herein by reference).4(l)
    
    Amended and Restated Declaration of Trust dated as of September 30, 2003 by
and among Bancinsurance Corporation, JPMorgan Chase Bank, Chase Manhattan Bank USA,
National Association, John Sokol, Si Sokol and Sally Cress (reference is made to
Exhibit 4(c) of Form 10-Q for the fiscal quarter ended September 30, 2003 (file number
0-8738), which is incorporated herein by reference).4(m)
    
    Guarantee Agreement dated as of September 30, 2003 by and between
Bancinsurance Corporation and JPMorgan Chase Bank (reference is made to Exhibit 4(d)
of Form 10-Q for the fiscal quarter ended September 30, 2003 (file number 0-8738),
which is incorporated herein by reference).4(n)
    
    Amended and Restated Credit Agreement effective as of June 15, 2006 by and
between Bancinsurance Corporation and Fifth Third Bank of Columbus, Ohio (reference is
made to Exhibit 4.1 of Current Report on Form 8-K filed June 16, 2006 (file number
0-8738), which is incorporated herein by reference).4(o)
    
    Eleventh Amendment and Restatement of Note effective as of June 15, 2006 by
and between Bancinsurance Corporation and Fifth Third Bank of Columbus, Ohio
(reference is made to Exhibit 4.2 of Form 8-K filed June 16, 2006 (file number
0-8738), which is incorporated herein by reference).10(a)
    
    Amended Tax Allocation Agreement by and between Bancinsurance Corporation
and Ohio Indemnity Company (reference is made to Exhibit 10(d) of Form 10-K for the
fiscal year ended December 31, 1983 (file number 0-8738), which is incorporated herein
by reference).10(b)#
    
    Bancinsurance Corporation 1984 Stock Option Plan (reference is made to Exhibit 10(d)
of Form 10-K for the fiscal year ended December 31, 1984 (file number 0-8738), which
is incorporated herein by reference).10(c)#
    
    Bancinsurance Corporation 1994 Stock Option Plan (reference is made to Exhibit 10(f)
of Form 10-Q for the fiscal quarter ended June 30, 1994 (file number 0-8738), which is
incorporated herein by reference).10(d)#
    
    Employment Agreement dated May 17, 2000 by and between Ohio Indemnity Company and
Daniel J. Stephan (reference is made to Exhibit 10(g) of Form 10-Q for the fiscal
quarter ended March 31, 2002 (file number 0-8738), which is incorporated herein by
reference).10(e)#
    
    Bancinsurance Corporation 2002 Stock Incentive Plan (reference is made to Exhibit 10
of Form S-8 dated June 28, 2002 (file number 333-91396), which is incorporated herein
by reference).10(f)#
    
    Undertaking Agreement dated April 14, 2005 between Bancinsurance Corporation and Si
Sokol (reference is made to Exhibit 99.1 of Current Report on Form 8-K filed April 15,
2005 (file number 0-8738), which is incorporated herein by
reference).
 63




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##### Table of Contents



10(g)#
    
    Undertaking Agreement dated April 14, 2005 between Bancinsurance Corporation and
John S. Sokol (reference is made to Exhibit 99.2 of Current Report on Form 8-K filed
April 15, 2005 (file number 0-8738), which is incorporated herein by reference).10(h)#
    
    Undertaking Agreement dated April 14, 2005 between Bancinsurance Corporation and
Sally J. Cress (reference is made to Exhibit 99.3 of Current Report on Form 8-K filed
April 15, 2005 (file number 0-8738), which is incorporated herein by reference).10(i)#
    
    First Amendment to Undertaking Agreement dated October 17, 2005 between
Bancinsurance Corporation and Sally J. Cress (reference is made to Exhibit 99.1 of
Current Report on Form 8-K filed October 21, 2005 (file number 0-8738), which is
incorporated herein by reference).10(j)#
    
    Bancinsurance Corporation 2002 Stock Incentive Plan Form of Award Agreement
(reference is made to Exhibit 10.1 of Current Report on Form 8-K filed June 6, 2006
(file number 0-8738), which is incorporated herein by reference).10(k)#
    
    Bancinsurance Corporation 2006 Fiscal Year Executive Officer Bonus Plan (reference
is made to Exhibit 10.1 of Current Report on Form 8-K filed July 24, 2006 (file number
0-8738), which is incorporated herein by reference).10(l)
    
    Stock Purchase Agreement between A.L.P. Acquisition Co., Inc. and
Bancinsurance Corporation dated August 31, 2006 (reference is made to Exhibit 10.1 of
Current Report on Form 8-K filed September 7, 2006 (file number 0-8738), which is
incorporated herein by reference).10(m)#
    
    Bancinsurance Corporation 2007 Fiscal Year Executive Officer Bonus Plan (reference
is made to Exhibit 10.1 of Current Report on Form 8-K filed December 21, 2006 (file
number 0-8738), which is incorporated herein by reference).21*
    
    Subsidiaries of the Registrant as of December 31, 2006.23(a)*
    
    Consent of Daszkal Bolton LLP.31.1*
    
    Certification of Principal Executive Officer Pursuant to Rule 13a-14 under
the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Principal Financial Officer Pursuant to Rule 13a-14 under
the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Principal Executive Officer and Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed with this Annual Report on Form 10-K.#
    
    Constitutes a management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Annual Report on Form 10-K. (b)
    
    ExhibitsSee Item 15(a)(3).(c)
    
    Financial Statement SchedulesSee Item 15(a)(2).
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##### Table of Contents



Column A
    
    Column B
    
    Column C
    
    Column DType of Investment
    
    Cost (1)
    
    Estimated
    
    Amount at whichfair
    
    shown in thevalue
    
    balance sheetHeld to maturity:Fixed maturities:Governments
    
    $
    1,356,518
    
    $
    1,355,469
    
    $
    1,356,518Political subdivisions
    
    
    2,030,077
    
    
    2,037,707
    
    
    2,030,077Special revenue and assessments
    
    
    1,406,989
    
    
    1,457,810
    
    
    1,406,989Total held to maturity
    
    
    4,793,584
    
    
    4,850,986
    
    
    4,793,584Available for sale:Fixed maturities:States, territories and
possessions
    
    
    4,209,642
    
    
    4,248,063
    
    
    4,248,063Political subdivisions
    
    
    1,496,513
    
    
    1,515,050
    
    
    1,515,050Special revenue and assessments
    
    
    58,165,494
    
    
    58,863,798
    
    
    58,863,798Industrial and miscellaneous
    
    
    4,063,130
    
    
    3,920,975
    
    
    3,920,975Total available for sale fixed
maturities
    
    
    67,934,779
    
    
    68,547,886
    
    
    68,547,886Equity securities:Preferred stock:Banks, trusts and insurance
companies
    
    
    250,003
    
    
    286,298
    
    
    286,298Common stock:Banks, trusts and insurance
companies
    
    
    1,074,623
    
    
    1,662,368
    
    
    1,662,368Industrial and miscellaneous
    
    
    922,696
    
    
    1,412,840
    
    
    1,412,840Investment in mutual funds
    
    
    6,029,985
    
    
    6,038,741
    
    
    6,038,741Total available for sale equity securities
    
    
    8,277,307
    
    
    9,400,247
    
    
    9,400,247Short-term investments
    
    
    8,263,980
    
    
    8,263,980
    
    
    8,263,980Other invested assets
    
    
    751,936
    
    
    1,021,450
    
    
    751,936Total investments
    
    $
    90,021,586
    
    $
    92,084,549
    
    $
    91,757,633
 
 (1)
    
    Original cost of equity securities, adjusted for any write-downs, and, as to fixed maturities
and short-term investments, original cost reduced by repayments, write-downs and adjusted for
amortization of premiums or accrual of discounts. 65




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##### Table of Contents



December 31,2006
    
    
    2005AssetsCash
    
    $
    104,407
    
    
    $
    172,751Unaffiliated investments
    
    
    751,936
    
    
    
    807,531Investments in subsidiaries (at equity)
    
    
    46,237,424
    
    
    
    43,379,394Federal income tax recoverable
    
    
    271,052
    
    
    
    Receivable from subsidiaries, net
    
    
    2,672,990
    
    
    
    Other
    
    
    2,691,773
    
    
    
    2,308,401Total assets
    
    
    52,729,582
    
    
    
    46,668,077Liabilities and Shareholders EquityTrust preferred debt issued to affiliates
    
    
    15,465,000
    
    
    
    15,465,000Federal income tax payable
    
    
    
    
    
    
    2,060Payable to subsidiaries, net
    
    
    
    
    
    
    525,271Other
    
    
    898,963
    
    
    
    596,120Shareholders equity
    
    
    36,365,619
    
    
    
    30,079,626Total liabilities and shareholders equity
    
    $
    52,729,582
    
    
    $
    46,668,077
 66




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##### Table of Contents



Years ended December 31,2006
    
    
    2005
    
    
    2004Other income
    
    $
    187,184
    
    
    $
    288,842
    
    
    $
    406,318Net realized gain on sale of affiliate
    
    
    2,511,891
    
    
    
    
    
    
    
    Interest expense
    
    
    (1,427,241
    )
    
    
    (1,150,315
    )
    
    
    (892,804
    )General and administrative expenses
    
    
    (914,507
    )
    
    
    (461,938
    )
    
    
    (1,364,788
    )Income (loss) before tax benefit
and equity in earnings of
subsidiaries
    
    
    357,327
    
    
    
    (1,323,411
    )
    
    
    (1,851,274
    )Federal income tax benefit
    
    
    28,990
    
    
    
    269,416
    
    
    
    643,568Income (loss) before equity in
earnings of subsidiaries
    
    
    386,317
    
    
    
    (1,053,995
    )
    
    
    (1,207,706
    )Equity in distributed and undistributed earnings
of subsidiaries
    
    
    5,088,584
    
    
    
    7,348,069
    
    
    
    (7,292,914
    )Net income (loss)
    
    $
    5,474,901
    
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )
 67




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##### Table of Contents



Years ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    5,474,901
    
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )Adjustments to reconcile net income (loss) to net cash used in
operating activities:Equity in distributed and undistributed net earnings of subsidiaries
    
    
    (5,088,584
    )
    
    
    (7,348,069
    )
    
    
    7,292,914Net realized gain on sale of affiliate
    
    
    (2,511,891
    )
    
    
    
    
    
    
    Net realized gains on disposal of furniture and equipment
    
    
    
    
    
    
    (658
    )
    
    
    (183
    )Net realized (gains) losses on investments
    
    
    (74,801
    )
    
    
    (139,979
    )
    
    
    286,313Depreciation and amortization
    
    
    135,162
    
    
    
    145,045
    
    
    
    147,428Deferred federal income tax expense (benefit)
    
    
    (230,484
    )
    
    
    254,057
    
    
    
    (306,506
    )Change in operating assets and liabilities:Notes receivable
    
    
    (104,148
    )
    
    
    102,718
    
    
    
    58,664Loans to affiliates
    
    
    (71,719
    )
    
    
    (71,719
    )
    
    
    (71,719
    )Accounts receivable/payable from/to subsidiaries
    
    
    (3,198,261
    )
    
    
    (4,392,848
    )
    
    
    5,398,125Other assets
    
    
    18,218
    
    
    
    4,138,556
    
    
    
    (3,731,229
    )Other liabilities
    
    
    207,578
    
    
    
    (32,974
    )
    
    
    (685,312
    )Net cash used in operating activities
    
    
    (5,444,029
    )
    
    
    (1,051,797
    )
    
    
    (112,125
    )Cash flows from investing activities:Proceeds from sale of affiliate, net
    
    
    4,306,901
    
    
    
    
    
    
    
    Proceeds from available for sale fixed maturities
sold, redeemed or matured
    
    
    
    
    
    
    1,393,341
    
    
    
    764,257Proceeds from available for sale equity
securities sold
    
    
    93,426
    
    
    
    2,000,673
    
    
    
    735,683Cost of investments purchased:Available for sale fixed maturities
    
    
    
    
    
    
    
    
    
    
    (964,535
    )Available for sale equity securities
    
    
    
    
    
    
    (79,051
    )
    
    
    (859,367
    )Other
    
    
    (95,265
    )
    
    
    (49,928
    )
    
    
    (171,646
    )Net cash provided by (used in) investing activities
    
    
    4,305,062
    
    
    
    3,265,035
    
    
    
    (495,608
    )Cash flows from financing activities:Proceeds from note payable to bank
    
    
    
    
    
    
    
    
    
    
    3,500,000Repayments of note payable to bank
    
    
    
    
    
    
    (500,000
    )
    
    
    (3,000,000
    )Proceeds from stock options exercised
    
    
    38,880
    
    
    
    
    
    
    
    252,705Dividends from subsidiaries
    
    
    1,031,743
    
    
    
    2,462,563
    
    
    
    Capital contribution to subsidiary
    
    
    
    
    
    
    (4,200,000
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    1,070,623
    
    
    
    (2,237,437
    )
    
    
    752,705Net increase (decrease) in cash
    
    
    (68,344
    )
    
    
    (24,199
    )
    
    
    144,972Cash at beginning of year
    
    
    172,751
    
    
    
    196,950
    
    
    
    51,978Cash at end of year
    
    $
    104,407
    
    
    $
    172,751
    
    
    $
    196,950Supplemental disclosures of cash flow information:Cash paid (received) during the year for:Interest
    
    $
    1,421,109
    
    
    $
    1,137,074
    
    
    $
    884,457Federal income taxes
    
    $
    283,091
    
    
    $
    (58,842
    )
    
    $
    
 68




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##### Table of Contents



Signatures
  Bancinsurance CorporationDated: March 7, 2007
    By:
    /s/ John S. SokolJohn S. SokolActing Chief Executive Officer,

President and Director
(Principal Executive Officer)  Dated: March 7, 2007
    
    /s/ John S. SokolJohn S. SokolActing Chief Executive OfficerPresident and Director(Principal Executive Officer)Dated: March 7, 2007
    
    /s/ Douglas G. Borror
    
    Dated: March 7, 2007
    
    /s/ Kenton R. BowenDouglas G. Borror
    
    
    
    Kenton R. BowenDirector
    
    
    
    DirectorDated: March 7, 2007
    
    /s/ Stephen P. Close
    
    Dated: March 7, 2007
    
    /s/ Daniel D. HarkinsStephen P. Close
    
    
    
    Daniel D. HarkinsDirector
    
    
    
    DirectorDated: March 7, 2007
    
    /s/ Saul Sokol
    
    Dated: March 7, 2007
    
    /s/ Matthew D. WalterSaul Sokol
    
    
    
    Matthew D. WalterDirector
    
    
    
    DirectorDated: March 7, 2007
    
    /s/ Matthew C. NolanMatthew C. NolanVice President, Chief Financial Officer,Treasurer and Secretary(Principal Financial Officerand Principal Accounting Officer)
 69




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##### Table of Contents



INDEX OF EXHIBITS
  Exhibit No.
    
    Description3(a)
    
    Amended and Restated Articles of Incorporation of Bancinsurance Corporation (reference
is made to Exhibit 3(a) of Form 10-K for the fiscal year ended December 31, 1984 (file
number 0-8738), which is incorporated herein by reference).3(b)
    
    Certificate of Amendment to the Amended and Restated Articles of Incorporation of
Bancinsurance Corporation dated March 10, 1993 (reference is made to Exhibit 3(b) of Form
10-K for the fiscal year ended December 31, 2001 (file number 0-8738), which is
incorporated herein by reference).3(c)
    
    Amended and Restated Articles of Incorporation of Bancinsurance Corporation (reflecting
amendments through March 10, 1993) (for SEC reporting purposes only) (reference is made to
Exhibit 3(c) of Form 10-K for the fiscal year ended December 31, 2001 (file number 0-8738),
which is incorporated herein by reference).3(d)
    
    Amended and Restated Code of Regulations of Bancinsurance Corporation (reference is
made to Exhibit 3(b) of Form 10-K for the fiscal year ended December 31, 1984 (file number
0-8738), which is incorporated herein by reference).4(a)
    
    Credit Agreement dated January 25, 1993 by and between Bancinsurance Corporation and
The Fifth Third Bank of Columbus, Ohio (reference is made to Exhibit 4(a) of Form 10-K for
the fiscal year ended December 31, 2001 (file number 0-8738), which is incorporated herein
by reference).4(b)
    
    First Amendment to Credit Agreement dated November 5, 1993 by and between Bancinsurance
Corporation and The Fifth Third Bank of Columbus, Ohio (reference is made to Exhibit 4(b)
of Form 10-K for the fiscal year ended December 31, 2001 (file number 0-8738), which is
incorporated herein by reference).4(c)
    
    Second Amendment to Credit Agreement dated October 19, 1994 by and between
Bancinsurance Corporation and The Fifth Third Bank of Columbus, Ohio (reference is made to
Exhibit 4(c) of Form 10-K for the fiscal year ended December 31, 2001 (file number 0-8738),
which is incorporated herein by reference).4(d)
    
    Third Amendment to Credit Agreement dated November 24, 1999 by and between
Bancinsurance Corporation and The Fifth Third Bank of Columbus, Ohio (reference is made to
Exhibit 4(d) of Form 10-K for the fiscal year ended December 31, 2001 (file number 0-8738),
which is incorporated herein by reference).4(e)
    
    Fourth Amendment to Credit Agreement dated December 11, 2000 by and between
Bancinsurance Corporation and The Fifth Third Bank of Columbus, Ohio (reference is made to
Exhibit 4(e) of Form 10-K for the fiscal year ended December 31, 2001 (file number 0-8738),
which is incorporated herein by reference).4(f)
    
    Fifth Amendment to Credit Agreement dated July 1, 2002 by and between Bancinsurance
Corporation and The Fifth Third Bank of Columbus, Ohio (reference is made to Exhibit 4(f)
of Form 10-Q for the fiscal quarter ended June 30, 2002 (file number 0-8738), which is
incorporated herein by reference).4(g)
    
    Sixth Amendment to Credit Agreement dated October 20, 2003 by and between Bancinsurance
Corporation and The Fifth Third Bank of Columbus, Ohio (reference is made to Exhibit 4(a)
of Form 10Q for the fiscal quarter ended September 30, 2003 (file number 0-8738), which is
incorporated herein by reference).4(h)
    
    Indenture dated as of December 4, 2002 by and between Bancinsurance Corporation and
State Street Bank and Trust Company of Connecticut, National Association (reference is made
to Exhibit 4(g) of Form 10-K for the fiscal year ended December 31, 2002 (file number
0-8738), which is incorporated herein by reference).4(i)
    
    Amended and Restated Declaration of Trust dated as of December 4, 2002 by and among
Bancinsurance Corporation, State Street Bank and Trust Company of Connecticut, National
Association, John Sokol, Si Sokol and Sally Cress (reference is made to Exhibit 4(h) of
Form 10-K for the fiscal year ended December 31, 2002 (file number 0-8738), which is
incorporated herein by reference).4(j)
    
    Guarantee Agreement dated as of December 4, 2002 by and between Bancinsurance
Corporation and State Street Bank and Trust Company of Connecticut, National Association
(reference is made to Exhibit 4(i) of Form 10-K for the fiscal year ended December 31, 2002
(file number 0-8738), which is incorporated herein by reference).4(k)
    
    Indenture dated as of September 30, 2003 by and between Bancinsurance Corporation and
JPMorgan Chase Bank (reference is made to Exhibit 4(b) of Form 10-Q for the fiscal quarter
ended September 30, 2003 (file number 0-8738), which is incorporated herein by reference).4(l)
    
    Amended and Restated Declaration of Trust dated as of September 30, 2003 by and among
Bancinsurance Corporation, JPMorgan Chase Bank, Chase Manhattan Bank USA, National
Association, John Sokol, Si Sokol and Sally Cress (reference is made to Exhibit 4(c) of
Form 10-Q for the fiscal quarter ended September 30, 2003 (file number 0-8738), which is
incorporated herein by reference).
 70




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##### Table of Contents



Exhibit No.
    
    Description4(m)
    
    Guarantee Agreement dated as of September 30, 2003 by and between Bancinsurance
Corporation and JPMorgan Chase Bank (reference is made to Exhibit 4(d) of Form 10-Q for the
fiscal quarter ended September 30, 2003 (file number 0-8738), which is incorporated herein
by reference).4(n)
    
    Amended and Restated Credit Agreement effective as of June 15, 2006 by and between
Bancinsurance Corporation and Fifth Third Bank of Columbus, Ohio (reference is made
to Exhibit 4.1 of Current Report on Form 8-K filed June 16, 2006 (file number 0-8738),
which is incorporated herein by reference).4(o)
    
    Eleventh Amendment and Restatement of Note effective as of June 15, 2006 by and
between Bancinsurance Corporation and Fifth Third Bank of Columbus, Ohio (reference
is made to Exhibit 4.2 of Form 8-K filed June 16, 2006 (file number 0-8738), which is
incorporated herein by reference).10(a)
    
    Amended Tax Allocation Agreement by and between Bancinsurance Corporation and Ohio
Indemnity Company (reference is made to Exhibit 10(d) of Form 10-K for the fiscal year
ended December 31, 1983 (file number 0-8738), which is incorporated herein by reference).10(b)#
    
    Bancinsurance Corporation 1984 Stock Option Plan (reference is made to Exhibit 10(d) of
Form 10-K for the fiscal year ended December 31, 1984 (file number 0-8738), which is
incorporated herein by reference).10(c)#
    
    Bancinsurance Corporation 1994 Stock Option Plan (reference is made to Exhibit 10(f) of
Form 10-Q for the fiscal quarter ended June 30, 1994 (file number 0-8738), which is
incorporated herein by reference).10(d)#
    
    Employment Agreement dated May 17, 2000 by and between Ohio Indemnity Company and Daniel
J. Stephan (reference is made to Exhibit 10(g) of Form 10-Q for the fiscal quarter ended
March 31, 2002 (file number 0-8738), which is incorporated herein by reference).10(e)#
    
    Bancinsurance Corporation 2002 Stock Incentive Plan (reference is made to Exhibit 10 of
Form S-8 dated June 28, 2002 (file number 333-91396), which is incorporated herein by
reference).10(f)#
    
    Undertaking Agreement dated April 14, 2005 between Bancinsurance Corporation and Si Sokol
(reference is made to Exhibit 99.1 of Current Report on Form 8-K filed April 15, 2005 (file
number 0-8738), which is incorporated herein by reference).10(g)#
    
    Undertaking Agreement dated April 14, 2005 between Bancinsurance Corporation and John S.
Sokol (reference is made to Exhibit 99.2 of Current Report on Form 8-K filed April 15, 2005
(file number 0-8738), which is incorporated herein by reference).10(h)#
    
    Undertaking Agreement dated April 14, 2005 between Bancinsurance Corporation and Sally J.
Cress (reference is made to Exhibit 99.3 of Current Report on Form 8-K filed April 15, 2005
(file number 0-8738), which is incorporated herein by reference).10(i)#
    
    First Amendment to Undertaking Agreement dated October 17, 2005 between Bancinsurance
Corporation and Sally J. Cress (reference is made to Exhibit 99.1 of Current Report on Form
8-K filed October 21, 2005 (file number 0-8738), which is incorporated herein by
reference).10(j)#
    
    Bancinsurance Corporation 2002 Stock Incentive Plan Form of Award Agreement (reference is
made to Exhibit 10.1 of Current Report on Form 8-K filed June 6, 2006 (file number 0-8738),
which is incorporated herein by reference).10(k)#
    
    Bancinsurance Corporation 2006 Fiscal Year Executive Officer Bonus Plan (reference is
made to Exhibit 10.1 of Current Report on Form 8-K filed July 24, 2006 (file number
0-8738), which is incorporated herein by reference).10(l)
    
    Stock Purchase Agreement between A.L.P. Acquisition Co., Inc. and Bancinsurance
Corporation dated August 31, 2006 (reference is made to Exhibit 10.1 of Current Report on
Form 8-K filed September 7, 2006 (file number 0-8738), which is incorporated herein by
reference).10(m)#
    
    Bancinsurance Corporation 2007 Fiscal Year Executive Officer Bonus Plan (reference is
made to Exhibit 10.1 of Current Report on Form 8-K filed December 21, 2006 (file number
0-8738), which is incorporated herein by reference).21*
    
    Subsidiaries of the Registrant as of December 31, 2006.
 71




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##### Table of Contents



Exhibit No.
    
    Description23(a)*
    
    Consent of Daszkal Bolton LLP.31.1*
    
    Certification of Principal Executive Officer Pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.31.2*
    
    Certification of Principal Financial Officer Pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1*
    
    Certification of Principal Executive Officer and Principal Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 *
    
    Filed with this Annual Report on Form 10-K.#
    
    Constitutes a management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Annual Report on Form 10-K. 72